U.S. BANK REGULATORS DROP KNOW YOUR CUSTOMER PLAN

WASHINGTON (Reuters) - U.S. banking regulators Tuesday dropped a
controversial proposal that would have required banks to monitor their
customers more closely to try to spot illegal activities like
money-laundering.

The proposed ``Know Your Customer'' rules sparked a public outcry and
drew heavy fire from Congress and the banking industry, with opponents
saying they would be a serious violation of personal privacy.

In a joint statement, the Federal Reserve, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency
and the Office of Thrift Supervision said they had reevaluated the
proposal and decided to withdraw it.

``The agencies received an unprecedented number of comments ... from
the public, banking organizations, industry trade associations, and
members of Congress,'' they said. ``Most of the comments reflect
public concern over the privacy of information that would be collected
and held by financial institutions.''

The proposal would have extended existing rules requiring banks to
report suspicious transactions, making them set up systems to screen
customers and monitor their accounts for unusual activity.

The FDIC alone received over 225,000 comments, with the vast majority
from private individuals opposed to the plan.

The regulators said they remained committed to the fight against money
laundering, but would seek in future to reconcile this with concerns
about personal privacy.

``The agencies agree that there must be an appropriate balance between
these legitimate interests,'' they said.

Senior U.S. Treasury officials warned the storm of protest whipped up
by the ``Know Your Customer'' issue should not be exploited to try to
weaken existing money laundering controls.

``We would not want to see ... the pendulum be permitted to swing the
other way so that legitimate law enforcement concerns using legitimate
law enforcement tools -- that are not unduly intrusive -- are somehow
abandoned,'' one official said.

``We think the current rules make sense, they have accomplished a
great deal, they strike the right balance between law enforcement and
privacy, and we aim to see their continued enforcement.''

Spurred by the public outcry, the Senate voted on March 5 to block the
Know Your Customer rules, adding a rider to an education bill to stop
the regulators from implementing them.

``I heard from more than 10,000 Texans who thought this rule was a bad
idea,'' Senate Banking Committee Chairman Phil Gramm, a Texas
Republican, said Tuesday. ``I'm glad to know there are regulators who
will listen to real people and walk away from a bad idea.''

Bank groups had also protested the burden the plan would have imposed
on them, and the American Bankers Association welcomed the decision to
drop the initiative.

``The proposal would have put banks in the untenable position of
invading their customers' privacy and potentially could have eroded
public confidence in the banking industry,'' said ABA executive vice
president Donald Ogilvie.

Paul Schosberg, president of the trade group America's Community
Bankers, urged the regulators not to revive the proposal in the future
in any form.

``Instead, we hope the agencies will turn their attention to improving
the implementation of existing laws and regulations to ... strike more
effectively at illegal money laundering activities,'' he said.