Customers may have banks snooping into their financial affairs under proposed federal regulations.
The pending "Know Your Customer" regulations require banks to develop customer profiles and determine the source of funds on deposits not matching the customer's typical banking activity.
For example, a customer making a regular $500 weekly deposit could be quizzed by the bank about a $5,000 deposit presented to a teller after selling a car or other asset. If the bank is unable to verify the source of the funds, the deposit would be refused.
Banks currently only have to watch for transactions of more than $10,000 and file a report with the Department of Treasury for those transactions.
The new rule is designed to prevent money laundering, but has bankers fuming over customer privacy. Bankers cringe at the thought of asking loyal customers, "where did you get this money?"
"We would be held accountable and the buck would stop with us for trying to know everything about our customers and their comings and goings," said Wolcott J. Humphrey III, president of Pavilion State Bank in Genesee County. "We would have trouble with that and, quite frankly, would not feel like it's any of our business."
The executive director of the Independent Bankers Association of New York calls the proposal the "most onerous regulation ever issued by federal regulators."
The regulation is in the midst of a 90-day public comment period and would not become effective until April 2000. The Federal Deposit Insurance Corp. has already received more than 8,000 comments about the proposal.
The regulation is designed for financial crime prevention in response to growing concern about dirty money passing through international money center banks.
But Richard Small, assistant director of banking supervision and regulation for the Federal Reserve, believes the proposal is misunderstood.
"I have now seen, from the comments we have received to date, there are some misconceptions . . . The terminology of profiling the customer has obviously stirred a lot of controversy and concern," Small said during a recent American Bankers Association teleconference.
Most banks probably already have policies and procedures in place to satisfy the regulation, Small said. Most banks already verify customer identity for opening new accounts and collect information about what products and services customers use, Small said.
Bankers claim the tough part is the details. The regulation's requirement for verifying customer identity can be difficult in the case of senior citizens without a driver's license or foreign nationals with no photo identification.
The requirement to verify the source of funds for transactions outside the normal customer profile would also be extremely difficult to implement, according to Douglas S. Cohen, vice president and money laundering control officer for Marine Midland Bank.
"Do we need to verify that you sold a car? How do we do that? Where do we go in terms of finding out that transaction is reasonable and the source of the funds are legitimate," Cohen said.
Bankers are concerned about the way federal bank examiners would interpret the wording of the regulation. While one bank examiner may loosely interpret the meaning of verifying funds, giving banks leeway in monitoring customer activity, other examiners may strictly hold banks to the letter of the law.