Know Your Customer

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 98-114]

RIN 1550-AB15

Know Your Customer

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to issue a

regulation requiring savings associations to develop and maintain Know

Your Customer programs to deter and detect financial crimes. The Board

of Governors of the Federal Reserve System, the Federal Deposit

Insurance Corporation, and the Office of the Comptroller of the

Currency are proposing substantially similar rules in separately

published notices. The proposed regulation would reduce the likelihood

that savings associations will become unwitting participants in any

customer's illicit activities by requiring savings associations to

determine the true identities and legitimate activities of their

customers. The proposal would require each savings association to

determine the identity of its customers, to determine normal and

expected transactions for its customers, to determine its customers'

sources of funds, to identify transactions that are not normal or

expected transactions for the customer, and to report suspicious

transactions under existing suspicious activity reporting requirements.

The proposal's flexible approach would allow each savings association

to design a Know Your Customer program suitable for its own

circumstances.

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

ADDRESSES: Send comments to Manager, Dissemination Branch, Information

Management and Services Division, Office of Thrift Supervision, 1700 G

Street, NW., Washington, DC 20552, Attention Docket No. 98-114. Hand

deliver comments to Public Reference Room, 1700 G Street, NW., lower

level, from 9:00 A.M. to 5:00 P.M. on business days. Send facsimile

transmissions to FAX Number (202) 906-7755 or (202) 906-6956 (if the

comment is over 25 pages). Send e-mails to [email protected]

and include your name and telephone number. Interested persons may

inspect comments at 1700 G Street, NW., from 9:00 A.M. until 4:00 P.M.

on business days.

FOR FURTHER INFORMATION CONTACT: Larry A. Clark, Senior Manager,

Compliance and Trust Programs, Compliance Policy, (202) 906-5628, Gary

C. Jackson, Analyst, Compliance Policy, (202) 906-5653, Christine

Harrington, Counsel (Banking and Finance), (202) 906-7957, or Karen

Osterloh, Assistant Chief Counsel, (202) 906-6639, Office of Thrift

Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

The financial sector's integrity depends on depository

institutions' ability to attract and retain legitimate funds from law

abiding customers. Depository institutions' ability to do so rests on

the quality and the reliability of their services and on their sound

reputation within the financial sector. Illicit financial activities,

such as money laundering and fraud, pose a serious threat to financial

institutions' integrity. Illicit funds transactions can damage the

reputations of the involved financial institution, may subject the

institution to criminal liability,1 and may ultimately

damage the reputation of the entire financial sector. While it is

impossible to identify every transaction that is illegal or that

assists criminals in moving illegally derived funds, financial

institutions must take every reasonable step to detect such activity.

When institutions identify their customers and determine what

transactions are normal and expected for these customers, they are able

to monitor transactions to identify unusual or suspicious transactions.

By identifying and reporting unusual or suspicious transactions,

financial institutions protect their integrity and assist the Federal

banking agencies and law enforcement authorities in thwarting illicit

activities.

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\1\ See 18 U.S.C. 1956 and 1957.

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The proposed regulation would implement 12 U.S.C. 1818(s). This

statute requires the Federal banking agencies to prescribe regulations

requiring depository institutions 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.)

Effective Know Your Customer programs should facilitate compliance with

the Currency and Foreign Transaction Reporting Act and the regulations

issued thereunder (31 CFR 103.11 et seq.) (collectively referred to as

the Bank Secrecy Act).

Accordingly, OTS is proposing to issue rules requiring savings

associations to develop and maintain Know Your Customer programs to

detect and deter financial crimes. The Federal Reserve Board, the

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

Insurance Corporation are also proposing similar Know Your Customer

regulations. OTS believes that similar rules applicable to different

types of financial institutions will prevent competitive disparities

between industries. OTS's proposal uses the plain language drafting

techniques described in President Clinton's Memorandum on Plain

Language in Government Writing (June 1, 1998), Vice President Gore's

Memorandum Implementing the Presidential

[[Page 67537]]

Memorandum on Plain Language (July 20, 1998), and the Federal Register

Document Drafting Handbook.

The Federal banking agencies' position regarding the importance of

a Know Your Customer program is consistent with that of other

countries, as evidenced by the pronouncements of several international

organizations.2 Numerous countries have supported Know Your

Customer programs and mandatory suspicious transaction reporting as the

best means of protecting the financial sector. Criminal elements tend

to gravitate towards financial institutions that operate within poorly

regulated and poorly supervised jurisdictions. Know Your Customer

programs work to stifle transactions involving illegally derived funds.

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\2\ See the Basle Committee on Banking Regulations and

Supervisory Practices' December 1988 ``Statement on the Prevention

of Criminal Use of the Banking System for the Purpose of Money

Laundering,'' as well as the Committee's April 1997 ``Core

Principles for Effective Banking Supervision;'' 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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OTS recognizes that the proposed Know Your Customer requirements

would impose additional burdens on some institutions. Consequently, OTS

has proposed only the minimal requirements necessary to ensure that

savings associations have adequate programs. Moreover, the proposed

regulation is designed to be flexible so that savings associations can

create Know Your Customer programs appropriate for their circumstances.

In addition, the Federal banking agencies intend to publish

interpretive guidance on Know Your Customer issuesat the same time as

the regulations become final. This guidance, coupled with a flexible

regulation, will aid savings associations in complying with the

regulations.

Section-by-Section Analysis

OTS proposes to add a new regulation at 12 CFR 563.178 that would

require every savings association to develop and implement a Know Your

Customer program. The proposed rule describes the basic requirements of

a Know Your Customer program, but does not set forth specific mandates

in a checklist style. Rather, the proposal would give each savings

association the flexibility to design a Know Your Customer program that

is appropriate for its size, the nature and complexity of its

operations, and its risk of illicit activity. The proposed rule is

summarized below.

Section 563.178(a) Who Must Establish a Know Your Customer Program?

Proposed paragraph (a) would require each savings association to

establish and comply with a written Know Your Customer program. The

savings association's board of directors or a committee of the board

would be required to approve the program and record the approval in the

official board minutes. These requirements would ensure that the same

standards are applied throughout the savings association and would

inform auditors and examiners of the program's requirements.

OTS intends to allow savings associations a sufficient time after

publication of a final rule to establish Know Your Customer programs.

OTS proposes to make the final Know Your Customer rule effective on

April 1, 2000. In this way, savings associations will have a sufficient

period to establish and implement their Know Your Customer programs.

Section 563.178(b) Why Must I Establish a Know Your Customer Program?

Paragraph (b) of the proposed rule would explain why a savings

association must establish a Know Your Customer program. Such programs

serve several purposes: protecting the savings association's

reputation; facilitating its compliance with the Bank Secrecy Act, the

OTS's suspicious activity reporting regulations, and safe and sound

practices; and protecting the savings association from becoming a

vehicle for, or a victim of, illegal activities by its customers.

Section 563.178(c) Who Is My Customer?

The proposed rule defines ``customer'' to include any person or

entity who has an account with a savings association that involves the

receipt or disbursal of funds, and any person or entity on behalf of

whom an account is maintained. The term includes direct and indirect

beneficiaries of the account when the activity in the account involves

the receipt or disbursal of funds. A ``customer'' would include an

accountholder, a beneficial owner of an account, or a borrower. A

``customer'' could include the beneficiary of a trust, an investment

fund, a pension fund or a 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'' does not include recipients of services for which the

receipt or disbursal of customer funds is incidental, such as rental of

safe deposit boxes.

The proposed definition would include both existing and new

customers. The effectiveness of a Know Your Customer program would be

greatly reduced if all customer accounts in existence prior to the

effective date of the regulations were excluded from its scope.

However, the OTS does not believe that it is practicable for a savings

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

existing customers. Rather, a savings association could comply with the

proposed regulation by determining its current customers' normal and

expected transactions using available account data, and monitoring

their transactions for suspicious activities. However, if existing

customers and their transactions present unusual risk of illegal

activity (for instance, transactions involving private banking

customers), it may be necessary to fulfill all of the requirements of

this regulation as if they were new customers.

Section 563.178(d) What Transactions Are Covered Under This Section?

The regulation would define ``transaction'' to include any

transaction by a customer that is conducted at a savings association's

facilities or that involves the savings association, regardless of

where the transaction is conducted.

Section 563.178(e) What Must My Know Your Customer Program Contain?

Proposed paragraph (e) sets forth the basic requirements for Know

Your Customer programs. Savings associations vary considerably in how

they conduct their day-to-day business. OTS believes that requiring

each savings association to follow a standard checklist would be of

little value. Accordingly, the proposed regulation would allow each

savings association to develop an individualized Know Your Customer

program. Such individualized programs would more appropriately reflect

the size and complexity of the savings association, the types of

customers it serves, the nature and extent of its customers'

activities, and its risks of illicit activity. In particular, proposed

paragraph (e) would allow a savings association to develop ``customer

profiles'' for classifying customers into risk-based categories to

determine the information and monitoring that is appropriate for those

customers and to determine when customers' transactions may be

suspicious.

[[Page 67538]]

While the proposed regulation would provide savings associations

with substantial flexibility to devise individualized Know Your

Customer programs, all Know Your Customer programs must contain certain

critical features. First, proposed Sec. 563.178(e)(1) would require

each savings association to determine the identities of its prospective

customers. For existing customers, a savings association also would be

required to determine their identity if it has reason to believe that

it lacks adequate information to know their identity.

Each savings association would need to establish, to its own

satisfaction, that it is dealing with a legitimate person or entity,

and must verify its customer's identity. The nature and extent of the

identification process should be commensurate with the anticipated

transactions and the risks of illegal activity associated with such

transactions.

If a prospective customer refuses to provide any requested

information, sound practices would require that the savings association

not establish the customer relationship. Similarly, if an established

customer refuses to provide requested information, sound practices

would require the savings association to consider terminating the

relationship.

The best documents for verifying the identity of a prospective

customer are the ones that are the most difficult to obtain illicitly

and the most difficult to counterfeit. Because no single form of

identification can be guaranteed to be genuine, a savings association

should use a cumulative identification process and should obtain enough

information and documentation to ensure that it has properly identified

its customer. In addition to the customer's name, key identifying

information may include the customer's address, place of business, and

telephone number. A savings association may find it appropriate to

verify addresses by physically observing the locations, and to verify

telephone numbers by calling the numbers. Extra steps may be

appropriate for customers outside a savings association's normal

service area.

If a customer is a natural person, acceptable forms of

identification would include a document with a photograph, a

description of the person, the person's signature, and an easily

recognizable identification issued by a government entity. While not an

exhaustive list, examples of acceptable identification issued by a

government entity include a driver's license or an identification card

with a photograph issued by the State where the savings association is

located, or a United States passport or alien registration card. Other

forms of identification, while not sufficient without corroboration,

can serve as helpful cumulative information. Examples of such

information include an employer or student identification card, an out-

of-State driver's license, a credit card, or a customer's current home

utility bills.

For corporate or business customers, a savings association should

verify that the corporation or business entity exists and engages in

its stated business. A savings association should obtain evidence of a

business's legal status, such as an incorporation document, a

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

some instances, it may also be appropriate to obtain information on the

business's controlling owners. Additionally, a savings association

should obtain a business customer's financial statements, a description

of the business, and a description of its primary areas of trade. To

verify information, a savings association may also obtain information

related to a business's customers and suppliers.

At a minimum, for both natural persons and corporate or business

customers, the savings association's records should indicate the type

of identification obtained. If no legal impediment exists, the savings

association should duplicate and maintain a copy of the documentation.

Establishing a customer relationship without face to face contact

(e.g., by mail, Internet, or other electronic operations) poses

difficulties in identifying customers. Even though photographic

identification may be impractical, other acceptable means of

identifying the customer are available. In such circumstances, a

savings association should carefully verify a customer's address and

telephone number. The savings association may use other commercially

available data, such as credit reports and traditional information

sources, to compare items such as a customer's name with his or her

date of birth and social security number.

Introductions or referrals of prospective customers by established

customers can provide extremely valuable background information about a

prospective customer. The savings association should, of course,

document details regarding the introduction or referral to assist in

verifying the prospective customer's identity. Introductions and

referrals cannot, however, take the place of the identification

required under the proposed regulation.

Private banking accounts pose unique risks because customers may

use them to protect or conceal their identities by using such account

vehicles as personal investment companies, trusts, personal mutual

investment funds, or a financial advisor's account. However, OTS and

other Federal banking agencies believe that properly identifying

private banking customers is necessary to depository institutions' safe

and sound operation. Procedures for identifying private banking

customers should be no different than the procedures for identifying

other customers. A savings association can address private banking

customers' confidentiality needs by developing special protections that

limit access to information that could reveal the beneficial owners of

these accounts.3

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\3\ 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 Federal Reserve

Board. It is available on the Federal Reserve Board's public

Internet website (www.federalreserve.gov/).

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A savings association must also identify beneficial owners of

assets bought, sold or managed through the savings association. Such

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

managers. The ``customer'' in these situations would include the

beneficiaries of the transactions, not just the intermediaries. The

amount of information necessary to fulfill Know Your Customer

obligations would depend on the risk of illicit activity. Risk depends

on matters such as the type, duration, and size of the transactions

that a customer will conduct. Savings associations should address the

type and amount of information necessary as a part of their Know Your

Customer programs.

Where there is little risk of illegal activities by customers,

savings associations would not be required to identify those indirect

customers or monitor their transactions. For example, if the customer

is a widely-held mutual fund or asset management fund whose shares are

traded on a public exchange, there is little risk that the customer's

shareholders would conduct illegal acts at the savings association.

Similarly, if a savings association's customer is a regulated financial

institution for whom the savings association is an intermediary in

check clearing or funds transfer processing, there is little risk that

the financial institution's customers would conduct illegal acts at the

savings association. On the other hand, if the savings association's

customer is a mutual fund established in an off-shore

[[Page 67539]]

jurisdiction that has a limited number of shareholders, the risk of

illegal activity is higher. In that case, the savings association would

be required to identify and monitor the customers of the mutual fund.

In addition to identifying each customer as a part of the Know Your

Customer program, proposed Sec. 563.178(e)(2) would require a savings

association to identify its customer's sources of funds for

transactions at the savings association. For purposes of determining

and documenting the sources of funds, the amount of information

necessary will depend on the type of customer. A savings association

may categorize customers and obtain more or less information depending

on the risks of illicit activities in the category. For example, many

customers with demand deposit accounts obtain their funds from payroll

deposits. Thus, a savings association may identify and document these

customers' sources of funds relatively easily. On the other hand, a

savings association would be required to obtain more documentation for

customers with multiple deposits from a variety of sources. The

proposed regulation would allow, and OTS would encourage, savings

associations to categorize customers that share common characteristics

in order to collect pertinent information with the least burden.

Proposed Sec. 563.178(e)(3) would require a savings association to

determine its customers' normal and expected transactions. This

determination forms the basis for identifying transactions that are out

of the ordinary, unexpected, and possibly suspicious. A savings

association cannot completely determine a customer's normal and

expected transactions when it first establishes a customer

relationship. Accordingly, an effective Know Your Customer program

should include procedures for periodically reviewing a savings

association's original determination to determine whether the same

transactions are still normal and expected.

OTS encourages savings associations to design flexible Know Your

Customer programs. This proposed rule would allow savings associations

to determine normal and expected transactions for categories or classes

of customers that share common characteristics. Associations may use

this flexibility to focus their efforts on areas with the greatest risk

of illicit activity. For example, customers with demand deposit

accounts funded by payroll deposits will, most likely, use the accounts

for depositing salaries and for ordinary living expenses. Such accounts

would require little analysis. Conversely, business accounts or private

banking customers' accounts may require more in-depth analysis of the

customers' intended use of the accounts.

Proposed Sec. 563.178(e)(4) would require a savings association to

monitor customers' transactions to determine if transactions are normal

and expected for individual customers or for categories or classes of

customers. While monitoring is critical, a savings association would

not be required to monitor every transaction of every customer.

Similarly, OTS does not suggest that savings associations must purchase

expensive, sophisticated computer hardware or software to comply with

the proposed rule. Rather, OTS encourages each savings association to

design an effective monitoring program that is appropriate for that

institution and that corresponds to the risk of illegal activities by

its customers. For example, a savings association may categorize, for

monitoring purposes, by account type, transaction type, account size,

or number and size of transactions in accounts. A savings association

may choose to monitor only those transactions that meet established

parameters, such as dollar size, frequency, or source of funds, for a

particular category of account. Whatever the method, savings

associations should focus their monitoring on areas with the greatest

risk of illegal activity. The Federal banking agencies are working on

interpretive guidance to help institutions in this area. OTS will give

deference to a savings association's monitoring program.

For some categories or classes of accounts, a savings association

may have to monitor each transaction. For example, a savings

association should understand the nature of and monitor each

significant private banking transaction. Because one of the goals of

private banking is to offer highly individualized service through the

use of relationship managers, OTS does not believe that the burden of

monitoring each transaction of private banking customers is

significant.

In many instances, savings associations already monitor their

customers' transactions. For example, savings associations monitor

transactions in order to comply with suspicious activity reporting

requirements. Similarly, savings associations monitor for large cash

transactions, check kiting and attempted withdrawals from accounts with

insufficient funds or from closed accounts. Savings associations'

experience in monitoring these transactions should ease the impact of

Know Your Customer monitoring requirements.

Proposed Sec. 563.178(e)(4) would require savings associations to

identify customer transactions that are not normal and expected. Under

this proposed rule, a savings association would not be required to

detect every abnormal or unexpected transaction. Rather, a savings

association would be required to identify those monitored transactions

that were not consistent with its determination of what is normal and

expected for a particular customer.

Under proposed Sec. 563.178(e)(5), the savings association would be

required to determine whether each identified transaction is unusual or

suspicious. If the transaction is suspicious, the association would be

required to report the transaction under OTS's existing suspicious

activities reporting requirements at 12 CFR 563.180. The proposed Know

Your Customer regulation would impose no additional reporting

requirements.

Section 563.178(f) How Do I Ensure Compliance With My Know Your

Customer Program?

Under proposed Sec. 563.178(f), a savings association must follow

its Know Your Customer program. To do so, a savings association would

have to establish internal controls to ensure ongoing compliance. In

addition, the savings association would be required to use either

outside parties or independent employees to test its compliance. The

proposed rule would also require each savings association to designate

at least one individual to be responsible for coordinating and

monitoring day-to-day compliance. Finally, a savings association would

be required to train the appropriate personnel in the Know Your

Customer program at least annually.

These requirements are very similar to OTS's procedures for

monitoring Bank Secrecy Act compliance.4 Savings

associations are familiar with, and regularly use, the Bank Secrecy Act

procedures. Where appropriate, a savings association may charge its

Bank Secrecy Act compliance officer with the responsibility for its

Know Your Customer program. This should ease the burdens associated

with complying with the new Know Your Customer regulation.

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\4\ 12 CFR 563.177(c) (1998).

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[[Page 67540]]

Section 563.178(g) How Do I Document My Compliance With My Know Your

Customer Program?

Proposed section 563.178(g) would require a savings association to

maintain information and documents demonstrating that it has complied

with all of the requirements of the Know Your Customer regulation,

including the internal control, independent testing, and training

requirements listed under the compliance requirements. The proposed

rule would further require a savings association to make all Know Your

Customer documents available to OTS within 48 hours of a request,

unless OTS specifies a different time period.

In addition, if a savings association maintains information or

documents at a location other than where it maintains a customer's

account or where it renders financial services, it must also establish

and follow procedures designed to ensure that its employees review, on

an ongoing basis, information and documents to ensure that it has

complied with the Know Your Customer requirements.

Comments Sought

OTS specifically seeks comments on the following questions:

1. Is the proposed definition of ``customer'' sufficient to include

all persons who benefit from an account opened at a savings

association, such as persons who establish off-shore shell companies,

or entities that otherwise conduct their business through

intermediaries?

2. Is the proposed definition of ``customer'' too broad,

unnecessarily reaching persons who pose a minimal risk of illicit

activities at savings associations?

3. Should ``customer'' include savings associations' counterparties

in wholesale financial transactions? Should ``customer'' include

correspondent banking relationships? Would a different standard be more

appropriate for those transactions or relationships?

4. Would the benefits of implementing Know Your Customer

requirements outweigh the costs involved? Are there alternatives that

would better balance these costs and benefits?

5. Would the proposed regulation place savings associations at a

competitive disadvantage with respect to other financial entities

offering similar services that are not subject to similar requirements?

Please cite specific examples.

6. Would the added compliance benefits of this proposal outweigh

the actual or perceived invasion of personal privacy interests?

7. Should OTS waive Know Your Customer requirements for accounts

below a minimum size threshold? If so, where should OTS set the

threshold?

Executive Order 12866

The Director of OTS has determined that this proposed rule does not

constitute a ``significant regulatory action'' for the purposes of

Executive Order 12866.

Regulatory Flexibility Act

Under the Regulatory Flexibility Act, OTS must either provide an

Initial Regulatory Flexibility Analysis (IRFA) with this proposed rule,

or certify that the proposed rule would not have a significant economic

impact on a substantial number of small entities. This proposed rule is

designed to be flexible so that each savings association could design a

Know Your Customer program appropriate for its circumstances. While

advantageous to savings associations, this flexibility makes it

difficult to predict the economic impact of the proposed rule. OTS

cannot, at this time, determine whether the proposed rule would have a

significant economic impact on a substantial number of small

institutions. OTS, therefore, includes this IRFA.

A. Reasons for and Objectives of the Proposed Rule

The proposed Know Your Customer rule is designed to deter and

detect financial crimes, such as money laundering, tax evasion, and

fraud. Financial crimes conducted at or through savings associations,

even where savings associations are not parties to the transactions,

can damage the reputations of the institutions involved, and possibly

of the entire thrift industry. Under current law, savings associations

are required to report suspicious activities to law enforcement

authorities, but are not required to specifically search for suspicious

activities. As a result, suspicious activities may go unreported, and

illegal activity may go undetected. Know Your Customer programs would

better enable savings associations to alert law enforcement authorities

to potential criminal conduct and help deter criminal conduct in the

thrift industry.

OTS has two primary objectives for this proposed rulemaking: (1)

increasing savings associations' detection and reporting of suspicious

customer activities; and (2) deterring financial crimes at savings

associations.

The proposed rule would apply to large and small savings

associations. Small savings associations are generally defined, for

Regulatory Flexibility Act purposes, as those with assets under $100

million.5 This proposed rule would apply to approximately

600 small savings associations.

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\5\ 13 CFR 121.201, Division H (1998).

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B. Requirements of the Proposed Rule

The proposed rule would require savings associations to identify

their customers, determine their customers' normal and expected

transactions, determine their customers' sources of funds, monitor

transactions to find those that are not normal and expected, and, for

transactions that are not normal and expected, identify which are

suspicious. Savings associations are required to report any suspicious

transactions under current law, and this proposed rule would have no

additional reporting requirements.

The impact of the proposed regulation on an institution's

resources, and the skills necessary to comply with it, will vary from

one institution to another because the proposed regulation is designed

to take into account each institution's size and resources. Because

each institution would be able to design an individualized Know Your

Customer program, it is difficult to specify the type of professional

skills necessary for preparing any required records or reports. Large

institutions may be more likely to use computerized Know Your Customer

programs, and in that event would be more likely to need professional

computer skills. Small institutions that choose to automate their Know

Your Customer programs would need professional computer skills.

Know Your Customer monitoring would be similar to monitoring that

savings associations already do. For example, savings associations

monitor customer transactions to ensure that cash transactions

exceeding $10,000 are reported under the Bank Secrecy Act, to ensure

that customers do not overdraw their accounts, and to ensure that loan

payments are accurate and timely. Thus, Know Your Customer monitoring

would rely, at least in part, on computer and other skills that savings

association personnel already have and regularly use.

C. Significant Alternatives

1. No Know Your Customer Requirements

OTS considered recommending rather than requiring Know Your

Customer

[[Page 67541]]

procedures. OTS decided to propose this rulemaking, however, because of

the risks that savings associations face from customers who attempt

illegal activities. Illegal activities would harm an association's

reputation and that of the entire thrift industry. Requiring Know Your

Customer programs significantly reduces the likelihood that some

savings associations would not establish or adhere to such programs. In

addition, because other Federal banking agencies are proposing Know

Your Customer rules, OTS believes that criminals would quickly move

their illegal funds transfers into savings associations without Know

Your Customer programs, thus increasing those savings associations'

exposure to illegal activity.

For these reasons, merely recommending Know Your Customer programs

would interfere with OTS's goals of increasing savings associations'

detection and reporting of suspicious customer activities, and

deterring financial crimes at savings associations.

2. Exemption for Small Savings Associations

OTS considered exempting small institutions from Know Your Customer

requirements. However, this alternative has the disadvantage of

possibly creating a haven for criminal activity. It is likely that

criminals would concentrate their activity at those institutions not

subject to any Know Your Customer requirements. An exemption for small

savings associations would conflict with OTS's goals of increasing

savings associations' detection and reporting of suspicious customer

activities and deterring financial crimes at savings associations.

3. Flexible Know Your Customer Requirements

OTS proposes requiring all savings associations to establish and

follow Know Your Customer programs, but proposes allowing each

institution to develop a program appropriate for its circumstances,

including but not limited to its size and resources. This approach is

preferable to the first two alternatives because it does not allow

criminals to choose a savings association without Know Your Customer

requirements to conduct illegal activities. A flexible alternative also

avoids requirements beyond the means of small institutions. Small

institutions could use simpler, less costly, and less burdensome

programs than larger institutions.

D. Other Matters

OTS has statutory authority to promulgate these proposed

regulations.6 There are no federal rules that duplicate,

overlap, or conflict with this proposed rule. The proposed rule

complement OTS rules implementing the Bank Secrecy Act at 12 CFR

563.178 and the suspicious activity reporting requirements at 12 CFR

563.180.

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\6\ 12 U.S.C. 1464(a)(1), 1464(d)(6)(A), 1818(s)(1).

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OTS encourages comments on all aspects of this initial regulatory

flexibility analysis, including comments on any significant economic

impacts the proposed rule would have on small entities.

Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

104-4 (Unfunded Mandates Act), requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

federal mandate that may result in expenditure by state, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. OTS has determined that the

proposed rule will not result in expenditures by state, local, or

tribal governments or by the private sector of $100 million or more.

Accordingly, this rulemaking is not subject to section 202 of the

Unfunded Mandates Act.

Paperwork Reduction Act

OTS invites comment on:

Whether the proposed information collection contained in this

proposal is necessary for the proper performance of OTS's functions,

including whether the information has practical utility;

The accuracy of OTS's estimate of the burden of the proposed

information collection;

(1) Ways to enhance the quality, utility, and clarity of the

information to be collected; Ways to minimize the burden of the

information collection on respondents, including through the use of

automated collection techniques or other forms of information

technology; and

Estimates of capital and start-up costs of operation, maintenance

and purchases of services to provide information.

Respondents/recordkeepers are not required to respond to this

collection of information unless it displays a currently valid OMB

control number.

OTS has submitted the collection of information requirements

contained in this proposal to the Office of Management and Budget for

review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Send comments on the collections of information to the

Office of Management and Budget, Paperwork Reduction Project (1550),

Washington, D.C. 20503, with copies to the Regulations and Legislation

Division (1550), Chief Counsel's Office, Office of Thrift Supervision,

1700 G Street, N.W., Washington, D.C. 20552.

The collection of information requirements in this proposed rule

are found in 12 CFR 563.178. OTS requires this information for the

proper supervision of savings associations' compliance with the Bank

Secrecy Act. The likely respondents/recordkeepers are savings

associations.

Estimated average annual burden hours per respondent/recordkeeper:

8.

Estimated number of respondents: 1191.

Estimated total annual reporting and recordkeeping burden: 9528.

Start up costs to respondents: None.

List of Subjects in 12 CFR Part 563

Accounting, Advertising, Crime, Currency, Investments, Reporting

and recordkeeping requirements, Savings associations, Securities,

Surety bonds.

Accordingly, the Office of Thrift Supervision proposes to amend

Title 12, Chapter V as set forth below:

PART 563--[AMENDED]

1. The authority citation for part 563 is revised to read as

follows:

Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,

1817, 1818, 1820, 1828, 1831p-1, 3806; 42 U.S.C. 4106.

2. Section 563.178 is added to read as follows:

Sec. 563.178 Know your customer.

(a) Who must establish a Know Your Customer program? Each savings

association (``you'') must establish and comply with a written Know

Your Customer program that describes your procedures for complying with

this section. Your board of directors, or a committee of your board,

must approve your Know Your Customer program and must record that

approval in your official board minutes.

(b) Why must I establish a Know Your Customer program? These

procedures: protect your reputation; facilitate your compliance with

the Bank Secrecy Act, the suspicious activity reporting

[[Page 67542]]

requirements of Sec. 563.180, and safe and sound practices; and protect

you from becoming a vehicle for, or a victim of, your customers'

illegal activities.

(c) Who is my customer? Your customer is any person or entity who

has an account with you involving the receipt or disbursal of funds,

and any person or entity on behalf of whom such an account is

maintained.

(d) What transactions are covered under this section? A transaction

is any transaction by a customer that is conducted at your facilities

or that involves you, regardless of where the transaction is conducted.

(e) What must my Know Your Customer program contain? Your Know Your

Customer program may vary in scope and complexity according to

categories or classes of customers that you establish, and the

potential risk of illicit activities associated with your customers'

accounts and transactions. Under your Know Your Customer program, you

must do all of the following:

(1) Determine your prospective customers' identities. You must also

determine the identities of your existing customers if you have reason

to believe that you lack adequate information to know the identities of

those customers.

(2) Identify the sources of funds for your customers' transactions.

You may make this determination for a customer individually, or for

categories or classes of customers that share common characteristics.

(3) Determine the types of transactions that you expect your

customers to normally conduct (``normal and expected transactions'').

You may make this determination for a customer individually, or you may

determine what types of transactions are normal and expected for

categories or classes of customers that share common characteristics.

(4) Monitor your customers' transactions and identify transactions

that are not consistent with your customers' normal or expected

transactions as determined under paragraph (e) (2) and (3) of this

section. You may monitor transactions for each customer individually,

or you may monitor transactions for categories or classes of customers

that share common characteristics.

(5) Determine whether transactions identified under paragraph

(e)(4) of this section are unusual or suspicious. If any are

suspicious, you must follow OTS's suspicious activity reporting

regulations at 12 CFR 563.180.

(f) How do I ensure compliance with my Know Your Customer program?

To ensure compliance, you must do all of the following:

(1) Establish internal controls to ensure your ongoing compliance.

(2) Independently test your compliance. Your employees or outside

parties may conduct the testing.

(3) Designate an individual(s) responsible for coordinating and

monitoring day-to-day compliance.

(4) Train all appropriate personnel on your program at least

annually.

(g) How do I document my compliance with my Know Your Customer

program? (1) You must maintain information and documents demonstrating

that you have complied with all of the requirements of this section,

including internal control, independent testing, and training

requirements of paragraph (f) of this section.

(2) You must provide all information and documents demonstrating

your compliance with this section to OTS for examination and inspection

within 48 hours of an OTS request, unless OTS specifies a different

time period.

(3) If you maintain information or documents at a location other

than where you maintain a customer's account or where you render

financial services, you must establish and follow procedures designed

to ensure that your employees review, on an ongoing basis, information

and documents to ensure that you comply with this section.

Dated: November 9, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98-32335 Filed 12-4-98; 8:45 am]

BILLING CODE 6720-01-P