Banking''s Proposed "Know Your Customer" Rules

Publication Date: August 2001

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

On December 7, 1998, federal banking regulators proposed regulations that would have required banks and thrifts to develop formal policies and procedures to identify unusual transactions in customers' accounts to report as suspicious activity in conjunction with the federal laws outlawing money laundering. Since 1996, banks have been required to report suspicious activity. Many institutions have maintained knowyour-customer procedures on an informal basis. Formal procedures subject to regulatory scrutiny would have been, however, an innovation. On March 23, 1999, the regulators issued a joint statement withdrawing the proposal, having received an unprecedented number of comments.

Small banks criticized the increased costs of screening. Individuals and businesses raised privacy concerns. Although there were varied proposals before the 106th Congress on the issue, no legislation was enacted. The issue likeliest to command attention in the 107th Congress is international money laundering. There have been recent instances in which banking regulators imposed corrective action, comparable to the Know Your Customer requirements, on several international banking institutions after unearthing potential money laundering activity.