Membership of State Banking Institutions in the Federal Reserve System; International Banking Operations; Bank Holding Companies and Change in Bank Control

[Federal Register Volume 63, Number 234 (Monday, December 7, 1998)]

[Proposed Rules]

[Pages 67516-67524]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 98-32332]

[[Page 67515]]

_______________________________________________________________________

Part II

_______________________________________________________________________

Federal Reserve System

12 CFR Parts 208, 211, and 225

_______________________________________________________________________

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Part 21

_______________________________________________________________________

Federal Deposit Insurance Corporation

12 CFR Part 326

_______________________________________________________________________

Department of the Treasury

Office of Thrift Supervision

12 CFR Part 563

_______________________________________________________________________

Regulations H, K, and Y: State Banking Institutions Federal Reserve

System Membership, International Banking Operations, and Bank Holding

Companies and Bank Control Change; ``Know Your Customer'' Requirements;

Minimum Security Devices and Procedures and Bank Secrecy Act

Compliance; and the Development and Maintenance of ``Know Your

Customer'' Programs to Deter and Detect Financial Crimes; Proposed

Rules

Federal Register / Vol. 63, No. 234 / Monday, December 7, 1998 /

Proposed Rules

[[Page 67516]]

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 211, and 225

[Regulations H, K and Y; Docket No. R-1019]

Membership of State Banking Institutions in the Federal Reserve

System; International Banking Operations; Bank Holding Companies and

Change in Bank Control

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board)

is requesting comments on proposed regulations requiring domestic and

foreign banking organizations supervised by the Board to develop and

maintain ``Know Your Customer'' programs. As proposed, the regulations

would require each banking organization to develop a program designed

to determine the identity of its customers; determine its customers'

sources of funds; determine, understand and monitor the normal and

expected transactions of its customers; and report appropriately any

transactions of its customers that are determined to be suspicious, in

accordance with the Board's existing suspicious activity reporting

regulations. By requiring banking organizations to determine the

identity of their customers, as well as to obtain knowledge regarding

the legitimate activities of their customers, the proposed regulations

will reduce the likelihood that banking organizations will become

unwitting participants in illicit activities conducted or attempted by

their customers.

The proposed regulations also implement the provisions of 12 U.S.C.

1818(s) by specifically requiring certain bank holding companies and

their nonbank subsidiaries, Edge and Agreement corporations, and the

U.S. branches and agencies and other offices of foreign banks

supervised by the Board to establish and maintain procedures reasonably

designed to ensure and monitor compliance with the Currency and Foreign

Transaction Reporting Act (31 U.S.C. 5311 et seq.) and the accompanying

regulations issued thereunder by the United States Department of the

Treasury (31 CFR 103.11 et seq.)(collectively referred to as the Bank

Secrecy Act).

DATES: Comments must be received by March 8, 1999 .

ADDRESSES: Comments should refer to Docket No. R-1019, and may be

mailed to Jennifer J. Johnson, Secretary, Board of Governors of the

Federal Reserve System, 20th and Constitution Avenue, N.W., Washington,

D.C. 20551. Comments also may be delivered to Room B-2222 of the Eccles

Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard

station in the Eccles Building courtyard on 20th Street, N.W. (between

Constitution Avenue and C Street) at any time. Comments received will

be available for inspection in Room MP-500 of the Martin Building

between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR

261.14 of the Board's Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Richard A. Small, Assistant Director,

Division of Banking Supervision and Regulation, (202) 452-5235 or

Pamela J. Johnson, Senior Anti-Money Laundering Coordinator, Division

of Banking Supervision and Regulation, (202) 728-5829. For users of

Telecommunications Devices for the Deaf (TDD) only contact Diane

Jenkins, (202) 452-3544, Board of Governors of the Federal Reserve

System, 20th Street and Constitution Avenue, N.W., Washington, D.C.

20551.

SUPPLEMENTARY INFORMATION:

Background

The integrity of the financial sector depends on the ability of

banks and other financial institutions to attract and retain legitimate

funds from legitimate customers. Banking organizations are able to

attract and retain the business of legitimate customers because of the

quality and reliability of the services being rendered and, as

important, the sound and highly respected reputation of banking

organizations. Illicit activities, such as money laundering, fraud, and

other transactions designed to assist criminals in their illegal

ventures, pose a serious threat to the integrity of financial

institutions. When transactions at financial institutions involving

illicit funds are revealed, these transactions invariably damage the

reputation of the institution involved. While it is impossible to

identify every transaction at a financial institution that is

potentially illegal or is being conducted to assist criminals in the

movement of illegally derived funds, it is fundamental for safe and

sound operations that financial institutions take reasonable measures

to identify their customers, understand the legitimate transactions to

be conducted by those customers and, consequently, identify those

transactions conducted by their customers that are suspicious in

nature. By identifying and, when appropriate, reporting such

transactions, in accordance with existing suspicious activity reporting

requirements, financial institutions are protecting their integrity and

are assisting the efforts of the bank regulatory agencies and law

enforcement authorities to thwart illicit activities at financial

institutions.

The Board has long advocated that one of the most effective means

by which a financial institution can both protect itself from engaging

in transactions designed to facilitate illicit activities and ensure

compliance with applicable suspicious activity reporting requirements

is for the institution to have adequate ``Know Your Customer'' policies

and procedures. While some customers may view ``Know Your Customer''

procedures as an unnecessary intrusion into their privacy, these

procedures are important for complying with the Bank Secrecy Act and

suspicious activity reporting requirements. The adoption of the

proposed ``Know Your Customer'' requirements may also assist banks in

ascertaining those banking services that will most effectively serve

the customers' interests and for managing risks to the bank. Many

financial institutions have already adopted policies and procedures

that are consistent with the proposed ``Know Your Customer''

requirements. Additionally, such policies and procedures have enabled

banks to better serve their clientele, as well as comply with existing

regulatory requirements.

The position of the Board is consistent with that of other

countries throughout the world, as evidenced by the pronouncements of

several international organizations.1 Numerous countries

have adopted the idea of ``Know Your Customer'' and mandatory

suspicious transaction reporting as the best means of protecting the

financial sector from participating in the movement of illicit funds.

Such ``Know Your Customer'' programs seek to stifle the criminal

element, which tends to gravitate towards financial institutions that

operate within poorly regulated and supervised jurisdictions, in its

attempts to conduct transactions involving illegally derived funds.

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\1\ See the Basle Committee on Banking Regulations and

Supervisory Practices, ``Statement on the Prevention of Criminal Use

of the Banking System for the Purpose of Money Laundering''

(December 1988), as well as the Committee's, ``Core Principles for

Effective Banking Supervision'' (April 1997); the 1988 United

Nations Vienna Convention Against Illicit Traffic in Narcotic Drugs

and Psychotropic Substances; the 1990 Council of Europe Convention;

and the Financial Action Task Force Forty Recommendations, issued in

1989 and amended in 1996.

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The requirement to establish a ``Know Your Customer'' program

should assist financial institutions in obtaining

[[Page 67517]]

information from their customers regarding the identity, the types of

transactions to be conducted and the source of funds, among other

things. The collection of such information will further assist

financial institutions in making a risk-based determination on matters

including the extent of identifying information necessary and the

amount of monitoring required, by allowing institutions to categorize

their customers into different groups based on the types of services

being requested and the magnitude and extent of the transactions being

conducted. Effective ``Know Your Customer'' programs will evidence the

intent of state member banks, bank holding companies, Edge and

Agreement corporations, and the U.S. branches and agencies of foreign

banks to take all reasonable measures to thwart the facilitation of

potential criminal activity.

Effective ``Know Your Customer'' programs will necessarily require

that banking organizations develop ``customer profiles'' to understand

their customers'' intended relationships with the institution, and,

thereafter, realistically determine when customers conduct transactions

that are suspicious or potentially illegal. Banking organizations that

already recognize the value of effective ``Know Your Customer''

programs and have implemented such programs may have found it difficult

to convince customers of the need to provide certain information,

especially when other financial institutions do not ask for such

information. Because such programs will now be required by regulation,

financial institutions will not be prejudiced or criticized for

needlessly inquiring into the affairs of their customers. Moreover,

legitimate customers should be more willing to provide the information

requested by the financial institutions because they will be aware that

a similar legal responsibility exists for all banking organizations

supervised by the federal bank supervisory agencies.

The Board recognizes that a ``Know Your Customer'' requirement will

impose additional burdens on some banking organizations. Mindful of

that fact, the Board is striving to impose only those requirements that

are necessary to ensure that banking organizations have in place

adequate ``Know Your Customer'' programs. In a supplemental document to

be provided at the time these regulations become final, the Board, in

coordination with the other federal bank supervisory agencies, will

provide detailed guidance on specific steps that banking organizations

may consider taking as they implement the regulations. The guidance is

not intended to provide additional interpretive explanations of the

regulations, but rather it will provide concrete examples of proven

effective means to accomplish the requirements of the regulations, such

as identifying customers and monitoring customer transactions. The

Board believes that this approach will strike an appropriate balance

that responds to requests for additional guidance in this area while

preserving the flexibility for each institution to take steps

appropriate for its customers.

In order to ensure the effective implementation of ``Know Your

Customer'' programs at each of the domestic and foreign banking

organizations supervised by the Board, the proposal also implements the

provisions of Section 8(s)(1) of the Federal Deposit Insurance Act, as

amended (12 U.S.C. 1818(s)(1)). The ``Know Your Customer'' programs

required by this proposal would be part of the Bank Secrecy Act-related

procedures required to be adopted by the domestic and foreign banking

organizations supervised by the Board.

Authority to Issue Regulations

The proposed regulations are authorized pursuant to the Board's

statutory authority under Section 8(s)(1) of the Federal Deposit

Insurance Act, as amended by Section 2596(a)(2) of the Crime Control

Act of 1990 (Pub.L. 101-647), which requires, inter alia, the Board to

issue regulations requiring state member banks, as well as other

domestic and foreign banking organizations operating in the United

States supervised by the Board, to establish and maintain internal

procedures reasonably designed to ensure and monitor compliance with

the Bank Secrecy Act. Effective ``Know Your Customer'' programs serve

to facilitate compliance with the Bank Secrecy Act.

The regulations are also being proposed under the Board's general

authority to prevent unsafe and unsound practices and to adopt

regulations defining safe and sound conduct for banking organizations

under its supervision, as well as under the Board's authority to

prescribe specific operational and managerial standards for banks, as

set forth in 12 U.S.C. 1831p-1(a)(2).

Proposal

The Board proposes to revise 12 CFR Parts 208, 211, and 225 by

requiring state member banks, certain bank holding companies and their

nonbank subsidiaries, U.S. branches and agencies and nonbank

subsidiaries of foreign banks, and Edge and Agreement corporations

(collectively referred to as a ``bank'' or ``banks'') to develop and

implement a ``Know Your Customer'' program within their

institutions.2

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\2\ Generally, the ``Know Your Customer'' requirements set forth

in this proposal will be applicable only to those bank holding

companies and their nonbank subsidiaries that engage in business

activities or transactions with the public and that are involved

with the receipt or disbursal of customer funds.

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The requirements of the ``Know Your Customer'' program are set out

in general terms, reflecting the Board's view that a ``Know Your

Customer'' program that is appropriate for one institution may not be

appropriate for another. Under the proposed regulations, the Board

would expect each banking organization to design a program that is

appropriate to that organization, given its size and complexity, the

nature and extent of its activities, its customer base and the levels

of risk associated with its various customers and their transactions.

The Board believes that this approach is preferable to a detailed

regulation that imposes the same list of specific requirements on every

organization regardless of its specific circumstances or situation.

The Office of the Comptroller of the Currency, the Federal Deposit

Insurance Corporation, the Office of Thrift Supervision and the

National Credit Union Administration are proposing to adopt

substantially similar regulations covering national banks, federal

branches and agencies of foreign banks, state nonmember banks, insured

state chartered branches of foreign banks, savings associations and

credit unions, respectively. The Board expects that federal regulators

of non-bank financial institutions, such as broker-dealers, will

propose similar rules in the future.

The Board proposes to add a new paragraph (d) to section 208.63 of

Regulation H of the Board (12 CFR 208.63). New paragraph 208.63(d)

describes the requirements for a ``Know Your Customer Program'' at a

state member bank. New sections 211.8(b) and 211.24(f)(2) of the

Board's Regulation K and new section 225.4(g) of the Board's Regulation

Y make all of section 208.63 of the Board's Regulation H, including the

new ``Know Your Customer'' provisions of section 208.63(d), applicable

to Edge and Agreement corporations, the U.S. branches and agencies of

foreign banks (except a federal branch or federal agency or a state

branch that is insured by the Federal Deposit Insurance Corporation),

and certain bank holding

[[Page 67518]]

companies and their nonbank subsidiaries, respectively.

Section-by-Section Analysis

Section 208.63--Procedures for Monitoring Bank Secrecy Act Compliance

Paragraph (d)(1)--Purpose

The proposal makes it clear, by delineating the purposes for which

a ``Know Your Customer'' program should be developed, that it is in

each bank's own best interest to establish and implement such a

program. The creation of a ``Know Your Customer'' program is intended

to protect the reputation of the bank; facilitate the bank's compliance

with all applicable statutes and regulations (including the Bank

Secrecy Act and the Board's suspicious activity reporting regulations)

and with safe and sound banking practices; and protect the bank from

becoming a vehicle for or a victim of illegal activities perpetrated by

its customers.

Paragraph (d)(2)--Definitions

Because the text of the proposed regulations is set forth in

Regulation H, the term ``bank'' is defined to mean a state member bank.

Regulations K and Y will incorporate by reference the ``Know Your

Customer'' provisions from Regulation H without repeating the entire

text of the regulations and make them applicable to bank holding

companies and their nonbank subsidiaries, foreign banks operating in

the United States that are subject to the Bank Holding Company Act and

their nonbank subsidiaries operating in the United States, Edge

corporations, Agreement corporations, and branches and agencies of

foreign banks in the United States, subject to Regulations K and Y. In

most instances, however, banking organizations that do not engage in

business transactions with the public will be excluded from the

definition of bank, as set forth in paragraph (d)(2). For example,

shell bank holding companies that solely own or control the shares of

their subsidiary banks or thrifts and nonbank subsidiaries of bank

holding companies that operate solely to service the activities of

their affiliates and, in so doing, do not interact in any manner with

any public customers will not be covered by this proposal. In addition,

the proposed regulations will not apply to credit card banks, bankers

banks or other banks that operate solely to service the activities of

their affiliates.

The proposed regulations define the term ``customer'' as the person

or entity who has an account involving the receipt or disbursal of

funds at a bank and any other person or entity on behalf of whom such

an account is maintained. The term encompasses direct and indirect

beneficiaries of deposit, loan and other accounts that involve the

receipt or disbursal of funds. The term also encompasses a person or

entity who owns or is represented by the customer. Under this

definition, a ``customer'' would include an accountholder, a beneficial

owner of an account or a borrower and could include the beneficiary of

a trust, an investment fund, a pension fund or company whose assets are

managed by an asset manager, a controlling shareholder of a closely

held corporation or the grantor of a trust established in an off-shore

jurisdiction. The term ``customer'' is not meant to include receipt of

services from the bank for which no transaction involving the receipt

or disbursal of customer funds occurs, such as a bank's provision of

safe deposit boxes.

Paragraph (d)(3)--Establishment of Know Your Customer Program

This section of the proposed regulations requires that each bank

supervised by the Board establish a ``Know Your Customer'' program by

April 1, 2000. Additionally, this section of the proposal will require

that the ``Know Your Customer'' program be reduced to writing and

approved by the board of directors of the bank, or a committee thereof,

and the approval recorded in the official minutes of the board. For the

U.S. offices of foreign banks, such approval may be obtained from the

highest level management official in the United States.

Paragraph (d)(4)--Contents of Know Your Customer Program

This section of the proposed regulations sets forth the specific

requirements for the contents of the ``Know Your Customer'' program.

Banks vary considerably in the way in which they conduct their business

on a day-to-day basis. Therefore, the Board believes that to impose

regulations that simply require each bank to follow a pre-designed,

standardized checklist would not be appropriate. The proposed

regulations allow each bank to develop and delineate a system that will

comprise the ``Know Your Customer'' program, consistent with the

banking practices of the particular bank that, when followed by the

bank, will effectively meet the requirements and goals of the

regulations. This will allow each bank to design a ``Know Your

Customer'' program specifically suited to its own situation that

appropriately reflects the size and complexity of the bank, the types

of customers it serves and the nature and extent of their activities at

the bank.

Additionally, this section recognizes that each bank's ``Know Your

Customer'' program may vary depending on the nature of the specific

activity, the type of customers involved, the size of the transactions

and other factors that reflect the bank's assessment of the risk

presented. This section recognizes that it may be beneficial for banks

to classify customers into varying risk-based categories that the banks

can use in determining the amount and type of information,

documentation and monitoring that is appropriate. While these proposed

regulations will provide banking organizations with substantial

flexibility in devising an appropriate ``Know Your Customer'' program,

the Board believes that all ``Know Your Customer'' programs should

contain certain critical features, which are set forth herein.

Paragraph (d)(4)(i) of the proposed regulations also requires that

the ``Know Your Customer'' program delineate acceptable documentation

requirements and the due diligence procedures the bank will follow in

meeting the requirements of the proposed regulations. The delineation

of this information in the ``Know Your Customer'' program will ensure

that the same standards are applied throughout the bank and will inform

auditors and examiners of the bank's established standards for review

of customer information.

Paragraph (d)(4)(ii) of the proposal sets forth the minimum

requirements for an acceptable ``Know Your Customer'' program. The

proposed regulations require that, rather than following a

``checklist'' approach, a bank may develop a ``system'' designed to

meet the basic requirements of the regulations. The system approach

allows each bank to design its own program, in accordance with its own

business practices, that will best suit the bank. While this places

some burden on the bank to develop the specifics of the ``Know Your

Customer'' program, such an approach recognizes that each bank conducts

business in accordance with its own policies, procedures, goals and

objectives. The ``Know Your Customer'' program, in order to be the most

effective, must be developed and implemented with the bank's regular

and ordinary business practices in mind. Potentially, there can be a

variety of ways in which a ``Know Your Customer'' program can be

established and operated to best meet the needs of the bank while

fulfilling the requirements of the regulations.

[[Page 67519]]

Paragraph (d)(4)(ii)(A) of the proposed regulations requires that

the ``Know Your Customer'' program provide a system for determining the

identity of customers maintaining accounts at the bank, as defined. It

is imperative that a bank establish, to its own satisfaction, that it

is dealing with a legitimate person, whether the person is a natural

person, corporation or other business entity. The nature and extent of

the identification process should be commensurate with the types of

transactions anticipated by the customer and the risks associated with

such transactions.

The Board does not believe that it is practicable for a financial

institution to conduct a large-scale information request from all its

existing customers. Rather, the Board contemplates that a financial

institution will be able to comply with the proposed regulation with

respect to its existing customers by determining their normal and

expected transactions using available account data, monitoring their

transactions for potentially suspicious activities, and obtaining and

documenting additional information from them in order to explain

unusual transactions or when otherwise needed. However, for some

customers, depending on the severity of the risk associated with such

customers and their transactions, it may be necessary to fulfill all of

the requirements of these regulations as if these were new customers.

The identity of a prospective customer should be satisfactorily

established before a customer relationship with the bank is permanently

established. If a prospective customer refuses to provide any of the

requested information the customer relationship should not be

established. Similarly, if additional or follow-up information is not

forthcoming consideration should be given to terminating the

relationship.

The best identification documents available for verifying the

identity of prospective customers are those which are the most

difficult to obtain illicitly and the most difficult to counterfeit. No

single form of identification can be guaranteed to be genuine, however,

and, therefore, the identification process should be cumulative,

obtaining enough information and documentation to assure the bank that

it has properly identified the prospective customer.

As an example, an integral part of the identification process

should be the prospective customer's address or place of business and

telephone number. Verification of this information for some customers

could include physical observation of the location at the address

provided and return telephone calls, or ``call backs,'' to determine

the authenticity of the telephone number provided. Extra consideration

may be required when it is determined that a prospective customer is

situated outside of the area normally served by the bank.

The identification process for natural persons wishing to establish

a customer relationship should, when appropriate and practicable,

include the review of appropriate identification documentation. In

these instances, acceptable forms of documentation should include

within the document a photograph and description of the individual,

along with the signature of the individual. The documentation should

also be easily recognizable identification issued by a government

entity. While not an exhaustive list, some examples of acceptable

identification documentation could include: driver's license with

photograph issued by the State in which the bank is located;

3 State identity card with photograph issued by the State in

which the bank is located; and United States passport or alien

registration card. Other forms of identification, while not sufficient

to be used without corroboration, are satisfactory as forms of

secondary identification that could be used in conjunction with the

types of identification documentation described above to assist in

identifying or verifying the identity of the prospective customer. Some

examples, again while not an exhaustive list, could include: employer

identification card; student identification card; out-of-State driver's

license; credit card; and current utility bills from place of

residence. At a minimum, the accepted forms of identification should be

recorded and, if no legal impediment exists, duplicated and maintained

in the customer's ``file'' at the bank.

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\3\ For customers that are located in a multi-state regional

area, such as the Washington, D.C. metropolitan region, which

encompasses parts of Maryland and Virginia, identification documents

from a neighboring state would be acceptable.

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Similarly, for prospective corporate or business customers, the

customer identification process should include the review of

appropriate documentation that allows for a means to verify that the

corporation or other business entity does exist and does engage in the

business, as stated. In establishing the identity of a corporate or

business customer, the prospective customer should provide evidence of

legal status, such as an incorporation document, a partnership

agreement, association documents, or a business license. In some

instances, it may also be necessary to obtain information on the

controlling owners of the business or legal entities. Additionally, the

prospective customer should provide a financial statement of the

business, a description of the business to include such information as

whether the business is in the wholesale or retail markets, and a

description of the business's primary area of trade. It also may be

appropriate to obtain information related to customers and suppliers of

the prospective customer for purposes of verifying information

presented by the prospective customer. At a minimum, all documentation

reviewed, as well as verifications of the information contained

therein, should be recorded and maintained within the customer's

``file'' at the bank.

Any practice of a bank that allows for the establishment of a

customer relationship without face to face contact with bank personnel,

such as banking by mail or Internet banking, poses difficulties in the

identification of the prospective customer by use of the traditionally

accepted practice of obtaining identification documentation to include

photographic identification. Even though photographic identification in

such circumstances will be impractical, other accepted means of

identifying a customer are still viable. In such circumstances, special

care should be given to verification of address and telephone number,

as well as the use of commercially available data to compare such items

as name with date of birth and social security number.

Introductions or referrals of prospective customers by established

customers of the bank, while extremely valuable in providing background

information about the prospective customer, cannot take the place of

identification requirements that should be set forth in the bank's

``Know Your Customer'' program. Details regarding the introduction or

referral should be documented so that the information obtained can be

effectively used to assist in the verification of the prospective

customer.

The proposed regulations allow each bank to determine what

documentation will be appropriate and acceptable in light of

circumstances regarding that particular bank. If the identification

process will allow for the possibility of exceptions to the established

practice, for, as an example, accounts being established for senior

citizens or minors, the possible exceptions should be delineated within

the ``Know Your Customer'' program.

Heightened interest in the marketing of private banking activities

by banks, as well as the heightened interest by banking customers, in

the benefits

[[Page 67520]]

derived from using private banking services has lead to a demonstrable

increase in the number of private banking clients.4 As the

market for private banking grows, so does the level of competition

among institutions that provide private banking services. Accordingly,

there is increased pressure to obtain new customers, increase the

assets under management, and contribute a greater percentage to the net

income of the bank.5 Emphasizing customer growth, without

adopting appropriate procedures to understand a customer's personal and

business background, source of funds and intended use of the private

banking services, may well certainly lead to increased reputational and

legal risks.

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\4\ For an in-depth discussion of private banking and sound

practices associated with the administration of private banking

activities, see the July 1997 Guidance on Sound Risk Management

Practices Governing Private Banking Activities, prepared by the

Federal Reserve Bank of New York and issued by the Board

(hereinafter referred to as the ``Sound Practices Paper''). The

Sound Practices Paper was distributed, or made available, to banking

organizations supervised by the Board by the Federal Reserve Banks

pursuant to the Board's Division of Banking Supervision and

Regulation SR Letter 97-19 (SUP). Copies of the Sound Practices

Paper and SR Letter are available on the Board's public Internet web

site (www.federalreserve.gov).

\5\ See Sound Practices Paper at page 2.

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Typically, private banking customers make use of such account

vehicles as personal investment companies (PICs), trusts, personal

mutual investment funds, or are clients of financial advisors. The

establishment of such accounts serves the stated purposes of protecting

the legitimate confidentiality and financial privacy of the customers

that use such accounts. However, banks need to identify properly the

beneficial owners of such accounts, through an effective ``Know Your

Customer'' program. Therefore, ``Know Your Customer'' procedures for

identifying the beneficial owners of such accounts should be no

different than the procedures for identifying other customers of the

bank. Any needed confidentiality required by customers of a bank's

private bank can be addressed by the development of special protections

to limit access to information that would generally reveal the

beneficial owners of these accounts.6

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\6\ For a more specific discussion of suggested ``Know Your

Customer'' procedures appropriate for private banking operations see

generally Sound Practices Paper.

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Equally important is the identification of beneficial owners of

assets bought, sold or managed through a relationship with a bank. Such

transactions often occur at the behest of intermediaries, such as asset

managers, who may or may not be registered investment advisors, who

deal with banks on behalf of one or more of their clients. For purposes

of the proposed regulations, the ``customer'' of the bank in these

types of situations would include the beneficiaries of the transactions

and not just the intermediaries. The extent of the information

regarding the customer that may be necessary to fulfill the bank's

``Know Your Customer'' obligations should depend on a risk-based

assessment of the customer and the transactions that will occur, such

as the type, duration and size of the transactions, and should be

addressed within the bank's ``Know Your Customer'' program.

Ultimately, the amount of information necessary to identify

adequately the beneficial owner of an account should be the result of a

risk assessment of the customer and the intended transactions of the

customer. The bank's ``Know Your Customer'' program should provide the

flexibility to group or categorize customers in a manner that allows

the bank to better determine the amount of information necessary for

such groups or categories. In some instances, however, it may not be

necessary to determine the identity of the beneficiaries of the bank's

customers, because the identity of these customers has already been

satisfactorily established. For example, if the bank's customer is a

widely-held mutual fund or asset management fund, a bank does not have

to ``know'' all of the customer's shareholders and certainly does not

have to monitor the shareholders' individual transactions that may

occur through the bank. Similarly, in the event that a bank's customer

is a financial institution supervised by the Board or another federal

or state financial institutions supervisory agency and the bank is

acting as an intermediary for the financial institution that is the

bank's customer in such activities as check clearing or funds transfer

processing, the bank is under no obligation to ``know'' the customers

of the financial institution or monitor the transactions of the

financial institution's customers. On the other hand, if the bank's

customer is a mutual fund established in an off-shore jurisdiction that

has a limited number of shareholders, the bank will be required to

``know'' the customers of the mutual fund.

Paragraph (d)(4)(ii)(B) of the proposed regulations requires that

the ``Know Your Customer'' program provide a system for determining the

source of funds of customers. An effective ``Know Your Customer''

program requires that a bank understand the nature and source of the

funds being placed in the bank by the customer including the types of

instruments used and from where the funds or assets were derived or

generated. Under standards that currently exist in criminal law,

failure to obtain knowledge that is readily available, such as the

source of funds of a particular customer, because of a desire to avoid

the perceived embarrassment of having to obtain such information, can

lead to the prosecution for a money laundering violation when it is

later determined that the funds in question were derived from illicit

activity.7 Adoption of, and adherence to, a ``Know Your

Customer'' program can substantially minimize the risks to a bank.

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\7\ See 18 U.S.C. 1956 and 1957.

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For purposes of determining and documenting the source of funds,

the amount of information necessary can depend on the type of customer

in question. As an example, for a majority of retail banking customers

that maintain transaction accounts, where practically the only source

of funds comes from payroll deposits, it is a relatively simple task to

identify and document the source of funds as payroll deposits. On the

other hand, a more detailed analysis, with a more extensive

documentation process, would necessarily be required for high net worth

customers with multiple deposits from a variety of sources. For these

reasons, among others, it may be beneficial for banks to classify

customers into varying categories, based on such factors as the types

of accounts maintained and the types of transactions conducted and the

potential risk of illicit activities associated with such accounts and

transactions. Banks could then develop procedures, as part of the

``Know Your Customer'' programs, to obtain necessary information and

documentation based on the risk assessment for the various categories

or classes established by a bank.

Paragraph (d)(4)(ii)(C) of the proposed regulations requires that

the ``Know Your Customer'' program provide a system for determining

customers'' normal and expected transactions involving the bank. The

primary objective of such a process is to enable the bank to predict

with relative certainty the types of transactions in which a customer

is likely to be engaged. Without an understanding of the normal and

expected transactions of the customers of the bank is virtually

impossible to determine if any particular transaction conducted by a

customer is suspicious.

Understanding a customer's normal and expected transactions is not

a task

[[Page 67521]]

that can be accomplished entirely at the inception of the account

relationship. While it should be a simple task to obtain and record

information as to a customer's expectations at the time of account

opening, only after reviewing the customer's activity for a given

period of time can a determination as to the customer's normal

transactions be made. For this reason, effective ``Know Your Customer''

procedures for determining the normal and expected transactions for a

bank's customers should envision an amount of time adequate to make

these assessments.

The ``Know Your Customer'' procedures for determining normal and

expected transactions should also take into consideration the type of

account that is being established. As an example, a demand deposit

account associated with a payroll deposit will not require an

inordinate effort to determine that the customer will, most likely, use

the account for ordinary living expenses and the deposit of the

customer's salary. Conversely, a business account or an account

maintained by a private banking customer may require a more in-depth

analysis of the customer's intended use of the account coupled with a

heightened ongoing review of account activity to determine if, in fact,

the customer has acted in accordance with the expectations developed at

the inception of the account relationship.

Paragraph (d)(4)(ii)(D) of the proposed regulations requires that

the ``Know Your Customer'' program provide a system for monitoring, on

an ongoing basis, the transactions conducted by customers to determine

if their transactions are consistent with the normal and expected

transactions for particular customers or for customers in the same or

similar categories or classes. The proposed regulations do not require

that every transaction of every customer be reviewed on a daily basis.

However, banks must develop and implement effective monitoring systems,

commensurate with the risks presented by the types of accounts

maintained at the bank and the types of transactions conducted through

those accounts.

The Board is not suggesting that banks must expend considerable

resources to purchase sophisticated computer hardware or software as a

means of complying with the proposed regulations. The effectiveness of

the monitoring system of a bank's ``Know Your Customer'' program will

be based on that particular bank's ability to monitor transactions

consistent with the volume and types of transactions conducted at the

bank.

There are numerous means by which a system can be developed to

carry out the ongoing monitoring of the transactions being conducted by

the customers of the bank. Therefore, it would be appropriate for a

bank to design a monitoring system that would correspond to the risk

associated with the types of accounts maintained and the types of

transactions conducted through those accounts.

The design of such a monitoring system, for example, could involve

the classification of accounts into various categories based on such

factors as the type of account, the types of transactions conducted in

the various types of accounts, the size of the account, the number and

size of transactions conducted through the account, and the risk of

illicit activity associated with the type of account and the

transactions conducted through the account. For certain classes or

categories of accounts, which may be the majority of accounts at some

banks, it may be sufficient for an effective monitoring system to

establish parameters for which the transactions within these accounts

will normally occur. Rather than monitoring each transaction, an

effective monitoring system could entail monitoring only for those

transactions that exceed the established parameters for that particular

class or category of accounts. Under the proposed regulations, a bank's

determination as to how to monitor its various accounts based on the

risks associated with those accounts will be given great deference by

the Board.

In many instances, monitoring is already occurring. As an example,

monitoring of transactions already occurs as a means of complying with

existing suspicious activity reporting regulations. Similarly,

monitoring occurs for such things as large cash transactions, check

kiting and attempted withdrawals from accounts with insufficient funds

or from closed accounts.

For other categories or classes of accounts, it may be necessary to

monitor most, if not all, transactions conducted. One such example are

transactions conducted by private banking customers. As a general

proposition, transactions of private banking customers usually involve

large sums of money. For this reason alone, it is important that a bank

understands the nature of these transactions and reviews these

transactions to ensure that the transactions are consistent with the

normal and expected transactions for that particular customer or for

customers in the same or similar categories or classes. It is the

Board's experience that relationship managers are very aware of

transactions conducted by a private banking customer and, in most

instances, assist the private banking customer in conducting the

transactions. Therefore, there should be little, if any, hardship

associated with reviewing transactions to ensure that they are

consistent with the normal and expected transactions for that

particular customer.

Many banks already engage in sufficient account monitoring

activities. These practices should be formalized in a sound ``Know Your

Customer'' program, which will ensure that banks have identified and

implemented procedures that adequately monitor a broad range of account

activity while providing flexibility in defining the requisite

monitoring activity in light of the risks associated with particular

customers and the transactions being conducted.

Paragraphs (d)(4)(ii)(E) of the proposed regulations require that

the ``Know Your Customer'' program provide a system for determining if

a transaction is suspicious and making a report, when necessary, in

accordance with the Board's suspicious activity reporting regulations.

In identifying reportable transactions, a bank should not conclude that

every transaction that falls outside what is expected for a given

customer, or for categories or classes of customers, should be

reported. Rather, a bank should focus on patterns of inconsistent

transactions and isolated transactions that present risk factors that

warrant further review.

Paragraph (d)(5)--Compliance With Know Your Customer Program

Paragraph (d)(5) of the proposed regulations sets forth the

requirements a bank must follow to ensure that it is in compliance with

its ``Know Your Customer'' program. The requirements include that a

bank provide for and document a system of internal controls to ensure

ongoing compliance, as well as provide for and document independent

testing for compliance with the ``Know Your Customer'' program.

Additionally, the bank must designate an individual responsible for

coordinating and monitoring day-to-day compliance and provide for and

document training to all appropriate personnel of the content and

requirements of the ``Know Your Customer'' program.

Paragraph (d)(6)--Availability of Documentation

Paragraph (d)(6) of the proposed regulations requires, for all

accounts opened or maintained in the United States, that all

information and documentation necessary to comply

[[Page 67522]]

with the regulations be made available for examination and inspection,

at a location specified by a Board or Reserve Bank representative,

within 48 hours of a request for the provision of such information and

documentation. In instances where the information and documentation is

at a location other than where the customer's account is maintained or

the financial services are rendered, the bank must include, as part of

its ``Know Your Customer'' program, specific procedures designed to

ensure that the information and documentation is reviewed on an ongoing

basis by appropriate bank personnel.

Issues may arise, on occasion, concerning whether foreign laws

permit a bank to disclose certain customer information to bank

supervisory agencies, such as the Board. The Board believes that

nondisclosure provisions that may exist in foreign, if they exist,

should not, in any event, present a bar to the disclosure of such

information and documentation. In instances where foreign laws have

been raised as creating a prohibition to the disclosure of information

that is required by the proposed regulations, the Board's experience is

that the information already exists within the banking organization in

the United States because the information is used by the relationship

manager, who resides in the United States, as well as other components

of the bank, to provide banking services to the customer. Moreover, in

other instances where banks have raised foreign law disclosure issues,

the banks, at the Board's suggestion, have obtained from their

customers waivers to any perceived prohibition to disclosure of the

information and documentation. Therefore, in the opinion of the Board,

there is no prohibition or insurmountable bar to the disclosure of the

required information and documentation.

Comments Sought

In addition to other comments that commenters may feel are

appropriate, the Board is seeking comments specific to the following:

1. Whether the proposed definition of ``customer'' is sufficient to

include all persons who benefit from the transactions conducted at the

bank, such as persons who establish off-shore shell companies or

entities or otherwise conduct their business through intermediaries.

2. Whether the proposed definition of ``customer'' is too broad and

will unnecessarily include persons that pose a minimal ``Know Your

Customer'' risk.

3. Whether a bank's ``Know Your Customer'' program should apply to

a bank's counterparty relationships with respect to transactions in

wholesale financial markets (e.g., sales or purchases involving foreign

exchange or securities) and correspondent banking relationships or if,

in such markets, a different standard than that applicable to retail

relationships would be more appropriate and, if such a distinction is

appropriate, how the definition of ``customer'' can be distinguished

between transactional counterparty customers, correspondents and retail

customers.

4. Whether the proposed regulations will create a competitive

disadvantage with respect to other financial sector entities offering

similar services that may not be subject to the proposed regulations

(citing, where possible, specific examples).

5. Whether the proposed regulations will create a competitive

disadvantage with respect to other financial entities offering similar

services that may not be subject to similar regulations.

6. Whether the actual or perceived invasion of personal privacy

interests is outweighed by the additional compliance benefits

anticipated by this proposal.

7. Whether there would be a minimum account size threshold below

which the ``Know Your Customer'' requirements would be waived.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA)

(5 U.S.C. 605(b)), the initial regulatory flexibility analysis

otherwise required under section 603 of the RFA (5 U.S.C. 603) is not

required if the head of the agency certifies that the rule will not

have a significant economic impact on a substantial number of small

entities and the agency publishes such certification and a succinct

statement explaining the reasons for such certification in the Federal

Register along with its general notice of proposed rulemaking.

The Board hereby certifies that the proposal will not have a

significant economic impact on a substantial number of small entities.

The proposal should result in a net benefit to banks regardless of size

because it establishes uniform rules relating to the identification of

customers for all banking organizations supervised by the Board. Most

banking organizations, from small to large, already have policies and

procedures aimed at collecting, retaining and reviewing the types of

information required by this proposal, and there should, thus, be

little economic impact from this proposal.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule

under the authority delegated to the Board by the Office of Management

and Budget.

The collection of information requirements in this proposed

regulation are found in 12 CFR 208, 211, and 225. This information is

required to evidence compliance with section 8(s) of the Federal

Deposit Insurance Act. The recordkeepers are for-profit financial

institutions, including small businesses. Records must be retained for

five years for inspection under the institution's established standards

for review of customer information and pursuant to the Bank Secrecy

Act.

The OMB control number for the information collection contained in

the proposed rule is 7100-0212. The Board may not conduct or sponsor,

and an organization is not required to respond to, this information

collection unless it displays a currently valid OMB control number.

Recordkeepers for this information collection include all state

member banks, U.S. branches and agencies of foreign banks, Edge and

agreement corporations supervised by the Board, and certain bank

holding companies and nonbank subsidiaries of bank holding companies.

8 The Federal Reserve estimates there will be 3,500

recordkeepers in the first year; in subsequent years, the recordkeepers

will consist of newly-chartered institutions subject to the rule. The

majority of the paperwork burden associated with the proposed rule is

the one-time cost of developing a plan and implementing written

policies and procedures. In the normal course of business, most

institutions likely already have sufficient information about their

customers in their files and would only need to organize and review

such information. Because each institution would design its own program

in accordance with its own business practices, the Federal Reserve

estimates that the burden of the proposed rule would vary considerably

and may range from ten to thirty hours.

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\8\ The proposed rule will not apply to shell bank holding

companies.

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The proposed rule is not expected to significantly increase the

ongoing annual burden for the recordkeepers because most of the ongoing

burden is incurred and accounted for under other existing information

collections.

[[Page 67523]]

Ongoing costs include gathering the required information about

customers (to the extent that the bank does not already possess such

information), monitoring customer transactions, and reporting unusual

or suspicious transactions. Institutions likely perform most, if not

all, of these tasks currently as part of their fraud prevention

procedures, as part of their monitoring of transactions for reporting

on the Department of the Treasury's Currency Transaction Reports (OMB

No.1545-0183), and as part of their procedures to detect violations or

suspicious activity reported on the Suspicious Activity Report. Because

the records would be maintained at the subject organizations and are

not provided to the Board, no issue of confidentiality under the

Freedom of Information Act arises.

Comments are invited on: (a) whether the proposed collection of

information is necessary for the proper performance of the Federal

Reserve's functions, including whether the information has practical

utility; (b) the accuracy of the Board's estimate of the burden of the

proposed information collection, including the cost of compliance; (c)

ways to enhance the quality, utility, and clarity of the information to

be collected; and (d) ways to minimize the burden of information

collection on respondents, including through the use of automated

collection techniques or other forms of information technology.

Comments on the collection of information should be sent to Mary M.

McLaughlin, Chief, Financial Reports Section, Division of Research and

Statistics, Mail Stop 97, Board of Governors of the Federal Reserve

System, Washington, DC 20551, with copies of such comments to be sent

to the Office of Management and Budget, Paperwork Reduction Project

(7100-0212), Washington, DC 20503.

List of Subjects

12 CFR Part 208

Accounting, Agriculture, Banks, banking, Confidential business

information, Crime, Currency, Federal Reserve System, Flood insurance,

Mortgages, Reporting and recordkeeping requirements, Securities.

12 CFR Part 211

Exports, Federal Reserve System, Foreign banking, Holding

companies, Investments, Reporting and recordkeeping requirements.

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal

Reserve System, Holding companies, Reporting and recordkeeping

requirements, Securities.

For the reasons set forth in the preamble, parts 208, 211, and 225

of chapter II of title 12 of the Code of Federal Regulations are

proposed to be amended as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)

1. The authority citation for 12 CFR Part 208 continues to read as

follows:

Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,

371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o),

1831o, 1831p-1, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,

78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q, 78q-1, and 78w; 31

U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.

2. Section 208.63 is amended by adding a new paragraph (d) to read

as follows:

Sec. 208.63 Procedures for monitoring Bank Secrecy Act Compliance.

* * * * *

(d) Know your customer program--(1) Purpose. This paragraph (d)

requires that member banks establish and regularly maintain procedures

reasonably designed to determine the identity of their customers, as

well as their customers' normal and expected transactions and sources

of funds involving the bank. These procedures (referred to as the

``Know Your Customer'' program) are intended to: protect the reputation

of the bank; facilitate the bank's compliance with all applicable

statutes and regulations (including the Bank Secrecy Act and the

suspicious activity reporting requirements of 12 CFR 208.20) and with

safe and sound banking practices; and protect the bank from becoming a

vehicle for or a victim of illegal activities perpetrated by its

customers. In general, the ``Know Your Customer'' rules apply to all

state member banks, however, the rules do not apply to credit card

banks, bankers' banks, or banks that operate solely to service the

activities of their affiliates.

(2) Definitions. For the purposes of this paragraph (d):

(i) Bank means a state member bank.

(ii) Customer means:

(A) Any person or entity who has an account involving the receipt

or disbursal of funds with a bank; and

(B) Any person or entity on behalf of whom such an account is

maintained.

(3) Establishment of Know Your Customer program. By April 1, 2000,

each bank shall develop and provide for the continued administration of

a Know Your Customer program. The Know Your Customer program shall be

reduced to writing and approved by the board of directors (or a

committee thereof) with the approval recorded in the official minutes

of the board.

(4) Contents of Know Your Customer program. The Know Your Customer

program may vary in complexity and scope depending on different

categories or classes of customers established by the bank and the

potential risk of illicit activities associated with those customers'

accounts and transactions. Components of the program should include the

following:

(i) Appropriate documentation requirements and due diligence

procedures established by the bank to comply with this paragraph (d);

and

(ii) A system for:

(A) Determining the identity of the bank's new customers and if the

bank has reasonable cause to believe that it lacks adequate information

to know the identity of existing customers, determining the identity of

those existing customers;

(B) Determining the customer's sources of funds for transactions

involving the bank;

(C) Determining the particular customer's normal and expected

transactions involving the bank;

(D) Monitoring customer transactions and identifying transactions

that are inconsistent with normal and expected transactions for that

particular customer or for customers in the same or similar categories

or classes, as established by the bank; and

(E) Determining if a transaction is suspicious, in accordance with

the Board's suspicious activity reporting regulations and reporting

accordingly.

(5) Compliance with Know Your Customer program. The bank shall

comply with its Know Your Customer program. To ensure compliance, the

bank shall:

(i) Provide for and document a system of internal controls;

(ii) Provide for and document independent testing for compliance to

be conducted by bank personnel or by an outside party on a regular

basis;

(iii) Designate an individual or individuals responsible for

coordinating and monitoring day-to-day compliance; and

(iv) Provide for and document training to all appropriate

personnel, on at least an annual basis, of the content and required

procedures of the Know Your Customer program.

(6) Availability of documentation. For all accounts opened or

maintained in the United States, each bank must

[[Page 67524]]

ensure that all information and documentation sufficient to comply with

the requirements of this paragraph (d) are available for examination

and inspection, at a location specified by a Board or Reserve Bank

representative, within 48 hours of a Board or Reserve Bank

representative's request for such information and documentation. In

instances where the information and documentation is maintained at a

location other than where the customer's account is maintained or the

financial services are rendered, the bank must include, as part of its

Know Your Customer program, specific procedures designed to ensure that

the information and documentation is reviewed on an ongoing basis by

appropriate bank personnel in order to comply with this paragraph (d).

PART 211--INTERNATIONAL BANKING OPERATIONS (REGULATION K)

1. The authority citation for 12 CFR part 211 continues to read as

follows:

Authority: 12 U.S.C. 221 et seq., 1818, 1835a, 1841 et seq.,

3101 et seq., 3901 et seq.

2. A new Sec. 211.9 would be added to read as follows:

Sec. 211.9 Procedures for monitoring Bank Secrecy Act compliance.

(a) Each Edge corporation or any branch or subsidiary thereof,

Agreement corporation or branch or subsidiary thereof, shall, by April

1, 2000, in accordance with the provisions of Sec. 208.63 of the

Board's Regulation H, 12 CFR 208.63, develop and provide for the

continued administration of:

(1) A program reasonably designed to ensure and monitor compliance

with the provisions of subchapter II of chapter 53 of title 31, United

States Code, the Bank Secrecy Act, and the implementing regulations

promulgated thereunder by the Department of the Treasury at 31 CFR part

103; and

(2) A ``Know Your Customer'' program reasonably designed to

identify customers of the Edge or Agreement corporation or subsidiary

thereof, including customers' normal and expected transactions at or

through the institution.

3. Section 211.24 is amended as follows:

a. Paragraph (f) is redesignated as paragraph (f)(1); and

b. A new paragraph (f)(2) is added.

The addition would read as follows:

Sec. 211.24 Approval of officers of foreign banks; procedures for

applications; standards for approval; representative-office activities

and standards for approval; preservation of existing authority; reports

of crimes and suspected crimes; government securities sales practices.

* * * * *

(f) Reports of crimes and suspected crimes.--(1) * * *

(2) Procedures for monitoring Bank Secrecy Act compliance. Each

branch and agency of a foreign bank (except a federal branch or a

federal agency or a state branch that is insured by the Federal Deposit

Insurance Corporation) in the United States shall, by April 1, 2000, in

accordance with the provisions of Sec. 208.63 of the Board's Regulation

H, 12 CFR 208.63, develop and provide for the continued administration

of:

(i) A program reasonably designed to ensure and monitor compliance

with the provisions of subchapter II of chapter 53 of title 31, United

States Code, the Bank Secrecy Act, and the implementing regulations

promulgated thereunder by the Department of the Treasury at 31 CFR part

103; and

(ii) A ``Know Your Customer'' program reasonably designed to

identify customers of the branch or agency, including customers' normal

and expected transactions at or through the institution.

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)

1. The authority citation for 12 CFR part 225 continues to read as

follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,

1843(c)(8), 1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and

3909.

2. Section 225.4 is amended by adding a new paragraph (g) to read

as follows:

Sec. 225.4 Corporate practices.

* * * * *

(g) Procedures for Monitoring Bank Secrecy Act Compliance.--(1) By

April 1, 2000, each company described in paragraph (g)(2) of this

section, shall, in accordance with the provisions of Sec. 208.63 of the

Board's Regulation H, 12 CFR 208.63, develop and provide for the

continued administration of:

(i) A program reasonably designed to ensure and monitor compliance

with the provisions of subchapter II of chapter 53 of title 31, United

States Code, the Bank Secrecy Act, and the implementing regulations

promulgated thereunder by the Department of the Treasury at 31 CFR part

103; and

(ii) A ``Know Your Customer'' program reasonably designed to

identify customers of the company, subsidiary, or foreign bank

including customers' normal and expected transactions at or through the

institution.

(2) Paragraph (g)(1) of this section shall apply to each company

that:

(i)(A) Is a bank holding company or a nonbank subsidiary thereof;

or

(B) Is a nonbank company operating in the United States that is a

subsidiary of a foreign bank that is a bank holding company or that is

subject to the BHC Act by virtue of section 8(a) of the International

Banking Act (12 U.S.C. 3106(a)); and

(ii) Holds accounts involving the receipt or disbursal of funds for

persons other than affiliates.

By order of the Board of Governors of the Federal Reserve

System, December 1, 1998.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 98-32332 Filed 12-4-98; 8:45 am]

BILLING CODE 6210-01-P