Bank Secrecy Update

FINCen and the bank regulatory agencies have made a great deal of progress in recent months. We have final rules on the new CTR, suspicious activity reporting, and real progress on the exemption list.

However, they are far from finished. Several major issues remain. The exemption rules will be finalized this fall. The final rule may make changes to the interim rule currently in effect. Any changes will be based on your comments and experiences with using the new exemption procedure.

Know Your Customer Rules
Know Your Customer ("KYC") rules are coming. The official answer is that we should see proposed rules "soon." The closest an agency spokesman will get is "several months at least."

In the meantime, KYC is a reality. For both lending and deposits, banks are expected to know who their customers are and to take steps to ensure that none of their customers are engaged in criminal activity. In fact, examiners routinely ask to see your KYC policies, notwithstanding the fact that there isn't any requirement yet.

However, regulators agree that you should have KYC policies and procedures. As a pre-rule tip, here's what the regulators say your KYC policies and procedures should cover.

First, your procedures should require customers to establish their identify when they open an account. Generally, you should require at least two forms of identification. At least one of these should be a picture ID.

Second, when an account is opened, your procedures should determine the status of any beneficiaries of the account and, if appropriate, obtain identification on them. Pending rules should clarify what steps are needed here. At a minimum, the bank needs to be satisfied that no beneficiary of an account is participating in criminal acts.

Your procedures should specify what documentation is needed or appropriate to establish the identification of the account holder. You may also want to give clear direction on what documentation should be reviewed and returned to the customer and what documents, if any, the bank should copy and retain. Remember to avoid any violations of Regulation B's information gathering prohibitions if there is a chance that the information could be used for subsequent credit applications.

Finally, take into account the fact that KYC is an ongoing process. Your procedures should not focus exclusively on the account opening stage but should require attention to account activity over the life of the account. Both when the account is opened, and when the account is reviewed, the bank should ask whether the information makes sense.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 12, 7/96