Oversight Hearing: The ‘Know Your Customer’ Rules: Privacy in the Hands of Federal Regulators


Mr. Chairman, my name is Solveig Singleton and I am a lawyer atthe Cato Institute. In keeping with the truth in testimony rules, Ifirst note that the Cato Institute does not receive any money atall from the federal government, nor has it in the past.

Thank you for this opportunity to comment on the FDIC’s proposed“Know Your Customer” regulations. The goal of my testimony today isto examine where the “Know Your Customer” proposal fits in the “BigPicture” of this administration’s privacy policy. The FDIC’s “KnowYour Customer” proposal is inconsistent with declarations made bythe FTC, the Commerce Department, and by Vice President Al Gore onAmerican’s privacy rights.

Government‐​supported programs like “Know Your Customer” pose aunique threat to human rights, because government alone has thepower or arrest and prosecution, and to demand assetforfeitures.

The “Know Your Customer” proposal fosters mistrust andresentment of government, particularly among immigrants andminority groups.

The proposal sidesteps the Fourth Amendment.

“Know Your Customer” will not make our streets or bankssafer.

“Know Your Customer” eerily recalls Communist China, whereneighborhood committees of retired communist party members reportedon their neighbors.

Abuses of information collected by government in the past showthat that government will not observe safeguards intended toprevent the abuse of the power to collect information.

The Administration’s Stance on Privacy

Since electronic commerce began to put on a growth spurt, headedfor ungainly adolescence, various agencies and individuals in theexecutive branch and in various agencies have offered up manypronouncements on privacy. These announcements are entirelyinconsistent with the “Know Your Customer” policies developed bythe FDIC, as if the right hand does not know what the left hand isdoing.

Since 1996, the FTC has initiated a large number of workshops,reports, and proceedings on the importance of privacy. These havebeen directed at the private sector businesses that collectinformation from customers for marketing purposes. The FDIC’sproposal to have banks monitor their customer’s transactions andcreate profiles of “normal” banking patterns, though, suggests thatthe FTC should turn its scrutiny from the private sector togovernment. The banks will not use the information they collect todevelop new services, cut costs, or to contact customers withinformation about new products. Rather, the banks would provideinformation to regulators who possess powers of arrest and to bringcitizens to trial or to seize assets in forfeitureproceedings – powers the private sector lacks.

In privacy proceedings, the FTC and the Commerce Department haveeach emphasized that their view of privacy includes givingconsumers a choice about privacy. The FTC explains that “choicemeans giving consumers options as to how any personal informationcollected from them may be used.” The FDIC’s “know your customer“proposal, however, would give customers no escape fromsurveillance. This top‐​down regulatory mandate would impact allFDIC‐​insured banks.

In 1998, Vice President Al Gore has proposed, with greatfanfare, an Electronic Bill of Rights. In discussing privacy, hesaid:

Privacy is a basic American value — in the InformationAge, and in every age. And it must be protected. We need anelectronic bill of rights for this electronic age. You should havethe right to choose whether your personal information is disclosed;you should have the right to know how, when, and how much of thatinformation is being used; and you should have the right to see ityourself, to know if it’s accurate.

Why should government, with its unique law enforcement powers,be permitted to disregard “basic” privacy principles? In targetingthe uses of information in the private sector and allowinggovernment‐​sponsored information gathering to grow, thisadministration has turned the privacy problem upside down.

The FDIC’s Proposed Know Your Customer Rule

The proposed “Know Your Customer” rule represents regulators’attempts to discover where U.S. citizens get their money andwhether the citizens’ banking activities are “normal.”

The “Know Your Customer” proposal fosters mistrust andresentment of government.

The FDIC has already received thousands of comments from peopleoutraged at this prospect. People know the difference between beingtreated as a citizen and being treated as a suspect. Imagine theanger and fear that recent immigrants, African Americans andHispanics will feel, knowing their banks are recording informationabout their jobs and patterns of withdrawals and deposits.

The proposal sidesteps the Fourth Amendment.

The Fourth Amendment to the United States Constitution protectsour privacy from government intrusions. If the police suspect aU.S. citizen of a crime, they would need a warrant to legally seehis or her private papers. The “Know Your Customer” proposal forcesbanks to become agents of the police, spying and reporting on theirown customers‐​without ever obtaining a warrant. It’s an end runaround our constitutional rights of privacy. Unless and until thepolice have probable cause to suspect someone of a crime, where hegets his money is none of the government’s business.

“Know Your Customer” will not make us safer.

The FDIC argues that the new rules are somehow needed to ensurethe “safety” and “reputation” of the banking system. Butbanks‐​Swiss banks in particular‐​have managed to respect theircustomers’ privacy for decades without endangering the “safety” ofthe banking system.

With the “Know Your Customer” proposal, the government wouldsacrifice the rights of all to catch a tiny number of allegedwrongdoers. Of the 7,300 defendants charged with money launderingfrom 1987 and 1995, only 580 were convicted, in almost all casesthe “small fry.” Money laundering is essentially a paperworkoffense, the crime of trying to conceal the proceeds of a crime.Historically, it was not a crime at all. Money launderingconvictions are obtained at enormous taxpayer expense, and thestreets are no safer because of them. Only a desk‐​bound view of lawenforcement would see more surveillance to catch money launderingas a meaningful way to protect the rights of crime victims.

“Know Your Customer” or “Know Your Comrade?”

Under the proposed rule the banking system would act like anetwork of police spies‐​not unlike the neighborhood committees ofretired party members in communist China (known as a “a bridgebetween the government and the masses”). Those committees ofelderly women with bound feet were known as the “KGB with tinyfeet.” They padded about to report their neighbors for having toomany children or a dirty house or harboring “capitalist roaders.“There are differences between the two systems-“Know Your Customer“isn’t intended to support a Communist Party program. But there is akey similarity: in both systems, an intrusive program of regulationrequires the government to force the private sector to help byreporting on everybody, everywhere. This is a sure sign that thegovernment is on the wrong track.

In a free society, there’s no need to turn private businessesinto spy agencies. Most laws are self‐​reporting. If I murdersomeone, his relatives will demand justice; if I defraud him, hewill complain himself and do his best to see that I am caught; if Ispill foul chemicals into his stream, he will complain loudly whenhe finds out. There’s no need to force bankers, grocers orneighbors to report that kind of behavior, or to threaten them withthe forfeiture of their property if they don’t. Using neighbors orprivate businesses as spies is a sure sign that the state hasdeparted from the central job it is supposed to perform‐​protectingour liberties and rights.

Government Abuses of Information

Government cannot be trusted with the power to collect complexand private facts about our lives without a showing of probablecause. History shows that government will not observe safeguardsintended to prevent the abuse of the power to collectinformation:

During World War II, U.S. census data was used toidentify Japanese‐​Americans and place them in internmentcamps.

When Social Security numbers were introduced in 1935, the publicwas repeatedly assured that they would be used only to ensure thatworkers were paying the payroll tax; they are now used throughoutthe federal government and private sector for many purposesentirely unrelated to social security.

In 1995 over 500 Internal Revenue Service agents were caughtillegally snooping through tax records of thousands of Americans,including personal friends and celebrities. Only five employeeswere fired for this misconduct.

In response, the IRS developed new privacy protection measures.These measures were useless, with hundreds of IRS agents beingcaught in early 1997, again snooping through the tax records ofacquaintances and celebrities.

The Clinton administration reportedly obtained hundreds of FBIfiles, including those of:

Billy R. Dale: Fired Travel Office Director
Marlin Fitzwater: Bush’s press secretary
Ken Duberstein: Reagan’s chief of staff
James Baker: Bush’s secretary of state
Tony Blankley: Newt Gingrich’s spokesman

The complexity of our lives and the government’s lack ofknowledge about them are a bulwark against authoritarianism asimportant as the Constitution. As James C. Scott noted inSeeing Like A State: How Certain Schemes to Improve the HumanCondition Have Failed, all through history governments havestruggled to collect more information about citizens. But the morethey strive, the more unlikely it is that their goals can becompatible with the complex, fast‐​moving life in free society. NoAmerican citizen should be treated like a suspect unless and untilhe is one. The “Know Your Customer” rule has no place in a freecountry.

Solveig Singleton

Subcommittee on Commercial and Administrative Law
Committee on the Judiciary
United States House of Representatives