October 11, 2003

Hello big brother, goodbye privacy Commentary: The Patriot Act and your retirement

By Robert Powell, CBS MarketWatch.com

(Editor's note: This is the latest column by Robert Powell, a senior personal finance journalist who has joined CBS MarketWatch as a regular columnist and editor of our next subscription newsletter, Retirement Weekly, which launches on Friday, Oct. 10.)

BOSTON (CBS.MW) -- Next time you walk into your bank, don't be surprised if the teller cards you.

Yes, under the new Anti-Money Laundering Program required by the USA Patriot Act of 2001, retirees and would-be retirees who want to invest their money, say, from the sale of their house, an inheritance, a pension fund distribution, or life insurance proceeds will likely have to jump through lots of hoops to deposit their money in a financial institution.

According to the U.S. Treasury Customer Identification Program (CIP), which took effect on October 1, 2003, your banker, mutual fund firm, broker, adviser, or insurance agent must now verify that you are who you say you are when you open a new account, especially with a large sum of money. In other words, your banker must verify your identity before you open up a new account.

A financial institution has a three-point checklist for new accounts under the program, according to John Hall, a spokesman for the American Bankers Association. First, the bank has to verify the identity of the person and maintain record of the identification. Next, the bank has to check the new account owner's name against a list of suspected terrorists and organizations, and then it must give the new account owner some type of notification about why they are asking for all this information.

But that's not the worst of it, according to Charles O'Neill, an anti-money expert with DALBAR, Inc. in Boston. "The new CIP, in effect, allows financial institutions to better monitor your financial behavior," he says. "This is going to take the get-to-know-your customer rule to the next level. It's now get-to-know-your-customer-even better."

For instance, O'Neill says investors should expect their banker or brokers to ask them a series of questions about their new found money - the source of funds, their investment objective, and why they are investing. In some cases, O'Neill says the retiree who takes his check from the sale of a residence into a bank might be asked not just about source of funds, but the name and relationship of person who purchased his house.

O'Neill says the reason for these and what some might think are intrusive questions is this: The Suspicious Activities Report or SAR. Financial institutions must now report suspicious financial activities to the U.S Treasury and that means they must constantly review customer transactions with an eye on potential terrorist activities. Each firm, he says, must set up a "risk-based" computer system that flags transactions that are extraordinary. For instance, he notes that investors who make a series of deposits, say daily in the amount of $9,999.99, might get a "what's up" call from their friendly banker.

O'Neill says retirees and would-be retirees who plan to deposit a large check in the future or make a series of deposits should give their banker or broker a heads up about the upcoming "unusual" deposit or deposits. The same holds true if you plan to establish a trust. O'Neill says bankers will be especially eager to learn the names of the donor, the names of the beneficiaries, and, in some cases, may even want to review the trust document.

By way of background, the final rules implementing Section 326 of the Patriot Act require that financial institutions maintain records of the steps taken to verify identity, including all relevant information in an identification document, such as address, document number, etc. The record keeping may include photocopies of identification documents but does not require it. But the Treasury says, financial institutions, at their discretion, may find it prudent to maintain photocopies of identification documents.

Unfortunately, consumers don't have much recourse when it comes to questions that some might view as intrusive. O'Neill says consumers should certainly ask for a copy of a firm's anti-money laundering policy, but too many questions might result in a SAR being filed on the customer. And, the bad news about the SAR is this: the bank is under no obligation to inform you that it has filed a SAR with the U.S. Treasury. And that can't be a good thing.

So, what if you decide not to provide the information requested or if your identity can't be verified? Well, the mattress starts to look better and better. According to the NASD, your firm may not be able to open an account or carry out transactions for you. What's worse, if your firm has already opened an account for you, they may have to close it.

You can view Treasury's announcement in full at http://www.treas.gov/press/releases/js743.htm.

You can also view the "Final Regulations Implementing Customer Identity Verification Requirements under Section 326 of the USA PATRIOT Act at http://www.fincen.gov/326bdfinal.pdf.

You can also view a copy what your brokerage firm might stuff in your next statement about the CIP at http://www.nasdr.com/pdf-text/2003_cip_notice.pdf

Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News

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