Know Your Customer: What Happened and What Happens Next?
| DOI | https://doi.org/10.1108/eb027248 |
| Published date | 01 February 2000 |
| Pages | 345-349 |
| Date | 01 February 2000 |
| Author | John J. Byrne |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 3 No. 4
Know Your Customer:
What Happened and What Happens Next?
John J. Byrne
No one could have predicted the outcry from the
industry, the public, Congress and the media on the
know your customer (KYC) proposal unveiled on
7th December, 1998.1 For many years, compliance
officers had heard about the possibility of a regulatory
proposal to formalise the policy of identifying new
account holders, reporting suspicious activity and
training all employees. What was finally released
went far beyond that.
As far back as 1994, the industry learned that the
Treasury Department was preparing a KYC regu-
lation, but eventually the four major banking
agencies joined in a late 1998, announced notice of
proposed rulemaking. The 1998 proposal, however,
drew an unprecedented amount of negative com-
ments. As this paper goes to print, the agencies are
preparing to withdraw the proposal. What lies
ahead for the industry when that happens?
A BRIEF HISTORY OF THE KYC ISSUE
It was during the 102nd Congress (1992) that the
Treasury Department first asked Congress for
complete authority to mandate know your customer
policies for all financial institutions. However, the
concept was agreed to on an international level
prior to that in a Basel Treaty approved in 1988.
The Basel Committee on Banking Regulations and
Supervisory Practices (of which the USA is a partici-
pant) adopted a statement of principles concerning
money-laundering prevention. This statement was
the first international mention of KYC procedures
and encouraged bank management to make
reasonable efforts to identify fully all customers and
to refuse significant business transactions with
customers who fail to provide proper identification.
While not a legally binding document, it had the
effect of ensuring that the international community
was aware of the need to know one's customer
base.2
When Congress was debating a bill that eventually
became the Annunzio-Wylie Anti-Money Launder-
ing law, the Treasury Department pointed out that
no amount of record keeping or reporting will
'replace the need for financial institutions to have
stringent "know your customer" provisions and to
be alert to transactions by those customers that do
not comport with the customer's normal type or
volume of business'.3 Congress agreed and changes
to the Treasury's authority were enacted into law.
Congress amended 31 USC 5318(a)(2) by adding
the critical phrase 'or to guard against money
laundering' so that the Treasury Department could
promulgate KYC regulations covering the Bank
Secrecy Act and the federal money-laundering
statutes. The Treasury Department never utilised
that sought-after authority.
Section 5318 (h) now states:
'Anti-money laundering programs —
(1) In general. In order to guard against money
laundering through financial institutions, the
Secretary may require financial institutions to
carry out anti-money laundering programs,
including at a minimum:
(A) the development of internal policies,
procedures, and controls,
(B) the designation of a compliance officer,
(C) an ongoing employee training program,
and
(D) an independent audit function to test
programs.
(2) Regulations. The Secretary may prescribe
minimum standards for programs established
under paragraph (1).'
This statutory authority still exists but is being
challenged by members of
Congress.4
While Treasury contemplated the creation of KYC
requirements for all financial institutions, the various
banking agencies (as well as Treasury) were working
on improving the criminal referral form — a form
required to be filed whenever a bank knew of
possible violations of laws such as cheque fraud,
loan fraud and many other financial crimes. Rather
than crafting a KYC regulation, Treasury threw its
efforts behind amending and streamlining the report-
ing of suspicious activity (under the new SAR require-
ments) and the KYC issue lay dormant for several
years.
Journal of Money Laundering Control
Vol.
3,
No.
4, 2000,
pp.
345-349
© Henry Stewart Publications
ISSN 1368-5201
Page 345
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