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

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

Government‐​supported programs like “Know Your Customer” pose a unique threat to human rights, because government alone has the power or arrest and prosecution, and to demand asset forfeitures.

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

The Administration’s Stance on Privacy

Since electronic commerce began to put on a growth spurt, headed for ungainly adolescence, various agencies and individuals in the executive branch and in various agencies have offered up many pronouncements on privacy. These announcements are entirely inconsistent with the “Know Your Customer” policies developed by the FDIC, as if the right hand does not know what the left hand is doing.

Since 1996, the FTC has initiated a large number of workshops, reports, and proceedings on the importance of privacy. These have been directed at the private sector businesses that collect information from customers for marketing purposes. The FDIC’s proposal to have banks monitor their customer’s transactions and create profiles of “normal” banking patterns, though, suggests that the FTC should turn its scrutiny from the private sector to government. The banks will not use the information they collect to develop new services, cut costs, or to contact customers with information about new products. Rather, the banks would provide information to regulators who possess powers of arrest and to bring citizens to trial or to seize assets in forfeiture proceedings–powers the private sector lacks.

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

In 1998, Vice President Al Gore has proposed, with great fanfare, an Electronic Bill of Rights. In discussing privacy, he said:

Why should government, with its unique law enforcement powers, be permitted to disregard “basic” privacy principles? In targeting the uses of information in the private sector and allowing government‐​sponsored information gathering to grow, this administration 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 and whether the citizens’ banking activities are “normal.”

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

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

The proposal sidesteps the Fourth Amendment.

The Fourth Amendment to the United States Constitution protects our privacy from government intrusions. If the police suspect a U.S. citizen of a crime, they would need a warrant to legally see his or her private papers. The “Know Your Customer” proposal forces banks to become agents of the police, spying and reporting on their own customers‐​without ever obtaining a warrant. It’s an end run around our constitutional rights of privacy. Unless and until the police have probable cause to suspect someone of a crime, where he gets 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 ensure the “safety” and “reputation” of the banking system. But banks‐​Swiss banks in particular‐​have managed to respect their customers’ privacy for decades without endangering the “safety” of the banking system.

With the “Know Your Customer” proposal, the government would sacrifice the rights of all to catch a tiny number of alleged wrongdoers. Of the 7,300 defendants charged with money laundering from 1987 and 1995, only 580 were convicted, in almost all cases the “small fry.” Money laundering is essentially a paperwork offense, the crime of trying to conceal the proceeds of a crime. Historically, it was not a crime at all. Money laundering convictions are obtained at enormous taxpayer expense, and the streets are no safer because of them. Only a desk‐​bound view of law enforcement would see more surveillance to catch money laundering as 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 a network of police spies‐​not unlike the neighborhood committees of retired party members in communist China (known as a “a bridge between the government and the masses”). Those committees of elderly women with bound feet were known as the “KGB with tiny feet.” They padded about to report their neighbors for having too many 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 a key similarity: in both systems, an intrusive program of regulation requires the government to force the private sector to help by reporting on everybody, everywhere. This is a sure sign that the government is on the wrong track.

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

Government Abuses of Information

Government cannot be trusted with the power to collect complex and private facts about our lives without a showing of probable cause. History shows that government will not observe safeguards intended to prevent the abuse of the power to collect information:

The Clinton administration reportedly obtained hundreds of FBI files, including those of:

The complexity of our lives and the government’s lack of knowledge about them are a bulwark against authoritarianism as important as the Constitution. As James C. Scott noted in Seeing Like A State: How Certain Schemes to Improve the Human Condition Have Failed, all through history governments have struggled to collect more information about citizens. But the more they strive, the more unlikely it is that their goals can be compatible with the complex, fast‐​moving life in free society. No American citizen should be treated like a suspect unless and until he is one. The “Know Your Customer” rule has no place in a free country.