EFF Comments to FDIC on draft "Know Your Customer" bank surveillance regs

Deborah Pierce, Staff Attorney
Electronic Frontier Foundation
1550 Bryant Street, Suite 725
San Francisco, CA 94103

March 5, 1999

Mr. Robert E. Feldman, Executive Secretary
Attention: Comments/OES
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

Sent Via Overnight Delivery and Electronic Mail

Re: RIN 3064-AC19

Dear Mr. Feldman:

The Electronic Frontier Foundation (EFF) is a nonprofit, public interest organization working to protect rights and promote responsibility in the electronic world. We thank you for giving us the opportunity to submit our comments on the proposed "Know Your Customer" (KYC) regulation.

As a civil liberties organization, EFF is very concerned with the proposed regulation. There are several serious flaws with it. First, inspecting every banking transaction and creating profiles of every bank customer is an outrageous invasion of privacy. Second, the KYC proposal is inconsistent with other laws that Congress has passed with regard to the banking industry.

The Know Your Customer proposal regards every bank patron as a potential suspect and eliminates financial privacy by inspecting all banking transactions and establishing customer profiles.

The KYC proposal requires that all financial institutions determine the "normal and expected" transactions for each of their customers. This includes determining the source of funds for each deposit and reporting any "suspicious" activity in an account to federal law enforcement authorities. For the first time in history, banks are being called on to act as surrogate law enforcers and to spy on the daily transactions of all of their customers. The proposed regulation is not calling for the monitoring of customers who are suspected of engaging in illegal activity. Rather, this move is to monitor and profile every bank customer. Nowhere in our society, with the exception of the monitoring of prisoners, is such constant surveillance tolerated.

Furthermore, in order to comply with the requirement that banks determine the source of funds for each deposit, a profile of each customer must be created. The more sources of funding a customer has, the more intrusive and extensive the documentation process becomes. Through this process of identifying all sources of income, determining banking patterns, and ongoing surveillance of bank transactions, a picture of the banking customer is developed. But it is an artificial one. It does not allow for out-of-the-ordinary events, such as receiving an inheritance or a bonus from work, buying a house, or paying for expensive medical treatment. These special transactions must be adequately justified to a bank teller, and if an explanation of the out-of-pattern deposit or withdrawal is not forthcoming, or if the explanation is not adequate, a suspicious activity report is secretly filed with the government on that customer.

The proposed regulation states that suspicious activity reports are to be filed without customers' knowledge. These "snitch" reports could expose innocent customers to further intrusions into their lawful, private, financial affairs by law enforcement officers. The KYC regulation shifts the burden of proving innocence to the customers, after their personal privacy has been violated, rather than requiring the government to prove guilt or even probable cause. The KYC regulation turns every person who has a bank account into a criminal suspect! This is unacceptable in a free society such as ours.

The Know Your Customer proposal is inconsistent with other laws Congress has passed with regard to the banking industry.

Under current law, including the Bank Secrecy Act, financial institutions are authorized to report suspicious activities of their customers to the government. Reports currently are filed in specific circumstances: 1) insider abuses involving any amount, 2) transactions aggregating $5,000 or more where a suspect can be identified, 3) transactions aggregating $25,000 or more regardless of potential suspects, and 4) transactions aggregating $5,000 or more that involve potential money laundering or violations of the Bank Secrecy Act. Section 4(iii) allows a report to be filed where the transaction is not the sort of one that the customer would normally be expected to engage, but only if Òthe bank knows, suspects, or has reason to suspectÓ, wrongdoing by that customer. The bank is only looking particular transactions, not all transactions, by that customer. This statute does not authorize constant surveillance of account activity.

In addition, the Right to Financial Privacy Act, 12 U.S.C. section 3401, gives citizens certain privacy rights in their financial information. The KYC proposal oversteps the requirements of the Bank Secrecy Act and violates citizens' privacy rights. Under the KYC proposal, a person can have a "suspicious activity" report filed against her if she acts outside of her profile, refuses to hand over any and all personal information requested by a bank teller, or behaves in some other "suspicious" manner. Under this proposed "Big Brother" regulation, the mere fact that a person appears reticent to hand over information as requested, or worries aloud that her privacy rights are being invaded, could be enough to trigger a "suspicious activity" report on that customer. This kind of intrusive scrutiny should require a showing of probable cause of criminal behavior and a judge-issued warrant. Using the bank secrecy laws and KYC proposal to circumvent basic constitutional rights is not acceptable.

Another troubling aspect of this proposed regulation is that it requires banks and other financial institutions to not only report suspicious activities, but to actively search for wrongdoing. Current laws only require financial institutions to report suspicious activities that come to their attention. Under the more expansive proposed KYC regulation, financial institutions would be required to search every customer's bank accounts for activity that might be suspicious. Deputizing bank tellers into a special wing of law enforcement is an extreme way to catch a minimal number of potential criminals. Furthermore, Congress did not intend to give such extensive power to bank tellers and banks.

Thank you again for giving us the opportunity to comment on these proposed regulations. Please contact me at 415-436-9333, ext. 106 if I can be of any further assistance.

Respectfully,

Deborah Pierce
Staff Attorney

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