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Big Brother

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Tags Big GovernmentMoney and Banks

02/03/1999Michael Kelly

One of the terrible consequences of the income tax was to provide an excuse for the federal government to pry into people's finances. Today, if financial regulators want to bully citizens into a more compliant mode, just about any excuse will do.

As Michael Kelly explains below, this prying instinct has set off a furious war between regulators and citizens who demand that some degree of autonomy be retained. Note too that Ron Paul of Texas, distinguished counselor to the Mises Institute, is playing a central role in the attempt to bring down the surveillance state.

The Washington Post
Wednesday, February 3, 1999; Page A17

Banking With Big Brother
By Michael Kelly

On Dec. 7, 1998, the Federal Deposit Insurance Corp. posted for comment a notice of a proposed federal banking regulation. It was a kindly, unassuming Little-Engine-That-Could sort of regulation. You could tell so by its very name: It was the "Know Your Customer" rule.

A simple regulation, one that any child could understand. In the words of the official notice, the Know Your Customer rule "would require each . . . bank to develop a program designed to determine the identity of its customers; determine its customers' sources of funds; determine the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report any transactions of its customers that are determined to be suspicious."

What this meant is that, by April 1, 2000, every FDIC bank in the country would be required to establish a program to systematically spy upon all of its customers, record the results of this spying and rat out to the Feds any suspicious customer.

Of course, banks have been to some degree in the spying and ratting business since passage of the Bank Secrecy Act of 1974, which obligates them to report to the government cash transactions of $10,000 or more, in the interests of combating money laundering and the drug trade. But the Know Your Customer rule, which also justifies itself on the basis of crime-fighting, would vastly increase the government's efforts, and would radically lower the bar for what was considered reportable activity.

What would the Know Your Customer rule define as a "suspicious" transaction? Oh, any old thing. Under the regulation, each bank would be obliged to "determine" the "normal and expected transactions" for each customer and to "monitor the account transactions . . . on an ongoing basis . . . to identify transactions that are inconsistent with the normal and expected transactions for particular customers or for customers in the same or similar categories or classes."

I especially like the bit about "customers in the same or similar categories or classes." Washington must know not only if you deposit or withdraw more one week than you normally do but also if you deposit or withdraw more than your neighbors normally do.

And who will make the judgment as to your likely criminality? Why, whomever your bank appoints, using whatever criteria your bank chooses. The next time you are in the midst of a long and infuriating argument over a mistake in your checking account with an assistant manager who seems to have the IQ of an eggplant, comfort yourself with the knowledge that this very eggplant may well be responsible for judging whether your recent dips into your savings account merit federal attention.

But here's the good news: None of this will cost the government a penny. In a real triumph of Reinvented Government, the Know Your Customer regulation proposes not only to force banks to spy on their customers but also to pay for the privilege. It's up to the banks to "provide for and document a system of internal controls to ensure ongoing compliance."

Actually, here is the real good news. The Know Your Customer regulation seems to be on the way to a well-deserved strangling in the cradle. A regrettable accident befell it: People found out about it.

The fix was supposed to be in. The FDIC was the last of the government's Big Four of banking to sign on to Know Your Customer; the Federal Reserve (whose baby it was), the Comptroller of the Currency and the Office of Thrift Supervision had already supported the measure. (Thus, Know Your Customer would cover not only FDIC banks but every bank and thrift in the country.) And the American Bankers Association, the industry heavy, was also on board; indeed, ABA officials had helped write the little darling.

But when the FDIC posted the proposed regulation on Dec. 7, it put Know Your Customer up on its Web site, where it was, alas, noticed. And where it generated, as of this week, some 15,000 comments (the average banking regulation inspires a few hundred). All but 12 of the comments were negative. The ABA quietly dropped its support of the measure. Republican Rep. Ron Paul of Texas announced plans to introduce legislation this week to kill the regulation the instant it is approved.

And before you could say "the era of big government is over," the FDIC began to rethink the whole idea. "It is evident to me personally that we are going to have to do something different than what was proposed," FDIC Chairman Donna A. Tanoue told the American Banker.

I do love it when they get the message.

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c Copyright 1999 The Washington Post Company

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