Section 326 Revisited Photocopying and Foreign ID Directives Considered

Section 326 Revisited
Photocopying and Foreign ID Directives Considered
by John Byrne

On July 1, 2003 the Department of the Treasury issued a Notice of Inquiry relating to final regulations issued as a result of the directions given in section 326 of the USA PATRIOT Act of 2001. In an unprecedented move, the final regulation was reopened for comment on two subjects. Treasury specifically requested comments on (i) whether and under what circumstances financial institutions should be required to retain photocopies of identification documents relied on to verify customer identity (recordkeeping) ; and (ii) whether there are situations when the regulation should preclude reliance on certain forms of foreign government-issued identification to verify customer identity (documentary verification of foreign nationals.)

The Patriot Act requires "?financial institutions to implement reasonable procedures to verify the identity of any person seeking to open an account, to the extent reasonable and practicable." Bankers, on the whole, believe the final regulation conformed to congressional direction to develop a reasonable rule, which set forth standards reasonable in light of the individual circumstances and risk perceived.

Photocopies
Questions raised regarding photocopying of documents cover maintaining a copy of the documents used to verify identity; whether or not there should be specific instances when photocopies should be made; and whether the regulation should provide guidance concerning risk factors.

Mandating photocopies of identification documents is contrary to congressional direction that Section 326 be reasonable, and is a useless evidence tool. Many times it is impossible to get a good copy of a drivers license, which is the most frequently offered piece of identification, and several states prohibit photocopying them. Other states have incorporated technology that blocks the capability of photocopying, effectively eliminating the photograph as an evidence source.

Compliance officers are also concerned about issues under the Equal Credit Opportunity Act with retaining copies of drivers licenses in loan files, since the regulators for years have discouraged such practices. And centralizing photocopy records would involve a major operational undertaking. A photocopy mandate will also harm, and possibly eliminate, the processing of remote applications in the credit card industry and with any banking product that is not based on face-to-face transactions.

Identification from foreign governments
Questions raised regarding identification issued by certain foreign governments ask whether or not we should require a passport number from all customers who are non-U.S. citizens and addresses the anticipated effects on those non-U.S. citizens who are not required to have a passport and those who open accounts from abroad.

In the final rule already given to the industry Treasury and the regulatory agencies created a risk-based approach to the challenges of account opening verification. This decision permits institutions to develop their CIP and what documents (or non-document processes) to accept based on all available information. With the government providing us with updates on the types of risks inherent in a particular form of foreign (or domestic) identification, we can address those risks in an appropriate manner. On the other hand, eliminating some forms of identification will further encourage foreign customers to utilize illegal underground financial practices or resort to all-cash, raising the potential for robbery and theft. As for being "susceptible to fraud and abuse," we know many of our own domestic identification documents lack security protections and are frequently counterfeited and copied.

An insidious possible result of not accepting foreign government documentation has been pointed out to the State Department in that many Americans abroad carry similar identity cards issued by our government, and their actions abroad could be seriously restricted if we ban the use of such cards here. Retention of the current risk-based approach to identification verification is the only effective means of addressing the myriad of foreign identification documents.

Result Of Change
If congress decides to change the regulation, it will mean an unavoidable delay in complying with the mandatory compliance date of October 1 as policy decisions relating to resource allocation to Section 326 compliance must be made and the internal approval process of the CIP must be completed.

The House Financial Services Committee stated that it "...is not the Committee's intent for the regulations to require verification procedures that are prohibitively expensive or impractical." And in a July 24th letter, the chairman of the committee and the ranking member supported the regulation by writing, "...the final regulations reflect the results of careful analysis and study by Treasury and the regulators as informed by a comprehensive notice and comment process." And then they added, "...no changes to the final regulations are warranted."

The financial industry is an important part of the U.S. government's efforts to prevent money laundering and terrorist financing. We have always been seen as partners and a valuable asset to these worthy goals. Any change to the 326 rule because of "concerns" that seem, at best to be a stretch, will dramatically alter that relationship. We remain convinced that the Treasury Department will do the right thing and move on.

Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 6, 8/03