A Switzerland-based banking committee has launched an effort to globalize controversial “know your customer” regulations, even though a massive public outcry caused U.S. banking officials to drop similar plans more than two years ago after the controversial policies were first publicized by WorldNetDaily.
Banking analysts say the renewed effort is little more than a thinly veiled attempt to bring back a 1998 proposal developed by the U.S. Department of Treasury via the Federal Deposit Insurance Corporation — the federal banking entity responsible for insuring depositors’ funds.
Then, as now, banking officials — under so-called “Know Your Customer” provisions — wanted “national supervisors” to adopt universal rules requiring banks to gather customer information under the guise of preventing financial crimes.
“National supervisors,” one banking professional told WND, are little more than nationwide monetary policy agencies, such as “our Federal Reserve Bank or the FDIC or the Office of the Comptroller of the Currency.”
The new proposals were authored by the Basel Committee on Banking Supervision, located in Basel, Switzerland, and published Jan. 31.
Described as “guidelines” by industry analysts, the proposals clearly reference the earlier U.S. “Know Your Customer,” or KYC, measures.
“National supervisors are responsible for ensuring that banks have minimum standards and internal controls that allow them to know with whom they are doing business,” said an executive summary of the proposals. “Banks must develop customer due diligence policies and procedures in four key areas: customer acceptance, customer identification, ongoing monitoring of high-risk accounts and risk management.”
Banking professionals told WorldNetDaily the phrase “customer due diligence policies” is now being used instead of “Know Your Customer,” but the term “KYC” is used throughout the new guidelines.
“Supervisors around the world are increasingly recognizing the importance of ensuring that their banks have adequate controls and procedures in place so that they are not used for criminal or fraudulent purposes. Adequate due diligence on new and existing customers is a key part of these controls,” said the Basel Committee’s summary.
“However, as a 1999 survey revealed, many supervisors around the world have not developed basic supervisory practices and are looking to the Basel Committee on Banking Supervision for insight on the appropriate steps to take. Accordingly, the Committee has developed a series of recommendations that provide a basic framework for supervisors and banks. Supervisors should work with their supervised institutions to ensure that these guidelines are considered in the development of know-your-customer (KYC) practices,” the summary continued.
“A bank’s KYC program should include policies and procedures for customer acceptance, customer identification, ongoing monitoring of high-risk accounts and risk management,” said the summary. “… Where there are legal impediments in a host country to the implementation of higher home country KYC standards, host country supervisors should use their best endeavors to have the laws and regulations changed.”
As with the FDIC’s program, the international effort is being sold as a way to enhance customer financial safety and the integrity of banks.
“Sound KYC policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems,” the executive summary said.
“The 1997 Core Principles for Effective Banking Supervision” — a policy paper that was also authored by the Basel Committee — “states that, as part of a sound internal control environment, banks should have adequate policies, practices and procedures in place that ‘promote high ethical and professional standards in the financial sector and prevent the bank from being used, intentionally or unintentionally, by criminal elements,'” said the summary.
“Rigorous customer due diligence is a key part of banks’ risk management and critical to safeguarding confidence and the integrity of the banking system,” said William J. McDonough, the committee’s chairman.
In 1998, the FDIC published the following explanation as justification for enacting the new anti-privacy rules:
“As proposed, the regulation would require each non-member bank to develop a program designed to determine the identity of its customers; determine its customers’ source of funds; determine the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report any transactions of its customers that are determined to be suspicious, in accordance with the FDIC’s existing suspicious activity reporting regulation.
“By requiring insured non-member banks to determine the identity of their customers, as well as to obtain knowledge regarding the legitimate activities of their customers, the proposed regulation will reduce the likelihood that insured non-member banks will become unwitting participants in illicit activities conducted or attempted by their customers,” the FDIC said. “It will also level the playing field between institutions that already have adopted formal ‘Know Your Customer’ programs and those that have not.”
One banking professional, who requested anonymity, faxed WorldNetDaily a copy of the executive summary, which had been issued to banks via the Federal Reserve Bank of San Francisco. The source said the “word is getting out,” though he wasn’t sure how far along the new proposal was in the U.S. banking system.
“I read this as an attempt [by] international people — who are behind global governance — to run this proposal through [the Basel Committee], just like they ran it through Treasury, ran it through FDIC, to make it appear different than it really is,” he said.
The executive summary “also makes it sound as though ‘national supervisory agencies’ are looking to the Basel Committee for guidance, which I don’t know to be true,” he said.
“Many countries around the world have not developed basic supervisory practices in this area and have looked to the Basel Committee for insight. This paper will provide the framework for them to set national supervisory standards,” said Charles Freeland, deputy secretary general of the Basel Committee.
Two years ago, the FDIC in announcing its proposals said a number of U.S. banks had already begun to implement particular aspects of KYC proposals, such as requiring customer fingerprints to open accounts and cash checks.
Also, the new international guidelines, which discuss reporting suspected financial crime to appropriate authorities, mimic the FDIC’s 1998 KYC requirements.
“By identifying and, when appropriate, reporting such transactions in accordance with existing suspicious activity reporting requirements, financial institutions are protecting their integrity and are assisting the efforts of the financial institution regulatory agencies and law enforcement authorities to combat illicit activities at such institutions,” the FDIC summary said.
“Banks should obtain and keep up-to-date customer identification papers, and retain them for at least five years after an account is closed,” said the Basel summary. “They should retain all financial transaction records for at least five years after the transaction has taken place. Banks should also have adequate information systems capable of monitoring customer accounts and potential suspicious patterns of activity.”
When developing a “customer acceptance policy,” the committee said banks should consider procedures that identify a customer’s “background, country of origin, public or high-profile position, business activities or other risk indicators.”
For example, “the policies may require the most basic account-opening requirements for a working individual with a small account balance,” but require “quite extensive due diligence … for an individual with a high net worth whose source of funds is unclear,” said the Basel committee.
In other words, one analyst said, the “average Joe” may not get hassled very much, but if a “wealthy person wants to open a new account but doesn’t want the bank to know how he makes his money — legally or otherwise — he may not get his account.”
“Banks should establish a systematic procedure for verifying the identity of new customers and should never enter a business relationship until the identity of a new customer is satisfactorily established,” the Basel committee report said.
The committee recommends that procedures especially be implemented for foreign customers.
“The bank should always ask itself why the [new foreign] customer has chosen to open an account in a foreign jurisdiction,” said the report. Also, the committee recommends that “national supervisors … [periodically] conduct a review of customer files and the sampling of some accounts” as an oversight measure.
“Supervisors should always have a right to access all documentation related to accounts maintained in that jurisdiction, including any analysis the bank has made to detect suspicious transactions,” the committee recommendation report said.
The Basel Committee recommends that “supervisors around the world should seek, to the best of their efforts, to construct and implement their national KYC standards fully in line with international standards,” to avoid litigation and “regulatory arbitrage” domestically and internationally.
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