Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th & Constitution Ave. NW
Washington DC 20551
Re: Docket No. R-1019
Notice of Proposed Rule making: "Know Your Customer" programs
Dear Ms. Johnson:
Please accept these comments on behalf of Consumers League of New Jersey, a 99-year old nonprofit organization promoting consumer interests, in response to the "Know your Customer" regulations published for comment in the Federal Register on December 7, 1998.
Consumers League is opposed to money-laundering, illegal activity and certainly fraud. We helped draft and enact the New Jersey Consumer Fraud Act and have participated in litigation through the years to strengthen it. We nonetheless object to what appear to be sweeping changes in the traditional relationship between ordinary law-abiding citizens and their banks. As drafted, the proposals apparently will require banking institutions to place all the transactions of all their customers, including the vast majority who have never been accused of any civil or criminal wrongdoing, under a mammoth system of surveillance, interrogation and reporting for failure to conform to "normal and expected" patterns set up by the banks. This is a radical departure from the traditional relationship between banks and bank customers, who have hitherto regarded their personal financial transactions as private and the bank as a neutral facilitator, not a critical observer.
Here are some of our specific objections to the proposal:
1. Potential for harassment of customers.
It appears that whenever a customer gets money from a source or spends it for a purpose the bank did not anticipate, the bank is supposed to record this, call the customer to account and perhaps report them to the Federal Reserve Board for further investigation.
For example, consider the "majority of retail banking customers that maintain transaction accounts, where practically the only source of funds comes from payroll deposits" 63 Fed. Reg. 67520 and "will, most likely, use the account for ordinary living expenses . . .." Id. at 67521. Here the Board seems to be suggesting one "profile." Will these customers get a call from the bank every time they deposit funds from a gift, an inheritance, an insurance reimbursement, or a day at the races? Apparently so, and since "transactions include expenditures as well as deposits they will also get a call if someone at the bank decides a check has been written for something that isn't an "ordinary living expense." Most people have better things to do than answer such questions.
The time spent to open an account, which can already run to several hours, will be expanded by additional demands for documentation and verification, maybe a visit to our house. The fact that customers will be annoyed is implicitly recognized by the query about "competitive disadvantage" vis-a-vis entities which are not required to do this, 63 Fed. Reg. 67522, "Comments Sought" #4. Presumably this is means a disadvantage in dealing with legitimate customers, not money-launderers and miscreants.
2. Exclusion of people from the banking system.
While it will only be an annoyance for most customers to produce photo ID's and all the other proofs required in this draft, for some customers the enhanced red tape will constitute an absolute bar to opening a bank account. The Board should realize that there are considerable numbers of people who do not have telephones, do not have photographic driver's licenses (or any driver's licenses), perhaps not even a permanent home. The poorer the person, the more likely this is to be true. For a variety of reasons, low-income people already have diminished access to banking services and are relegated to alternative, expensive, less-regulated alternatives like check-cashing services. This proposal will increase the exclusion of the poor by making it harder for them to open accounts. While banks could accommodate them under this proposal, they have shown little interest in accommodating the poor up to now.
Other people too may be excluded. (Most New Jersey residents do not have photographic drivers' licenses, as a matter of fact.) People who are new to an area may want to open a bank account before they have a telephone connected or establish all the other required local connections. The suggestion that "extra consideration may be required" for customers "situated outside of the area normally served by the bank", 63 Fed. Reg. 67519, seems designed to limit consumer choice and competition between banks.
Finally, it appears that people who object to answering prying questions about their personal finances will be denied new accounts and have their existing accounts closed. How else will banks comply? If this is not the intent of the proposal, there should be an express statement protecting customers from reprisal for defending their personal privacy.
3. Racial profiling and other forms of discrimination
The head of the New Jersey State Police was fired last week for expressing his opinion that Mexicans were more likely to be drug dealers than people of Irish or English extraction. He was attempting to explain why the State Police might target ethnic and racial minorities for disparate treatment in, for example, traffic stops. Not all bankers may exhibit greater sensitivity than this when they respond to the directive that they establish "different categories or classes of customers," decide "the potential risk of illicit activities associated with those customers' accounts and transactions" 12 CFR 208.63(d)(4), and vary the "amount and type of information, documentation and monitoring that is appropriate" 63 Fed.Reg. 67518, based on such categories. This is a virtual invitation to set up categories that discriminate on racial, ethnic or economic grounds.
The cost of documenting every customer (including perhaps "physical observation...at the address provided," 63 Fed.Reg. 67519), assigning every customer to a category, profiling every category of customer, monitoring every transaction of every customer, following up deviant transactions with further inquiry, and reporting suspicious or recalcitrant customers to the authorities will be enormous. Vast amounts of data will have to be generated and stored which we assume--and hope--banks do not now store. Legions of employees will be required to investigate all of us account-holders.
Consumers League fears that these costs will be passed along to customers in the form of higher bank charges rather than being absorbed by banks.
5. The use to which all this information will be put.
There is no limitation in the proposed rule upon the uses to which banks can put all the personal financial information they will gain from investigating and monitoring all their customers. It does not take much imagination to suppose that this information could be of interest, besides the Board, to telemarketers, compilers of mailing lists, the press, political parties, or the bank departments that market credit cards, financial planning and other products. Federal tax returns and Social Security records are protected by stringent confidentiality rules, with narrowly-defined exceptions, and yet they contain only a fraction of the information about personal finances which banks will be compiling under this program.
6. Invasion of the fundamental privacy of financial affairs.
Aside from the annoyance, the expenditure of time, the inflation of bank charges, the potential for discrimination, exclusion and publication of personal information, there is a still more basic concern. Consumers League believes that citizens have the right to obtain and spend their money without being monitored or interrogated about it unless there is probable cause to accuse them of crime. Financial matters are at the core of our personal privacy, as witness expressions like "None of your business" or "It's nobody's business but my own." Money matters ("business") are a paradigm for all the personal things we consider private.
If our society wants to abandon this privacy, it should be done only after a nationwide public debate to see if there is a consensus. It should not be done by a banking regulation, however well-intentioned.
Thank you for the opportunity to comment on this proposal.
Consumers League of New Jersey