FDIC Set to Drop Anti-Money-Laundering Plan

The head of the FDIC said Monday that her agency is ready to withdraw proposed anti-money-laundering rules dubbed “Know Your Customer,” after receiving a mountain of protest letters from bankers, consumers and privacy rights groups.

“The public has spoken very loudly and clearly,” said Donna Tanoue, chairwoman of the Federal Deposit Insurance Corp. Bankers and other observers agreed that the proposal to require banks to report more vigorously on customer activities was dead.

The proposed rules had required five things: that banks determine the identity of their customers, both when they opened accounts and when they later transacted business; that they have procedures to determine their customers’ “normal and expected transactions”; that they know the source of their customers’ funds; that they identify transactions that appeared abnormal or unexpected; and that they report anything suspicious.

Tanoue said she will urge her colleagues on the agency’s four-member board to drop the proposed rule when the board meets March 23.

While regulatory changes rarely touch off more than a yawn, the Know Your Customer proposal, which was revealed in mid-December, sparked a firestorm of protest.

By the time the 90-day public comment period ended Monday, the FDIC had received a record 225,000 letters and e-mail messages from consumers who believed the proposed changes would severely jeopardize their personal privacy.

Meanwhile, both legislators and bankers had asked the FDIC to withdraw the rules for fear that they would undermine consumer confidence in the entire banking industry.

Ironically, regulators had thought the rules were relatively innocuous. They were designed to simply formalize and merge existing anti-money-laundering rules, said Richard Small, assistant director of the division of banking supervision and regulation at the Federal Reserve Board in Washington, and author of the Know Your Customer proposal. Banks are already required to report both “suspicious transactions” and any cash deposits of $10,000 or more.

However, the wording of the proposal suggested something far more aggressive, bankers complained.

“Bankers have known for a couple of weeks that the measure was likely to die,” said David Burgess, policy director for the California Bankers Assn. on Monday.

Indeed, if the Federal Reserve does not withdraw it, Congress is likely to pass legislation to stop the rule from ever being enforced.

By an 88-0 vote, the Senate expressed support for a measure directing the regulators to drop the proposed rules. Senate Democrats blocked a vote on actual adoption of the measure, sponsored by Sens. Phil Gramm (R-Texas) and Wayne Allard (R-Colo.), so it lacks the force of law.

In the House, the Banking Committee last Thursday adopted an amendment to a big financial services bill that would kill the proposed banking rules.

Tanoue previously had said she was reconsidering the proposed rules, which were denounced in a flood of angry e-mail starting in December. The FDIC had received more than 170,000 e-mail messages and letters as of Friday; by Monday, the final day of the comment period, that had jumped to about 225,000.