March 8, 1999

Minimum Security Devices and Procedures and Bank Secrecy Act

  • Susan Dudley

    Director, George Washington University Regulatory Studies Center
Key materials
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Rulemaking:

Minimum Security Devices and Procedures and Bank Secrecy Act Compliance; 12 CFR Part 326, RIN 3064-AC19

Stated Purpose:

"[R]equire each nonmember bank to develop a program designed to determine the identity of its customers; determine its customers' sources of funds; determine the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report any transactions of its customers that are determined to be suspicious, in accordance with the FDIC's existing suspicious activity reporting regulation."

Summary of RSP Comment:

The stated purposes are to: protect a bank's reputation, facilitate its compliance with laws, and protect banks from illegal activities of customers. However, these are the bank's responsibilities, and are not appropriate roles for the federal government. Financial institutions have sufficient incentives to protect their own integrity and reputation. Crime itself is not a market failure, and it is better remedied by individual enforcement agencies, rather than requiring a business to enforce the law against its own customers.

The proposal is not based on any thoughtful analysis of the social costs or social benefits (either quantitative or qualitative) of the proposal compared to other approaches to address money laundering. The FDIC does not appear to have considered such important issues as the proportion of bank customers who launder money, the frequency of cases involving average customers, and the frequency of money laundering cases the average bank would expect to find. Nor does the FDIC offer evidence regarding the effectiveness of using the collected information to detect and apprehend money launderers.

The rule would treat all citizens as potential suspects. The FDIC has not demonstrated a compelling social need for this information that would justify its proposed disregard for customers' individual liberties and property rights.