HITTING A WALL OF OPPOSITION

A proposal that would force banks to keep closer track of customers'
transactions and report them to the government will be rewritten or even
scrapped because of public outcry, federal regulators said Wednesday in
Chicago.

The proposed rule, designed to combat money laundering and other illegal
activity, has encountered opposition from bankers, privacy advocates and
citizens who say it would turn banks into government spies and put
unnecessary regulatory burdens on the industry.

Richard Small, the Federal Reserve official who drafted the proposed rule,
said it has been misinterpreted and that he has "nobody but myself to blame
for that." He and two other government officials were part of a panel
discussion on the proposal at the Fairmont Hotel.

"Will this proposal go away? There's a good question about that," Small told
a group of about 200 bankers gathered by accounting firm KPMG. He declined
to comment further on what the Fed and other bank regulators might do,
because the public comment period for the proposal remains open until March
8.

Small said the plan was simply intended to formalize what banks do already:
identify their customers and watch for possible criminal transactions, which
could come in the form of extraordinarily large deposits or withdrawals.

That can help the government sniff out illegal activity such as money
laundering, the practice of making illegally acquired cash look as if it
were acquired legally. It is a multibillion-dollar problem that is prominent
in the U.S. because of the drug trade.

For years, banks have been required to file suspicious-activity reports when
they suspect possible criminal wrongdoing in transactions. Regulators and
law enforcement officials review the reports; roughly 200,000 have been
filed nationwide since mid-1996.

Many bankers have complained that they do not have clear guidance about when
to file such reports, Small said.

The regulation he drafted was meant to straighten that out, but it has
backfired badly.

As it stands, the proposed rule would order banks to keep track of
customers' typical transactions and report inconsistent activity. No minimum
dollar amounts are given, and it is unclear how inconsistent a transaction
would have to be to trigger a suspicious-activity report.

Small said he and other regulators never meant for the government to receive
more reports about bank customers. "If anything, we want fewer," said Lester
Joseph, a panelist from the criminal division of the U.S. Justice
Department, who said the government lacks resources to investigate
additional suspicious-activity reports.

The industry and consumers have not interpreted the proposal that way,
seeing it instead as an Orwellian infringement on privacy.

The Federal Deposit Insurance Corp., the only regulator among those
proposing the rule that is accepting comments via e-mail, has received the
most: As of Wednesday, it had received more than 17,000, with roughly only
one in 1,000 favoring the proposal.

The American Bankers Association, the American Civil Liberties Union and
members of Congress have spoken out against the proposal. In Washington on
Wednesday, Rep. Ron Paul (R-Texas) unveiled a legislative package that would
block the proposed rule.

Small shared excerpts from several of the roughly 20,000 comments that bank
regulators have received so far in opposition to the proposal.

Two of the comments he read likened the proposed rule to something Adolf
Hitler would have done; another expressed concern that a large deposit made
to a checking account after a Tupperware party would have to be explained if
it fell outside the realm of a customer's ordinary transactions.

But Small said the comments are a sign of how wrong critics are about the
proposal's intent. For most banks, the rule would mean simply formalizing
processes they already have in place. In fact, some banks already collect
and analyze far more information than the proposal asks--"more than many are
willing to admit," Small said--as part of their marketing programs.

Three bankers on the panel, the only speakers to win applause during the
three-hour session, retorted that the proposed rule, as written, oversteps
Small's stated intentions.

When panelist Gerald Janiak, project manager for Bank One Corp.'s so-called
know-your-customer program, asked if any bankers in the room were
comfortable with the proposed rule, no one raised a hand.

Another banker, Oak Brook Bank Chairman and CEO Richard Rieser, asserted
that the proposal asked banks to spy on their customers.

"Under the know-your-customer plan . . . the government is ordering a
systematic dragnet search of every customer's records," Rieser said.

Ruth Robb, a compliance manager with Harris Bank in Chicago, said the
proposal "is so general and so broad that it would impose undue hardship on
most banks."

The firestorm against the proposed rule has even spread overseas. Patrick
Moulette, executive secretary of the Financial Action Task Force on Money
Laundering in Paris, said in a telephone interview that he has received hate
e-mail on the matter, including one message he considered physically
threatening.

The group, based at the Organization for Economic Cooperation and
Development, is the world's primary multilateral task force against money
laundering.

The U.S. already complies with his group's recommendations for fighting
money laundering, although Moulette said that clarifying details about
suspicious-activity reporting would be a good next step. Moulette admitted
he had only heard about the proposal and not read it, but said, "It does not
sound very revolutionary." He said he finds the uproar, and the recent
messages he received, "quite surprising."