What's Up on Know Your Customer?

According to Rick Small, the FRB is still working - and still plans to publish - regulations on Know Your Customer ("KYC"). At BAI's National Regulatory Compliance Conference, Small predicted that the FRB would publish KYC regulations in time to receive comments and have a final rule by "the end of 1997 or early 1998." [editor's note: at this time last year, Small was saying "soon" and "sometime this spring" so don't drop everything - yet.]

Small admitted that the FRB is the only agency to have a draft KYC regulation and that the regulation would only apply to Federal Reserve member banks. In defense of the regulatory plans, he said the proposal would contain steps that a prudent bank should already be doing anyway.

The proposal will outline key elements of a KYC program including acceptable documentation and what constitutes due diligence to identify customers. A KYC program should establish how the bank will:
determine the true identity of the customer;
determine the customer's normal transaction activity at the bank;
document the source of funds;
monitor customer transactions and compare them to the expected transaction activity;
identify transactions that are not consistent with the customer's profile;
determine whether a transaction is unusual or suspicious; and
generate Suspicious Activity Reports, as appropriate.

The proposal may contain some additional requirements, such as required training, independent testing, and designating an individual to be responsible for the program. Small indicated that the proposal may apply to private banking departments and require private bankers to identify the ultimate user or beneficiary of accounts.

Small stresses the importance of KYC by explaining that if you know who you are dealing with, you are that much less likely to have problems with customers.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 7, 6/97