KNOW YOUR CUSTOMER

Federal agencies should respect banks, customers When the government makes
a mistake, it can be a whopper. That seems to be what has happened with
proposed regulations that would require banks to watch every customer as
though he or she is a drug dealer.

The suggested rules ought to be tossed in a trash can. But not too quickly:
Regulators first ought to apologize for a plan that would treat all
Americans like potential criminals.

The list of offending federal agencies includes the Federal Deposit
Insurance Corp., the Federal Reserve, the Department of Treasury and the
Office of Thrift Supervision. As a Herald story outlined recently, all have
proposed similar regulations that are being called "Know Your Customer"
requirements.

Like a lot of bad policies, the proposals spring from a good intention. In
this case, it is to increase the chances that drug dealers will be caught
when they try to launder money. But the regulations would turn banks into
law enforcement agencies.

The heart of the plan is to have each bank identify every customer and then
make determinations about what kind of transactions are normal for each
customer to make. Should a customer do something unusual, the bank or,
presumably, its computer system would go on alert. If the bank decided
there might be something suspicious about that check from Aunt Nancy, they
would let the feds know. That is a ridiculous affront to Americans'
ordinary notions of privacy, individualism and control of their own finances.

Banks already face substantial requirements to report transactions that
might be drug-related, including all cash deposits of $10,000 or more.
There are still abuses that can occur, in part because a very few unethical
bankers might see advantages in looking the other way. But any such
white-collar crooks and their clients can be handled through harsh
punishments for violations of existing laws.

The new rules would force banks to cross the line from common sense to
snooping. However well intended the original plan, the result would be
crazy. If the regulators have any doubts, they should consider the vehement
reaction to their proposals. At just one local bank, Frontier Bank, the 23
branches have already collected about 1,000 signatures opposing Know Your
Customer. The overwhelmingly negative response to the proposals nationally
has led to speculation that the agencies will retreat or scale back the
ideas. Complete surrender is the only sensible course.