Establishing "Know Your Customer" Programs
January 8, 1999
Circular No. 11129

Proposed Amendments to Regulations H, K, and Y

To All State Member Banks, Bank Holding Companies, Edge and
Agreement Corporations, Branches and Agencies of Foreign Banks, and Others Concerned, in the Second Federal Reserve District:

The following is from a statement by the Board of Governors of the Federal Reserve System:

The Federal Reserve Board has requested comment on a proposed rule that will require the domestic and foreign banking organizations supervised by the Federal Reserve to develop and maintain "Know Your Customer" programs.

Comment is requested by March 8, 1999.

The proposed "Know Your Customer" rule allows each banking organization to decide how best, consistent with its own business practices, it can identify its customers, understand their normal and expected transactions, and then monitor transactions in order to enable the banking organization, among other things, to identify and report suspicious transactions in accordance with the Board's existing suspicious activity reporting requirements.

The proposed rule is designed to build on already existing policies and procedures operating within banking organizations. For the majority of banking organizations, establishing a "Know Your Customer" program will involve little more than formalizing current operating procedures. As an example, for banking organizations involved in retail banking activities, establishing a "Know Your Customer" program will involve minimal additions or enhancements to already existing account opening procedures to determine the identity of a customer, as well as procedures currently in use to understand the normal transactions of a customer and identify and appropriately report suspicious transactions.

The proposed rule allows banks and other financial institutions to establish "Know Your Customer" programs tailored to their size and the types of activities of their customers. The proposal does not require that every transaction of every customer be reviewed on a daily basis. For example, banks are allowed to establish minimal procedures for monitoring the checking accounts of their customers who generally only deposit payroll checks and pay routine bills.

The proposed rule does not violate existing privacy protections. Under current federal law, banks and other financial institutions are required to maintain the confidentiality of customer information and records. The "Know Your Customer" proposal does not require banks and other financial institutions to obtain or disclose customer information that they do not already legally collect.

Written "Know Your Customer" procedures should be an important component of the anti-money-laundering programs of banking organizations.

Strong "Know Your Customer" programs serve to protect the reputation of financial institutions, facilitate their compliance with applicable statutes and regulations (including the Bank Secrecy Act), and protect the institutions from becoming a vehicle for, or a victim of, illegal activities perpetrated by their customers.

The Board's proposed rule is being issued along with nearly identical proposals of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.

The Board's official notice of the proposal, as published in the Federal Register of December 7, 1998, is available as a file (pdf - 69kb). Comments should be submitted to the Board, as specified in the notice, by March 8, 1999.