With federal regulators set to pound nails into the know-your-customer coffin today, many observers are still trying to figure out what went wrong.
Less than four months after proposing the anti-money laundering rule, the Federal Deposit Insurance Corp. and the Federal Reserve Board are holding public meetings this morning to decide its fate. Both agencies are expected to withdraw the proposal, as are the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Whether it will be resurrected as guidelines or a policy statement or merely tossed into the trash is unclear. One thing is certain, however: Hardly a soul in Washington can honestly say he predicted the public's emotional response.
How out of touch were bank regulators? The word "privacy" was never uttered at the Oct. 27 meeting when the FDIC board approved the proposed rule.
Former Nebraska banker and FDIC Vice Chairman Andrew C. Hove Jr. did say the plan would be burdensome for small banks. But he also said opposing an anti-crime initiative like the know-your-customer rule would be perceived as un-American.
"Arguing against this would be like arguing against motherhood and apple pie," Mr. Hove said.
He was right that the proposal would stir patriotic fervor, but wrong about the direction. More than 300,000 people wrote and e-mailed the FDIC to express their concerns, most of them individuals and virtually all opposed.
So vehement was the public's reaction that regulators and bank trade groups are vying to see who can distance themselves from it the most.
Earlier this month, for example, Comptroller John D. Hawke Jr. began his testimony before a House Judiciary subcommittee with an alibi. "I did not participate in either the process that led to this proposal, or in the formulation of the proposal," said Mr. Hawke, whose term began a day after regulators issued the proposal for public comment.
Others are establishing their distance by proposing radical surgery. The American Bankers Association has urged regulators not only to kill the proposal, but to remove any references to "know-your-customer" from Bank Secrecy Act exams.
Only Fed Assistant Director Richard A. Small still has the guts to say the public may have overreacted.
"There were obviously problems" with the proposal, he said in an interview. But "a lot of people complained without ever reading the proposal. I'm not willing to make a statement that the concept is a bad concept."
Mr. Small is not entirely alone in defending the idea. Sen. Carl M. Levin, D-Mich., recently urged fellow lawmakers to reject legislation that would block a revised know-your-customer rule.
"Ten or 20 years ago, if an individual walked into a U.S. bank with $1 million stuffed into a duffel bag and asked the bank to wire the money to an offshore account in a foreign country, most banks would have done so," he said, and "collected a nice fee." The advent of suspicious activity reporting requirements and know-your-customer programs changed all that, Sen. Levin said.
But privacy advocates are still calling for blood. A Libertarian Party Web site devoted to fighting the know-your-customer rule, www.defendyourprivacy.com, urges readers to support such legislation. "Apparently the FDIC doesn't care what the American people think," it says. "They seem determined to enact it one way or another."