[This is before the House Banking committee on Feb 11. --Declan] ********** REP. RON PAUL (R-TX): Thank you, Mr. Chairman. Mr. Greenspan, in the past you have spoken eloquently about, you know, the cost of regulations and the difficulty with it. But there's been some proposed regulations by the Federal Reserve, the regulations about "Know Your Customer." And there's been a lot of comments made about this, and I was just wondering if you're considering withdrawing these regulations, this proposal. MR. GREENSPAN: Well, Dr. Paul, we are in a process of going through a -- as I understand it -- a fairly standard rule-making procedure. And one of the purposes of a rule-making procedure is the purpose of getting people's opinions as to whether a specific rule, which remember, comes from a statute of some form that the Congress passes, is a reasonable rule. And when all of those answers that we've requested from all the various different parties come in, then we'll go through a formal rule-making process. REP. PAUL: Of course the authority for this comes from an old law, an old law of 1974, so -- MR. GREENSPAN: Well laws are laws. REP. PAUL: Right. And you have spoken out also about laws and regulations, I think very favorably, for the free market, and in a away, advice for us that sunsetting rules and laws might be a good idea. And you have said this many times, even including, you know, the Federal Reserve Act. So if this is the case, would you support some type of an amendment to a bill like H.R. 10 to make sure that everything that we can apply within the limitation of the bill, to sunset what we're trying to do here? REP. PAUL: I wouldn't sunset H.R. 10 by itself. But as I have said earlier, to which -- the issue to which you're alluding, I think a general sunsetting provision is a highly desirable thing to do in this system; that if a statute cannot muster 51 percent of both houses and the signature of the president, it's dubious whether it should continue to be the law of the land. REP. PAUL: But if it's legislatively permissible to do it under H.R. 10, why shouldn't we try, if it's a good idea? MR. GREENSPAN: Well, the only reason -- the only reason I would be uncomfortable with that is that why do it in this particular legislation, which, it obvious from all of the discussions we have, is a very tough thing to bring everyone together? REP. PAUL: Because we might not get another chance. MR. GREENSPAN: Well -- REP. PAUL: And also -- MR. GREENSPAN: Let me put it this way. I certainly approve of sunsetting in general, including H.R. 10. I would hate to find out that there was a consensus on passing H.R. 10 and it failed because somebody filibustered it over in the other -- REP. PAUL: Well, I see that as passing the buck, because we're not likely to do it separately. What if we would have written a sunset law into Glass-Steagall? Maybe we wouldn't be here today and we wouldn't have been here for six years discussing this. And on the Glass-Steagall, since that's part of the problem, if not the entire problem, why couldn't we simplify this a little bit and just write a one-page bill and say repeal Glass-Steagall and -- I, quite frankly, admit that I get confused on some of this stuff. I don't know if anybody else does. But I wouldn't get confused on repeal of Glass- Steagall. What would be the wrong with that type of an approach? MR. GREENSPAN: Nothing. REP. PAUL: Good. Maybe I'll introduce -- MR. GREENSPAN: Except for the -- REP. PAUL: -- that bill rather rapidly, then, and get your support, we'll have you over here and say this is the way to go. (Laughter.) Thank you. MR. GREENSPAN: I'm not sure I -- REP. LEACH: Will the gentleman yield briefly? REP. PAUL: Yes, I'll be glad to yield. MR. GREENSPAN: You carry a vote, Dr. Paul, and I don't. REP. PAUL: (Laughs.) REP. LEACH: In terms of -- REP. PAUL: But you carry some weight. REP. LEACH: In terms of a modest compromise, there's been a lot of discussion informally on this "Know your customer" rule. And I think there is a growing consensus that, as well-intended as it certainly was, that there is a view that it might in the final measure undercut rather than bolster the banking system, if, for no other reason, because the perceptions out there that bankers are expected to turn on their customers, as false as that perception may or may not be, it would appear that this is one rule where the general comments coming in should be looked at very seriously by the regulators, with an open mind to revising prior judgments. MR. GREENSPAN: I hope we do that all the time, Mr. Chairman. REP. PAUL: Mr. Chairman, may I just add, I appreciate your comments because I think the banks are really put in the middle because they are dependent on their charters, they're dependent on their credit, they're dependent on their insurance. It's very difficult for them to protect the liberties of the individuals which we are responsible for. And I thank the chairman. REP. LEACH: I would yield to the gentleman from New York. REP. LAFALCE: Just 15 seconds. Dr. Greenspan, Tuesday evening, when fielding a very, very difficult question from a constituent, my 17-year old son, who apprised me that in his government class that day, this "Know your customer" regulation issue was discussed, he asked: "Dad, the teacher wanted to know how come the regulators could promulgate such a crazy regulation. And I am wondering if you could give me a written response so that I could provide the class an explanation." MR. GREENSPAN: I would suggest you tell him to wait until the regulators have a chance to do what they are statutorily required to do -- REP. LAFALCE: Okay. MR. GREENSPAN: -- and then we will all be free to answer that question. REP. LAFALCE: All right. Fine. Thank you. REP. LEACH: I think the implication is -- the hint is that change is in the winds, and I think it's welcomed. Let me see. Is it the Democratic side? Yes, the gentle lady. I think you're next up. [...] REP. JONES: I know my last question is going to go over a little bit. Mr. Chairman, if you would permit that opportunity, I'd be much appreciative. My last question is, as a district attorney previously, on behalf of my county I sued some financial institution investors under what we call the "Know Your Customer" rule. And our allegation was that the investment companies did not adequately notice our agencies of what they were investing in, and the long-term possibilities or long-term detriment to the county (are standing ?). And I'm asking -- seeing how everyone's asking about this "Know Your Customer" rule -- is that the same "Know Your Customer" rule with which these others are speaking to? MR. GREENSPAN: The "Know Your Customer" rule that is being discussed here has got -- it's an extension of a money laundering issue and an endeavor to try to inhibit the types of transactions which have been clearly inappropriate and illegal. I think the issue that you're raising is more a question of the nature of fraud; that it's an issue of appropriate disclosure with respect to any form of transaction, because clearly, if you misrepresent what it is you're selling, that's called fraud and that's illegal. And I think that there are differences here between these two types of concepts which are related -- REP. JONES: I raise that with you because to me it's very important that even if we are talking about the inappropriate drug laundering and so forth, and so on, that "Know Your Customer" in the sense that I speak to, is a very important concept not only for governmental agencies, but for the consumers who we -- or at least who I speak for from my particular district. And I would hope that the Reserve is on board with the "Know Your Customer" rule that I'm speaking to. MR. GREENSPAN: Let me put it this way. Any bank which doesn't know its customer isn't going to be around very long. I mean, that's how you make money. REP. JONES: I would hope so. Thank you very much for your responses. Thank you, Mr. Chairman. ******* To: Declan McCullagh <[EMAIL PROTECTED]> From: solveig singleton <[EMAIL PROTECTED]> Date: Fri, 19 Feb 99 12:48:57 PST The Washington Times February 10, 1999 Page A15 Let federal eyes ogle your account? by Solveig Singleton The next time you go to the bank, you may find your banker demanding to know where you got your money, how you got it, and whether your transaction was a "normal" one. If a new "know your customer" rule proposed by the Federal Deposit Insurance Corporation goes through, banks would be required to collect that information from customers, monitor their accounts, and report "suspicious" activities. And if you don't give the bank the information it wants, you could forfeit your account. The FDIC has already received thousands of comments from people outraged at this prospect. People know the difference between being treated as a citizen and being treated as a suspect. Imagine the anger and fear that recent immigrants, African Americans and Hispanics will feel, knowing their banks are recording information about their jobs and patterns of withdrawals and deposits. There are grim jokes about the crime of DWH, "driving while Hispanic," because the police seem to stop you just because of the color of your skin. We're on the road to the crime of WCWH, "withdrawing cash while Hispanic." The FDIC argues that the new rules are somehow needed to ensure the "safety" and "reputation" of the banking system. But banks-Swiss banks in particular-have managed to respect their customers' privacy for decades without endangering the "safety" of the banking system. In response to critics, the FDIC is looking for alternatives. But this offers little comfort, since the agency has not backed down from the main idea of using the private sector as a tool of the police. Here's another way to look at it. The Fourth Amendment to the United States Constitution protects your privacy from government intrusions. If the police suspected you of money laundering or anything else, they would need a warrant to legally see your private papers. The "know your customer" proposal forces banks to become agents of the police, spying and reporting on their own customers-without ever obtaining a warrant. It's an appalling attempt to do an end run around our constitutional rights of privacy. In essence, under the proposed rule the banking system would act like a network of police spies-not unlike the neighborhood committees of retired party members in communist China (known as a "a bridge between the government and the masses"). Those committees of elderly women with bound feet were known as the "KGB with tiny feet." They padded about to report their neighbors for having too many children or a dirty house or harboring "capitalist roaders." There are differences between the two systems-"know your customer" isn't intended to support a Communist Party program. But there is a key similarity: in both systems, an overly ambitious program of regulation requires the government to force the private sector to help by reporting on everybody, everywhere. This is a sure sign that the government is on the wrong track. Hunger for centralized information collection by the state means the ambitions of the government have exceeded its capabilities. Individual rights to privacy take a back seat to rhetoric about pursuing some "social good." The government would sacrifice the rights of all to catch a tiny number of alleged wrongdoers-of the 7,300 defendants charged with money laundering from 1987 and 1995, only 580 were convicted, in almost all cases the "small fry." Our legal system is choked with paperwork offenses like money laundering. A wide range of behavior that violates no one's rights has been criminalized. And so it's no surprise when normal methods of investigation become almost useless. It's no bad thing, either, or almost everyone would be in jail for something. The problem is too much law, not too little surveillance. The answer is not to treat ordinary people like money launderers but to focus the resources of the legal system on behavior that hurts others in a direct way. In a free society, there's no need to turn private businesses into spy agencies. Most laws are self-reporting. If I murder someone, his relatives will demand justice; if I defraud him, he will complain himself and do his best to see that I am caught; if I spill foul chemicals into his stream, he will complain loudly when he finds out. There's no need to force bankers, grocers or neighbors to report that kind of behavior, or to threaten them with the forfeiture of their property if they don't. Using neighbors or private businesses as spies is a sure sign that the state has departed from the central job it is supposed to perform-protecting our liberties and rights. The complexity of our lives and the government's lack of knowledge about them are a bulwark against authoritarianism that is as important as the Constitution. As James C. Scott noted in Seeing Like A State: How Certain Schemes to Improve the Human Condition Have Failed, all through history governments have struggled to collect more information about citizens. But the more they strive, the more unlikely it is that their goals can be compatible with the complex, fast-moving life in free society. No American citizen should be treated like a suspect. The "know your customer" rule has no place in a free country. Solveig Singleton is director of information policy at the Cato Institute, and coeditor of the recent book Regulators' Revenge. --- http://www.y2kculture.com/ News and commentary, updated daily -------------------------------------------------------------------------- POLITECH -- the moderated mailing list of politics and technology To subscribe: send a message to [EMAIL PROTECTED] with this text: subscribe politech More information is at http://www.well.com/~declan/politech/ --------------------------------------------------------------------------
