WASHINGTON Remember the bitter fight over the know-your-customer plan?
The banking regulators who withdrew the anti-money-laundering plan in March 1999 after being bombarded with hundreds of thousands of industry and consumer complaints are still trying to forget it.
The concept, surprisingly, was revived last week. But this time, it has a new name the Wolfsberg Principles and, ironically, is driven not by regulators bent on Big Brother-like oversight of banks, as critics had charged, but by the banking industry itself.
The principles, released last week by a group of 11 international banks, are voluntary guidelines aimed at preventing private banking operations from being used to launder criminals money.
They would commit the banks to establishing the true identity of every account holder, understanding the source of the account holders money, recording the sort of activity that the bank should expect to see in the account, and monitoring for deviations from this norm. Activities deemed to be suspicious are to be reported to regulatory authorities.
The principles are very closely related to the discredited know-your-customer plan regulators proposed in 1998. This plan would have imposed five core requirements on banks: positive identification of customers, understanding of their business, knowing the sources of customers funds, monitoring accounts for deviations from normal activity, and determining whether a deviation qualifies as suspicious activity.
In the end, the concepts really arent that different, said Elliot H. Berman, a financial services lawyer in the Godfrey & Kahn firm in Milwaukee. The essence of them is similar, in the sense that the language of the principles appears to set a standard for doing appropriate due diligence, primarily at the client acceptance stage.
Mark Musi, chief compliance and control officer for Citibank Private Bank, a signer of the accord, agreed. At the end of the day there are some fundamental things that you have to do to know who the customer is and how you monitor that client throughout the banks relationship with him, he said. When you break it down there are only so many ways you can structure a standard to accomplish those things.
The Federal Reserve Board has refused to comment on the resemblance of the Wolfsberg Principles to know-your-customer, which emerged primarily from the Feds division of banking supervision and regulation. But the agreement must be gratifying to Richard A. Small, the divisions assistant director, who was chief architect of the know-your-customer plan.
When federal regulators, after years of debate, released the proposal in late 1998, the public response was immediate and overwhelmingly negative. Regulators were accused of wanting banks to spy on customers, and consumer privacy advocates whipped into a froth by predictions of profiling by regulators mobilized against the plan.
Under a barrage of negative comment letters and e-mails, the plans authors promptly ran for cover. Some, such as Comptroller of the Currency John D. Hawke Jr. and Federal Deposit Insurance Corp. Chairman Donna Tanoue, called publicly for the proposal to be altered or withdrawn.
Mr. Small was left alone on the battlefield to point out that the vast majority of critics appeared neither to have read the rule nor to have understood its real effect. I am not prepared to make a statement that the concept is a bad one, he said at the time.
Now, 18 months after the regulators retreat, a lot of big names in the banking industry, including Citigroup, Chase Manhattan Corp., and J.P. Morgan & Co. appear to agree with Mr. Small. When the Wolfsberg Principles were released in Zurich last Monday, they were accompanied by a press release that specifically described them as know-your-customer policies.
But many banks and trade groups remain extremely sensitive about the know-your-customer debate. Even after the announcement of the Wolfsberg Principles, many who agreed with Mr. Small in private were unwilling to go on the record as defending any aspect of the failed proposal.
Rick Small got hung out to dry by the other regulators on this, an executive in charge of anti-money-laundering efforts at a large U.S. bank said on condition of anonymity. This is absolute vindication for him.
The Fed, which has resurrected many of the same principles in guidelines it is currently developing, went so far as to abandon the name, using the term enhanced due diligence in order to avoid the negative connotations of the withdrawn proposal.
But call it what you will, know-your-customer is neither dead nor buried. Most experts believe that know-your-customer is the best way to protect against money laundering, said Charles A. Intriago, a former federal prosecutor who publishes Money Laundering Alert newsletter. So any institution with any brains is going to institute know-your-customer policies in order to protect itself.
As some observers have pointed out, the banking companies that rejected the regulators plan may force a near clone of it on their private banking operations as a result of their own decisions to subscribe to the voluntary guidelines.
If adopted by a sufficient number of banks, the principles will probably become viewed as best practices by regulators, who would then begin assessing other banks anti-money-laundering controls against the Wolfsberg standard.
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