Protests Squash "Know Your Customer"
by Fred E. Foldvary, Senior EditorIn my January 17 editorial "Your Banker Will Tell on You," I wrote of the "Know Your Customer" proposal by the Federal Deposit Insurance Corporation (together with other federal agencies) to force banks to spy on their customers and report any "unusual transactions" to federal investigators. Actually, the banks are already monitoring their customers' transactions and reporting "suspicious" transactions. This new regulation would have greatly expanded the development of customer profiles by making bank tellers ask their customers where they got their money and what they planned to do with it. My editorial included the contact information for those who wanted to comment on the proposal.
When Americans found out about "Know Your Customer," the response was overwhelming. The FDIC received over 250,000 comments, eighty percent by e-mail, and almost all opposing the regulation. The New York Times had an article on this on March 24, 1999, entitled "Flood of E-Mail Credited With Halting U.S. Bank Plan." Many of the protesting messages were individually crafted rather than just copying a mass message.
Usually, government officials discount e-mail messages, since they are so easy and inexpensive to send. But banking regulators were so impressed with the volume and quality of the e-mail that they withdrew the proposed regulation on March 23 at a meeting of officials from the FDIC, the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Office of Thrift Supervision.
The Libertarian Party played a major role in defeating "Know Your Customer." It sent press releases about it, as well as e-mail messages to libertarians, who then forwarded them to various e-mail group lists. The proposal became a hot topic on talk radio shows. The defeat of this proposal marks a milestone in the power of the internet to arouse the public and influence policy.
Despite this victory for financial privacy, the customer-snooping proposal is not dead. The decision to not implement "Know Your Customer" may just be a tactical retreat. In its statement on the withdrawal of the policy, the FDIC stated that it would not diminish its support for anti-money-laundering laws. Federal regulators may adopt "spy on your customer" as a policy or in conjunction with other regulations.
A press release on March 24 by the Libertarian Party states that the Bank Secrecy Act compliance manual of the Federal Reserve continues to declare that every bank "needs" to have a Know Your Customer-style policy, "giving it the force of an informal federal requirement." Congressman Ron Paul of Texas has introduced bills HR 516 and HR 220 to prohibit any federal agency from implementing "spy on your customer" regulations.
This "Know Your Customer" brouhaha demonstrates how interconnected the various government interventions can become. Why, for example, is the FDIC dealing with such regulation, when its primary mission is to insure bank accounts?
The "war on drugs" induces an underground cash economy which the government then attempts to control by watching bank accounts. Central banking enables controls over financial institutions, which then monitor customers' accounts. Income taxes lead to tax evasion, which the government tries to counter by snooping into bank transactions. The government then adopts "civil asset forfeiture" to confiscate cash and other assets without having to try and convict the holders. Officials monitor telephone and internet communications to catch alleged criminals.
As the interventions grow and interlock, the US government becomes ever more like that of the former Soviet Union, where the KGB spied on what everybody was doing and saying, and confiscated property at will. The legislation proposed by Ron Paul would help to prevent some of this intrusion.
A more comprehensive approach would be one sweeping constitutional amendment that prohibits the government from interfering with any peaceful and honest activity. I like to think we are making progress, and the defeat, even if temporary, of "Know Your Customer" shows that the people can prevail if aroused.
-- Fred Foldvary
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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.