Banking industry members taking issue with the provisions of the USA Patriot Act note that even smaller community banks like Rockland-based South Coastal Bank already have procedures in place to identify their customers.

Community banks take pride in recognizing loyal customers, but if the provisions of the USA Patriot Act remain as is, those familiar faces will be considered new clients, and the extra cost of maintaining additional files for established clients under the act’s Customer Identification Program will be arduous.

Earlier this month, the Massachusetts Bankers Association, the Independent Community Bankers of America and local banks in Massachusetts sent letters to Congress on the proposed Section 326 of the USA Patriot Act, citing not only significant cost and operational burdens with the proposal, but also a concern for their relationships with existing clients.

“The financial burden is the record retention. Our existing customers are impacted because what banks initially did was issue the signature card, not copy the driver’s license,” said Michael Piemonte, vice president of risk management and compliance at Franklin-based Benjamin Franklin Savings Bank. “So now we have to do all that again. My customer who has been here for 20 years is now a new customer.”

The MBA, on behalf of community banks and savings and loan associations, sent a letter to Congress in which the agency stated that community banks have a strong knowledge of their customers and are certain of the identity of some of their existing customers. The letter argues that the section should provide an exception for senior officers to approve new accounts when they are “confident that the customer represents an extremely low risk based on their prior experience with the customer.”

Even smaller community banks like Rockland-based South Coastal Bank, which has approximately $146 million in assets, have procedures in place to identify their customers, such as verification of Social Security cards, utility bills or employee identification cards, which have served their purpose for account maintenance in the past. Along with the continued identification process, the proposed law requires banks to retain records for five years, including the identifying information and how the customer’s identity was verified.

“They want a copy of everything, but we don’t have optical storage and record retention procedures. It’s burdensome and costly,” said Piemonte. “If I am a proposed customer, and my account is denied, the bank has to retain records for five years. It’s not a situation where you show your license; it’s all about validation … so now we have a training issue. And if you improperly validate someone, we have a big problem.”

More Time Needed

As a direct result of last year’s terrorist attacks on Sept. 11, the USA Patriot Act of 2001 requires financial institutions to verify the identity of new account holders and limit transactions with shell banks. Since the act went into effect, observations from banks around the nation have demonstrated the need to amend sections and proposals of the act.

The Customer Identification Program, which takes effect Oct. 26, requires “reasonable procedures” from all banks and financial institutions to verify the identity of any person seeking to open an account. The argument over whether these identification procedures would be required for existing customers remains unsolved, but banks contend that aspects of the proposal, as is, will be an extreme financial burden.

“Section 326 is the provision requiring all financial institutions to adopt a Customer Identification Program and at many respects, banks have been doing a fair amount of that with respect to deposit accounts,” said David Floreen, MBA senior vice president. “The financial burden would be substantial if the legislation was adopted as proposed. Copying a photo ID, scanning it, and keeping the records for five years is a substantial staffing and technology cost burden.”

Piemonte, a member of the MBA Regulatory Committee and active panel member in discussing the act’s probable impact on banks, believes the act itself is reasonable but the regulations are creating the additional problems.

“The regulation is subject to interpretation,” said Piemonte. “Regulators took the position that banks were doing these [verifications], but we weren’t to the extent they thought we were. It is very difficult to validate things that aren’t U.S.-issued, like Visas and green cards.”

The ICBA believes banks will need additional guidance on the types of identification appropriate for non-U.S. citizens, including the ability to accept identification other than passports and green cards, and guidance on appropriate identification procedures for non-U.S. citizens.

“Banks have been looking at the government-issued IDs and doing the kind of verification, whether online or by mail, of who people are,” said Floreen. “In many respects, there is not a wholesale change in what’s been going on for some time, but obviously, there is a heightened awareness.”

While banks have procedures to recognize and verify the identity of customers, they may note the information in the customer file but not retain a copy of the documentation or document what has been done to confirm a customer’s identity. According to the ICBA, the new procedures will be a radical departure from existing requirements, and will impose substantial financial burdens on banks. While the record-keeping systems may be electronic, the extra work to maintain the additional documentation will be extensive.

“We have purchased software that scrubs our files, with compliance, weekly with the act,” said John O’Connor, spokesman for South Coastal Bank in Rockland. “Compliance is mandatory and we’ve looked at it as the cost of doing business, and with as much automation as possible.”

But O’Connor says the increase in operating costs needed to comply with the act is secondary to the cost incurred on injured client relationships.

The Oct. 26 effective date for compliance with the Customer Identification Program is simply too soon, according to local banks and state agencies. The ICBA urges the federal agencies to either defer the effective date or allow a transition period in the final rule to accommodate the changes.

“The point is that they have to give banks more time. They don’t understand the impact and how it really affects the existing customer base,” said Piemonte. “My concern is that we have to get at least three to six months’ more time because the current time frame is impossible – you can’t train a staff to do this in 30 days. For existing customers, it’s a shame.”

Customer identification procedures aside, Piemonte’s main concern is the customers who have been with banks for 20 to 30 years.

“If they want to open a new account, we have to treat them like a new customer and that is my big concern,” said Piemonte. “Our overall risk profile is not as bad because our customers are mainly U.S. citizens. Where my concern lies is with the North Shore banks and banks in the Cambridge and Harvard University area that have non-resident aliens as clients.”

The MBA, ICBA and more than 230 commercial, savings and cooperative banks and savings and loan associations are hopeful that the regulators will make compliance optional for a reasonable amount of time.

Banks Concerned Over Patriot Act Provisions

by Banker & Tradesman time to read: 5 min