Testimony of
                       John D. Hawke, Jr.
                  Comptroller of the Currency
                            Before 
     The Subcommittee on Commercial and Administrative Law
                   Committee on the Judiciary
                 U.S. House of Representatives
                               On
             The Proposed "Know Your Customer" Rule
                         March 4, 1999

     Chairman Gekas, Ranking Member Nadler, and members of the
Subcommittee, I am pleased to be with you this morning to present
my views on the proposed regulation that has come to be called
"Know Your Customer."

     I was sworn in as Comptroller of the Currency on December 8,
1998, so I did not participate either in the process that led to
this proposal, or in the formulation of the proposal itself.  I
come new to the issue, and this has both advantages and
disadvantages.

     One clear disadvantage is that I did not have a first-hand
opportunity to learn of the background of the proposal before it
was published or to benefit from the interagency deliberations
concerning the complex issues that unquestionably surfaced as the
agencies formulated the proposal.

     One advantage of coming new to this issue, however, is that
I believe I can bring an objective judgment to the question of
what future the proposal should have -- a judgment that I hope is
informed by some 37 years in the public and private sector of
dealing with issues of federal banking regulation, as a lawyer in
private practice representing banks, as a professor of banking
law at three law schools, as General Counsel to the Federal
Reserve Board, and as Under Secretary of the Treasury for
Domestic Finance.

     Mr. Chairman, the comment period on the proposed regulation
closes this coming Monday, and we are reviewing the many comments
we have received.  It is my judgment, however, that the proposal
should be promptly withdrawn.  I firmly believe that any marginal
advantages for law enforcement in this proposal are strongly
outweighed by its potential for inflicting lasting damage on our
banking system.  I will explain my reasoning.

     Let me say at the outset that the law enforcement objectives
that underlie the Know Your Customer proposal are of enormous
importance to our country and must not be dismissed.  It is
widely recognized that the ability to launder the proceeds of
illegal activity -- particularly drug traffic -- facilitates
criminals engaged in such activity.  Stemming the flow of
narcotics into the country, and combating the sale of drugs on
our streets, depend heavily on the ability of law enforcement to
impede the efforts of drug dealers to convert the cash proceeds
of their activities into useable funds.

     Since it is inevitable that criminals will seek to use
depository institutions to launder their illegal revenues, it is
entirely reasonable that banks and their regulators take all
reasonable steps to ensure that they are not used wittingly or
unwittingly to further illegal activities.  For many years the
Bank Secrecy Act has been aimed at achieving this objective and
bankers have provided a valuable role in this effort in a working
partnership with bank regulators and the law enforcement
community. 

     Beyond the valuable contribution banks make to this effort,
there are other considerations that must be weighed as we
consider new regulatory initiatives.  Banks play an enormously
important role in our economy.  They serve as a safe repository
for the earnings and savings of scores of millions of citizens. 
They play an essential role in the financing of commercial and
consumer transactions.  They operate our mechanism for making and
clearing payments, and they provide a broad range of fiduciary
services for both individuals and businesses.

     Maintaining public confidence in the banking system has long
been an important objective of national policy.  That is why
Congress created a system of federal deposit insurance 65 years
ago; it is why the Federal Reserve has been invested with the
responsibility to act as a lender of last resort and provider of
liquidity; and it is why we have a comprehensive system of
federal bank licensing, supervision and regulation.  Indeed,
restoring public confidence in banks was one of the important
reasons why the OCC was created over 135 years ago.

     Crucial to maintaining the confidence of bank customers in
our banking system is their expectation that their relationships
with their banks will be private and confidential -- that
information they provide to their banks will not be used for
inappropriate purposes; that transactions will be processed
objectively and nonjudgmentally; and that the interests of the
customer will be paramount in importance.  As I learned early in
my legal career, many courts have held that banks have an implied
contractual obligation of confidentiality to their customers.

     To be sure, this confidentiality is not absolute.  Banks
must respond to lawful subpoenas for customer information; they
have reporting obligations under the Bank Secrecy Act; they are
required to report "suspicious transactions" to law enforcement
authorities; and they may share certain kinds of information
about credit experience with credit reporting bureaus.  To date,
however, these qualifications to customer confidentiality have
not seriously affected customer confidence in the system as a
whole -- although, as I will point out shortly, they have created
enough concerns to keep millions of Americans out of the system.

     My grave concern is that if federal law imposes an explicit
and enforceable obligation on banks not only to adopt procedures
designed to identify their customers, but also to maintain
systems for "monitoring customer transactions and identifying
transactions that are inconsistent with normal and expected
transactions" for that customer, as the proposed regulation would
require, it could have a profoundly adverse effect on the nature
of the relationship banks have with their customers, and
consequently, on the banking system as a whole.  Law-abiding
citizens -- who make up the overwhelming proportion of bank
customers -- are likely to have serious concerns that their
everyday relationships with their banks will be routinely
scrutinized for evidence of misconduct.  They will be
understandably apprehensive that their banks will report any
transactions that may be the least out-of-the-ordinary, or that
don't meet some predetermined customer "profile" established by a
faceless bank employee or some computer program, as a "suspicious
activity."  And they are likely to come to the view that instead
of being protectors of a confidential relationship, their banks
have turned into an extension of the law enforcement apparatus. 
Were this to occur, it could do lasting damage to our banking
system.

     There are several other reasons why I have concerns about
the proposed Know Your Customer regulation.

     First, it would obstruct our effort to bring more Americans
into the financial mainstream.  In my time as Under Secretary of
the Treasury, we worked hard to carry out the mandate of Congress
that all federal nontax payments should be made electronically. 
One of the greatest obstacles to achieving this goal has been
that an estimated 10 million people who regularly receive federal
payments do not have bank accounts.  There are a variety of
reasons why this is so, but surveys indicate that almost one-quarter 
of those recipients who do not have bank accounts cite
confidentiality as a reason.  A federally-enforced "Know Your
Customer" rule can only serve to heighten the concerns that
already cause millions to remain outside the banking system.

     Second, I believe that the proposal would create competitive
disparity among different types of financial service providers,
to the detriment of banks.  No regulation has yet been proposed
that would apply to credit unions, money market mutual funds and
security brokerage accounts.  It can be expected that customers
who have concerns about the continued confidentiality of their
financial affairs may migrate to these other institutions. 
Indeed, in an open marketplace one might expect those nonbank
intermediaries to exploit this advantage.

     Finally, I have serious concerns about the kind of
regulatory compliance burdens that would inevitably develop if a
new regulatory regime were adopted.  Bankers have been
conditioned to want certainty and precision in the rules they
must operate under.  I see the potential for a myriad of
questions being raised, resulting in the development of a
smothering body of rulings and interpretations that banks would
have to consult in order to be sure they were in conformity with
the law.  The creation of such burdens would have a particularly
heavy impact on community banks, which typically do not have the
depth of compliance resources that larger banks have. 

     Indeed, the rulemaking proposals themselves give a
forewarning of this.  While the text of the proposed rule itself
is quite short, the preamble material strongly suggests that
there will be a strong demand for definition and interpretation. 
One agency's proposal, for example, prescribes what kind of
customer identification should be required by a bank when a new
account is opened.  An in-state drivers license is acceptable, it
says, but an out-of-state license cannot be used without
"corroboration" -- unless the customer happens to live in a
community such as Washington, D.C., that spans several states and
the license was issued by a "neighboring" state.  How long will
it be before a banker asks for a ruling whether an expired
drivers license suffices, or an interpretation whether a state
must be contiguous to qualify as "neighboring"?

     None of these concerns should be taken as reflecting a
belief that banks should remain oblivious to the identities of
their customers or that they should not take care to have systems
and controls in place that will allow them to identify suspected
illegal conduct -- such as transactions that are purposely
structured to remain below reporting thresholds.  Banks not only
have obligations under existing law, but they have a variety of
good business reasons to know their customers.  The large
majority of banks already have processes in place to accomplish
these objectives.

     In that regard, bank trade associations could provide a
valuable service to their members by developing and sharing
information on best practices in this area.  Trade groups do an
effective job in communicating their members' objections to
proposed government initiatives, but there is an opportunity here
for them to address the Know Your Customer issue in a way that
could obviate the need for any new regulation.  Assisting members
in developing sensible and customer-sensitive Know Your Customer
programs would be a valuable service.

     For all of the reasons I have expressed in my statement to
you today, I am convinced that this proposal should be withdrawn. 
Thank you for the opportunity to address this important matter.