The release of a report by the Senate’s Permanent Subcommittee on Investigations on correspondent banking is an apt occasion for thinking broadly about money-laundering enforcement. The report, covering U.S. banks’ transactions with foreign banking organizations, points to the dangers of the notion that a foreign bank’s licensure is a substitute for monitoring the bank and its customers for illicit transactions. Its architect, ranking Democrat Sen. Carl Levin, has already had three hearings.

In an article in its Feb. 8 issue titled “Banks Wearing Blinders,” The Los Angeles Times used the report’s release to denounce banks. The paper suggested that those banks with weak money laundering controls be shamed and even blacklisted. It called enforcement of existing laws and regulations lax.

The recent push for stricter money-laundering enforcement has its metaphoric, if not actual, origins in high-profile incidents involving Citibank and the Bank of New York in the past few years. During roughly the same period, the financial privacy revolution gained momentum with the exposure of another large bank’s sale of customer information to a telemarketer. This revelation ultimately led to the inclusion of sweeping privacy standards in the Gramm-Leach-Bliley Act of 1999.

Oddly, these two divergent trends appeared to converge only briefly during that other watershed moment, the public defeat of the federal banking agencies’ Know Your Customer proposal. That plan had enormous privacy implications because detecting money-laundering requires banks to delve into their customers’ financial affairs. At the heart of Know Your Customer is a practice that is unavoidable, and one that its proponents now avoid naming: customer profiling. There is no way a bank could report suspicious customer transactions unless it knows what transactions are normal, so the argument went.

As many had predicted, the defeat of Know Your Customer would be just a temporary victory. The federal banking agencies arguably already have sufficient authority to issue guidelines and exam procedures to impose what they could not pass in the form of regulations. Indeed, shortly after withdrawing the Know Your Customer proposal in 1999, the agencies simply breathed life into its successor and gave it a new name: Enhanced Due Diligence.

It is tempting, but much too convenient, to write off privacy concerns associated with money-laundering enforcement as the plaintive protests of the undeserving rich and international criminals. But neither Know Your Customer nor Enhanced Due Diligence creates exemptions for nonwealthy, noncelebrated citizens. As the Congress contemplates additional requirements, it may be a good time to take inventory of existing ones.

Bank Secrecy Act and money laundering laws and their respective regulations already require banks to prepare hundreds of thousands of reports of large transactions and suspicious activities and ship them to Washington. Excessive regulation could easily, and does, snare everyday bank customers. The expense and social costs associated with investigating the “true” circumstances of unusual transactions make it more likely that regulatory red flags are raised — and reports generated — whenever a small business lands a big contract or a homebuyer borrows a large sum from a relative.

The fact that tainted transactions did pass through a major bank’s defenses is less revealing than calls to stop money laundering at all costs. Certainly, a measure of any advanced society is how it seeks to work out this tension between crime prevention and privacy interests. Bankers stand at that junction where that tension matters most — at the customer level — and can’t help feeling a bit schizophrenic. Recognizing that consumers’ privacy concerns are centered on the ability to control the flow of unsolicited offers, bankers have no illusions how their customers would feel about bank employees poring over their financial dealings and filing secret reports about perceived irregularities.

During these times, each banking agency is itself a house divided. One side of the house just issued interagency standards to protect customer information in the high-risk environment of technology, and the other side continues to push for enhanced customer monitoring precisely because innovations in technology make it possible.

It is inescapable that bankers have to sort this out, but our society would be better off that bankers are bankers first. If the report’s findings are accurate, then the industry can expect measures to shore up due diligence procedures relating to high risk foreign banks. Fair enough. Congress is not — perhaps need not be — as solicitous about the privacy interests of non-U.S. persons. If the committee elects to range beyond the issue of correspondent banking, it must acknowledge that competing principles are at play. And the industry must be vigilant in resisting efforts to impose additional monitoring requirements that would make banks the envy of law enforcement agencies.

Mr. Chan is general counsel for the California Bankers Association.

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