To help keep money laundering out of private banks, the Federal Reserve Board is expected to propose formal "know-your-customer" regulations this spring, for the first time. And private bankers say the central bank's guidance could not come soon enough.
"Right now there is no know-your-customer regulation, but we're being examined as if there were," said Susan Tuccillo, a New York-based vice president and regional compliance officer for Coutts & Co., a subsidiary of London's National Westminster Bank Group. "It's on an ad hoc basis."
Know-your-customer policies ask that bankers work aggressively to verify and understand a client's source of wealth, and to recognize the signs of suspicious transactions. Bankers say such policies are becoming harder to carry out as the international private banking business continues to grow and payment systems become faster and more complicated.
"The speed of electronic banking and the speed at which society does business work against the types of things you need to know about your customers," said Thomas M. Cornish, executive vice president and head of international banking for SunTrust Banks Inc., Atlanta.
"The vigilance and effort you need to put into it are more important because face-to-face contacts are not as frequent as before."
The Fed's planned proposals are not expected to include a laundry list of requirements for know-your-customer policies. Instead, they are expected to offer guidance on how bankers need to report on various transactions.
"Even if there is a regulation in place, there is still room for judgment," said Daniel Soto, senior special examiner of the Federal Reserve Board, Washington. "It is to provide more consistent guidance, not only for banks but to our exam staff."
Meanwhile, bankers say they are revising their own internal know-your- customer checks.
"I'm sure most institutions have something. But is it enough?," said W. Richard Holmes, managing director responsible for private banking at American Express Bank Ltd. "If someone's brother is president, you still have to ask the questions."
Many bankers said they have encountered fishy prospects. For instance, Deutsche Bank Trust Co., New York, has a team of cold callers who pitch the bank's fixed-income investments. Yet, a few potential clients have asked the caller about getting a loan.
"The prospect says, 'I'm not interested in bonds, but I'm interested in such and such,'" said Douglas H. Lemmonds, the private bank's senior credit officer. "They come up with the equivalent of a Ponzi scheme."
Mr. Lemmonds and other bankers agree that suspect transactions are most likely to rear their heads in the most complex product areas.
"What you find is people coming in with seemingly plausible credit transactions that have some earmarks, such as people offering to pledge you assets (for collateral) in offshore accounts," Mr. Lemmonds said.
"There are legitimate times where that does happen for international types of wealthy people," he added. "But if you're lending to a shell company here that has no assets except for your loan, you are tantamount to owner."
Mr. Cornish said that if a customer's behavior and transaction activity changes, then the private banker better keep up.
"People that fall into illegal activities don't always start there the day they open an account," Mr. Cornish said. "You may have a business that is legitimate, but the flow of money is inconsistent with what you think their volume should be."
Often, he said, the client has a legitimate explanation of why money is suddenly moving in and out of an account. But if not, Mr. Cornish recommends that the account be closed.
