Patriot Act makes banks pry into new accounts By Laura Bruce ⢠Bankrate.com "To deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes." -- From the Patriot Act, Congress, Oct. 24, 2001 The anti-money-laundering provisions of the Patriot Act are about to be noticed by consumers who open new accounts with financial institutions. Even if you have a checking account with a bank and you decide to open an IRA or a savings account with the same bank, you can expect to be asked some prying questions that may make you uncomfortable. Banks, savings associations, credit unions, brokerages and mutual funds are expected to comply with the provisions as of Oct. 1. Background checking Here is what is required when a new account is opened: A. The institution must verify the identity of any person seeking to open an account by obtaining customer identification that includes: 1. Name 2. Date of birth 3. Address 4. Identification number -- a taxpayer identification number for American citizens or a government-issued document for noncitizens. B. The institution must maintain records of the information used to verify the person's identity. Originally, the regulations required financial institutions to keep a photocopy of whatever document was used for identification. That rule has been changed; they will only have to keep a written record of the document. C. Determine whether the person appears on any lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency. Those provisions may seem fairly harmless, but Boston-based Dalbar, a financial industry consulting firm, says institutions have the ability to ask much more intrusive questions should they decide it's necessary. For instance, Dalbar says institutions could include questions about: Other accounts with links to the customer Nature of the customer's business and occupation Name and address of employer Customer's wealth Source of customer's income Customer's tax status Source of customer's funds used to open account Customer's investment objective "The regulations require a very limited amount of documentation: a valid drivers license or passport for a foreigner, valid street address and date of birth. They'll also check the suspect database," says Charles O'Neill of Dalbar. "But elsewhere in the regulations it's stated very clearly that the institution has an obligation beyond those requirements. The institution is still responsible for knowing their customers." O'Neill says how much scrutiny you're subjected to could depend, in part, on the nature of your transactions and the amount of money. "If you open an account with $100,000, you'll undoubtedly be asked for more than a driver's license. You may be asked where you have other financial accounts and crosschecked against other financial institutions and credit reports. "If you ordinarily maintain an average balance of $3,000 and over the course of three months you deposited two or three checks for $25,000 each, those transactions could be flagged. But it's also likely that based on their knowledge of you, perhaps you have a mortgage with them, they would cross reference you against other accounts and determine there is no suspicious or illegal activity." If an institution does suspect suspicious activity, don't expect to be told of an investigation. The law states that "the financial institution, director, officer, employee, or agent many not notify any person involved in the transaction that the transaction has been reported." O'Neill says some customers might simply be notified that their account has been frozen. "People could be sensitive about not being told why their account is frozen," O'Neill says. "That will happen rarely. There will be some circumstances in which it will occur where the individual is perfectly innocent. But you can be confident that when a Suspicious Activity Report is filed, that particular matter will be addressed by federal authorities very quickly. "Consider that several hijackers opened bank accounts and obtained credit cards with false Social Security numbers just a couple years ago. If there's over-documentation now, to me it's reasonable." Banks vs. bad guys Krista Shonk, regulatory specialist with America's Community Bankers, says banks have long been required to report suspicious activity and the reason customers aren't told is because doing so could compromise the investigation. Shonk says banks will continue to check all customers against a list of known terrorists and money launderers that's issued by the Office of Foreign Assets Control, but she adds that there is some concern about a list generated by law enforcement agencies of people who are merely suspects. "The OFAC list is bona fide bad guys. The 314A is a list of people suspected of money laundering or terrorism," says Shonk. "It's flexible. The concern is these are people who are suspected. Banks need to check customers against the 314A list, but they shouldn't use it to blackmail people." But Shonk agrees with other banking industry representatives that most legitimate consumers will hardly notice the implementation of the new regulations. "Generally, most customers will see absolutely no change," says John Hall, spokesman for the American Bankers Association. "Banks have a long history of doing due diligence in account openings. Our industry has always had the Bank Secrecy Act, which deals with account opening procedures. This is just codifying what's already in place." Little banks feel big pressure But some institutions clearly are struggling to comply with the regulations. First Community Bank in Whitehall, Ohio, has three branches and a total of 35 employees. "It's a lot of work for a small bank," says Kristy Nugent, vice president, comptroller and compliance officer. "We have so few people to do this. It's additional work on top of their regular duties." Being a small town bank also means customers may be a bit more put off by employees asking too many questions. "The customers come here because they want to know you on a personal basis, but they don't necessarily want to give you all their personal information," Nugent adds. "They could have a checking account with us and if they come in and open a savings account or take out a loan, we'll have to go through the background check and they won't like that. "We have signs in the lobbies saying that we'll be doing background checks. This way they can turn around and walk out." One thing that will likely affect all customers is the increased costs involved with implementation of the anti-money-laundering provisions of the Patriot Act. Dalbar estimates that labor costs involved in opening a new account will jump from current costs of about $7.75 to an estimated $22 under the new rules. "One way or another, financial institutions will have to find a way to recover (the costs) and ultimately some portion will trickle down to the customer," says O'Neill. "I don't think we've seen a lot of evidence of that yet. Maybe companies can absorb a certain percentage, but on an ongoing basis, depending on the absolute cost of compliance, it's most likely customers will pay."
Just be glad you aren't going for NFA registration as a floor trader where an alien rectal probe is part of the application packet.