Federal Deposit Insurance Corporation
Minimum Security Devices and ) 12 CFR Part 325
Procedures and Bank Secrecy Act ) RIN 3064-AC19
Federal Deposit Insurance Corporation
Notice of Proposed Rulemaking
DURK PEARSON & SANDY SHAW
PEOPLE FOR THE CONSTITUTION
Durk Pearson and Sandy Shaw ("Pearson & Shaw") and People for the Constitution ("People") hereby submit their joint comments in response to the call for public comments on the above referenced matter published in the December 7, 1998 Federal Register (Vol. 63 No. 234, pp. 67529-67536).
Durk Pearson & Sandy Shaw are scientists and authors. They have written extensively on both scientific and constitutional issues. Their first book, Life Extension, a Practical Scientific Approach (Warner Books, 1982) sold over one million copies and was on the New York Times Bestseller List for ten months. Their most recent book Freedom of Informed Choice: FDA vs. Nutrient Supplements (Common Sense Press, 1993) argues that the FDA's regulation of truthful health information on labels and in ads is dangerous to the public health and a violation of the First Amendment's prohibition on government abridgement of freedom of speech and the press. Pearson & Shaw are plaintiffs in a suit against the FDA for First Amendment violations (see www.emord.com). The suit is currently before the Court of Appeals for the District of Columbia Circuit. Pearson & Shaw have banks accounts in FDIC-insured banks and are opposed to having their banks either collect or report private financial information to the government, which they consider an invasion of their privacy as well as an unconstitutional search and seizure under the Fourth Amendment. They are prepared, if necessary, to bring suit against the FDIC on constitutional grounds to prevent the institution of the proposed rule.
People for the Constitution ("People") is a public interest litigation and education organization that educates the public about their constitutional rights and the limits the constitution places upon Federal government regulatory powers, including the Fourth Amendment right to freedom from unreasonable searches and seizures of their persons, houses, papers, and effects. People also commissions legal research on Constitutional issues in preparation for possible litigation against the Federal government in defense of Constitutional rights, including privacy and freedom from unreasonable searches and seizures.
Members of People object strenuously to the collection and disclosure by FDIC-insured banks at which they have accounts of personal financial information to the government in the absence of probable cause.
The proposed regulation (pg. 67529): "The FDIC is proposing to issue a regulation requiring insured nonmember banks to develop and maintain 'Know Your Customer' programs. As proposed, the regulation would require each nonmember bank to develop a program designed to determine the identity of its customers; determine its customers' sources of funds; determine the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report [to the FDIC] any transactions of its customers that are determined to be suspicious."
Stated purposes of the proposed regulation: "...the proposed regulation will reduce the likelihood that insured nonmember banks will become unwitting participants in illicit activities conducted or attempted by their customers." "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 financial institution regulatory authorities to combat illicit activities at such institutions."
Compliance (Subpart C, 4(f)): "Availability of documentation. For all accounts opened or maintained in the United States, each insured nonmember bank must ensure that all information and documentation sufficient to comply with the requirements of this section are available for examination and inspection, at a location specified by an FDIC representative, within 48 hours of an FDIC representative's request for such information and documentation."
Violation of the Fourth Amendment:
FDIC nowhere in their proposed rule discuss the Fourth Amendment implications of the rule. The Fourth Amendment states, "The rights of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized." The FDIC's proposed rule establishes processes for compulsory searches of the papers of Americans without following the Fourth Amendment requirement for probable cause and search warrant and is, hence, in violation of the Fourth Amendment. The proposed FDIC procedures establish unconstitutional government fishing expeditions for the papers of large numbers of innocent persons to find evidence of wrongdoing by a few.
Recent Court decisions have begun tightening legal restrictions on government searches and seizures after a period of loosening such limits far beyond that allowed under the clear language of the Fourth Amendment. For example, see a recent Ninth Circuit ruling (opinion written by Judge Kozinski) that a police "profile" of alleged characteristics of those more likely to have committed drug crimes provides no probable cause to search a person or his/her car for evidence of criminal activity. The U.S. Supreme Court ruled 9-0 (Dec. 8, 1998) that police cannot search people and their cars after merely ticketing them for routine traffic violations.
The U.S. Supreme Court has consistently supported the view that the constitution does not give the federal government general police powers (U.S. v. Lopez, 115 S. Ct. 1624 (1995); Justice Thomas, concurring). Under the Commerce Clause, the federal government has regulatory powers over interstate commerce, commerce with foreign nations, and commerce with Indian tribes. Federal authority does not extend to intrastate crime of a local nature, such as the possession of a gun within 1,000 feet of a school (U.S. v. Lopez, 1995), "The Act [Gun-Free School Zones Act of 1990] neither regulates a commercial activity nor contains a requirement that the possession be connected in any way to interstate commerce. We hold that the Act exceeds the authority of Congress "[t]o regulate Commerce ... among the several States."). (emphasis added) The proposed FDIC rule does not specify what procedures will be put in place by the FDIC to ensure that the federal government (FDIC) regulates only interstate commerce and does not, thereby, overstep its constitutional authority. If the federal government were allowed to ignore the distinction between interstate and intrastate characters of the transactions they were investigating, it would make a nullity of the constitution's limited delegation of authority to the federal government under the Commerce Clause.
As decided in Printz v. United States (Nos. 95-1478, 95-1503, U.S. Supreme Court), the federal government cannot compel state or local governments to enforce or administer federal law, nor can the federal government circumvent that prohibition by conscripting the state's officers directly. We argue here that, since the federal government was denied constitutional authority to regulate intrastate commerce, that the federal government has no constitutional authority to evade this constitutional limitation by conscripting private entities such as banks into regulating such local commerce.
The FDIC states (pg. 67530): Privacy Issues. "The proposed regulation requires insured nonmember banks to gather information about customers that, if misused, could result in an invasion of a customer's privacy. Given the potential for abuse in this area, it is the FDIC's expectation that, in complying with the Know Your Customer regulation, a nonmember bank will obtain only that information that is necessary to comply with the regulation and will limit the use of this information to complying with the regulation."
Comments: FDIC discusses here how the government has high expectations of the banks required to collect and report the valuable private customer information demanded by the FDIC without probable cause or warrant (see Fourth Amendment above). However, despite the high moral tone of the government's stated "expectations," the result is mere hot air since the federal government puts in place no procedural safeguards whatever for actual protection of that information. There are no penalties for bank failure to "obtain only that information that is necessary to comply with the regulation" or to "limit the use of this information to complying with the regulation." Moreover, those undefined limitations are void for vagueness and are arbitrary and capricious, since the FDIC never makes it clear to banks exactly how much of what kind of information is necessary to ascertain (for example) the sources of a person's income or how they would be expected to spend their money or of how a bank is to know when a customer has crossed over a purported line that tells them when somebody's spending pattern is "suspicious." In fact, because it is not at all clear how much information will be "adequate" for the purpose, the banks are likely to collect far too much information, subjecting each and every law-abiding customer to extensive (and unconstitutional under the Fourth Amendment) monitoring.
The Fourth Amendment prohibits federal government searches and seizures of persons, houses, papers, and effects without some evidence of wrongdoing. It is certainly easier for the government to force banks to conduct unreasonable searches and seizures for them than it is for the government to develop credible evidence of wrongdoing with which to obtain a search warrant, but it is still unconstitutional. The Constitution was not put in place for the convenience of the federal government in law enforcement, but to declare the federal government's delegated powers under the constitution and to prohibit the federal government from abridging constitutional rights of Americans.
Classifying Customers into Varying Risk-Based Categories
Page 67531, Paragraph (d) -- "Contents of Know Your Customer Program": "In complying with this section, it may be beneficial for insured nonmember banks to classify customers into varying risk-based categories that the insured nonmember banks use in determining the amount and type of information, documentation and monitoring that is appropriate."
A. When credit companies classify customers into varying risk-based categories, they are required to provide customers with copies of their credit reports so that errors can be corrected. Unfortunately, banks can and do make costly errors affecting their customers. (Government agencies have been known to make a few errors, too, and to abuse power to the detriment of those under their control.) Hence, there must be protective safeguards in place so that innocent citizens can become aware of and correct errors in their risk-based classifications. The cost to innocent citizens (who comprise the overwhelming majority of bank customers) of such errors can be very severe, including (for example) detailed monitoring by banks of their private financial transactions and the reporting of these, their private conduct and economic choices, to the government. Such monitoring could be used by government officials, for example, to illegally spy on political "enemies."
B. Another serious problem with such classification is that, in classifying customers into varying risk-based categories (that is, the risk of laundering money), certain groups (such as blacks, hispanics, Asians, and Arab-Americans) are disproportionately more likely to be classified as high risk. For example, it is an undeniable fact that a far higher percentage of blacks are incarcerated for drug crimes (one reason for money laundering) than are whites. Hispanics are more likely to have contacts in Latin America, where much drug traffic money laundering activity takes place. Arab Americans may be suspected of greater likelihood of involvement with Middle Eastern terrorists and Asians in criminal triads. What does the FDIC propose to do about the proportional overrepresentation of blacks, hispanics, and other minorities in the high-risk categories? Is the FDIC prepared for an avalanche of Civil Rights suits based upon its proposed classification? Is the FDIC prepared to reimburse banks that follow the FDIC suggestion to categorize "risky" customers and are then sued by minorities under the Civil Rights Act? Or, as is more likely, is the FDIC prepared to punish banks that have proportional overrepresentation of minorities in the high-risk categories?
No rational basis: The deposit and withdrawal of funds of unknown source (provided the cash is not counterfeit) has no effect upon the soundness or the reputations of FDIC-insured banks and poses no threat to the funds of their customers. FDIC asserts, without supporting evidence, that their new required monitoring and reporting protects the reputation of the bank. But, clearly the proposed rules are intended to promote, not the interests of FDIC-insured banks or their customers, but the ability of the federal government to identify possibly money-laundered funds that the federal government can seize, thus increasing the federal government's revenues from forfeitures. Requiring that banks act as government law-enforcement investigators for determining who among their customers may have committed crimes involving money (and most crimes do) has no rational relation to FDIC overseeing the carrying out of fiduciary responsibility by FDIC-insured banks to bank owners and bank depositors. Under this rationale, the federal government could demand that General Motors monitor all customers' purchasing histories and report anything "suspicious" on the basis that some of the money being used to purchase vehicles is obtained illegally, some vehicles being purchased will be used as getaway cars from robberies at public buildings or for running over IRS agents, and some vehicles will be used to deliver illicit drugs, etc. etc. The FDIC has a low profile, however, so most Americans would not be expected to know about being monitored under this proposed "Know Your Customer" program. However, we intend to use our free speech and free press rights under the First Amendment to inform as many people and civil liberties organizations as possible (a "Know Your Government" program) about this FDIC-proposed outrage.
Agents of the government:
Furthermore, if bank facilities and/or employees are going to be commandeered to provide law-enforcement services for the federal government by actively looking for and investigating supposedly "suspicious" customer transactions, then there is a very serious constitutional question of whether the bank becomes thereby an agent of the government and must meet all constitutional standards. A recent Ninth Circuit court decision (Berger v. Hanlon, 129 F. 3d 505, 13 Nov. 1997) ruled against CNN in a suit for damages, stating that TV news crews who are invited to accompany police on raids are considered governmental agents and must meet constitutional standards. Banks required to perform searches and seizures of customers' private information for the FDIC cannot be allowed to do so without the full protections of the Constitution against invasion of customers' privacy, unreasonable searches and seizures, and other protected rights. At the very least, bank customers have the right to be individually fully informed of the FDIC rules before the institution of federal government required monitoring and reporting and should be fully informed of the procedures to be used by their bank in monitoring their account activities. Just as citizens have the right to refuse searches of their cars requested by police, citizens ought, in logic and in reason, to have the right to refuse searches of their private financial information otherwise unavailable to the government. The government would then be free to seek warrants (as defined by the Fourth Amendment) to obtain such data on the basis of probable cause.
In Kolender v. Lawson, 461 U.S. 944 (1983), the U.S. Supreme Court expressly said that for a government official to demand ID from a law-abiding person is unconstitutional. There is a strong argument, then, that the FDIC's proposal to require that records of a person's ID and private financial transactions be turned over by a bank to an FDIC official within 48 hours of the government's demand is also unconstitutional.
Disparate Impact on Small Banks and Small Businesses
Small businesses, particularly those frequently or usually dealing in cash, such as hardware stores, gas stations, beauty salons, convenience stores, liquor stores, auto repair shops, bail bonds, and pawnshops, would be particularly likely to be investigated under this proposed rule. Yet such businesses (particularly those in inner cities) are more likely to be owned by minorities than are larger businesses. Hence, the proposed rule will have a disparate impact on minority-owned small businesses.
Moreover, it is not as though this bank "service" (eg. detailed monitoring and reporting of customers' financial transactions, sources of funds, etc., as specified in the proposed rule) will have no cost to the bank or its customers. The bank is likely to pass along these not insignificant costs to its owners and customers in the form of lower returns on invested capital for owners and lower interest rates paid or reduced services to customers. Small banks and small depositors will be hurt more than large banks and large depositors by these costs. Because of the particularly high costs likely to be involved in monitoring "high risk" small business customers in inner city areas, this rule will have a severe chilling effect on the opening or maintaining of banks and small businesses in those areas.
EXHIBIT 1 (ATTACHED):
Attached as Exhibit 1 is a photocopy of an article, "Privacy Concerns Spark Criticism of Bank Rule" (The Wall Street Journal, Dec. 10, 1998) in which it was reported that the FDIC has received nearly 3,000 complaints as of December 9, 1998 against the above described proposed FDIC rule. The article describes complaints based upon privacy, searches and seizures in violation of the Fourth Amendment, and the conscription of bankers as government law enforcement agents.
According to the article, "The proposed rule ... was meant to formalize procedures that many institutions have already had in place for years." We ask the FDIC to identify the banks that have already put these unconstitutional procedures in place at the behest or suggestion of the FDIC (or any other governmental agency) and to accept no further transmissions of information obtained from these banks under these unconstitutional "Know Your Customer" programs until such time as constitutionally required due process procedural safeguards have been put in place to, among other things, protect the innocent from unreasonable federal government searches and seizures.
Moreover, if the proposed rule is only "meant to formalize procedures that many institutions have already had in place for years," then the FDIC is in violation of the "due process" requirements of the Constitution, as well as the Administrative Procedure Act, for establishing the "informal" procedures in the absence of proposing the rule in the Federal Register and allowing for Public Comment.
Action: Notice of Proposed Rulemaking
We ask that the FDIC withdraw the proposed rule. We also ask the FDIC to stop unconstitutionally collecting information from any extant "Know Your Customer" programs.
Comments submitted by:
People for the Constitution
PO Box 3666
Tonopah, NV 89049
© Copyright 1999 by Durk Pearson & Sandy Shaw
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