Allegations of a global scheme to cleanse dirty money in U.S. banks have led to renewed calls for tougher anti-money-laundering rules. But lawmakers will have to walk a fine line between the conflicting goals of security and privacy, and banks may once again be caught in the middle.

Last week, House Banking Chairman Jim Leach proposed legislation that would force U.S. banks to take extra precautions before doing business with foreign customers. The White House shortly thereafter offered a combination of legislative and regulatory fixes.

Both initiatives came on the heels of news reports that Russian criminals and government officials may have exploited accounts at the Bank of New York and other financial institutions.

The proposals were noteworthy in another respect. They were the first issued since March, when a public outcry over privacy concerns -- reflected in 250,000 angry letters from citizens -- led regulators to yank their "know-your-customer" proposal. That failed plan would have made banks inquire about their customers' source of funds and flag deviations in regular account activity.

In describing his bill, Rep. Leach acknowledged the yin-yang of privacy and law enforcement.

"In our zeal to shut off the dirty money that flows all too freely through our financial institutions, we must be careful not to offend the legitimate privacy concerns that Americans have when it comes to their financial affairs," he said.

He said his bill passes the privacy test, because it focuses on foreign customers with exceptional account traffic. "Law enforcement attention must be directed to activities of a growing new international criminal class, not traditional American small-business enterprises."

Clinton Administration officials claimed a similar sensitivity to the privacy implications of their upgraded anti-money-laundering plan. At a press conference last week, Deputy Treasury Secretary Stuart E. Eizenstat said the administration would work with banks to strike the "very difficult balance" between privacy and fighting crime.

James F. Sloan, director of the Treasury Department's Financial Crimes Enforcement Network, said the Treasury is obliged to conduct a 180-day study of the plan's privacy implications. "To be engaged in money-laundering efforts that don't consider personal privacy issues would be ill-advised," he said in an interview.

Karen Shaw Petrou, president of the ISD/Shaw consulting firm here, said Washington has always whipsawed between the extremes of privacy and crime-fighting zeal. The transition from know-your-customer to Russian money laundering is just the most recent example.

"There's a spectacular allegation, then everybody gets all excited," she said in an interview. She called the process "the eternal dialectic of banking legislation."

Intriguingly, the only witness to raise the privacy issue at Rep. Leach's two days of money laundering hearings last week was Thomas A. Renyi, chairman and chief executive officer of the Bank of New York, who acknowledged that bank employees had ignored some highly suspicious money flows.

"If we choose to step up surveillance activities, can we do so with appropriate respect for our fellow citizens' right to privacy?" he asked. "I believe these are legitimate and important issues."

But, he added, "when any financial institution provides access to the system or facilitates its use, it must do everything it can to prevent illicit activity from taking place as a result. If illicit activity does take place, it must detect it and bring it promptly to the attention of appropriate authorities. This is our responsibility."

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