Federal Banking Regulators & Gulf Coast Community Banks Face Difficult Post-Katrina Balancing Act

By Andrew Cochran

One of the fallouts from Hurricane Katrina is that small community banks along the Gulf Coast not only saw buildings destroyed, but lost their computer systems, their currency, and their clients. In the terrorism context, the community banks now face the problem of trying to meet customer identification requirements imposed by the Bank Secrecy Act which were toughened, and thus more expensive to meet, by the USA PATRIOT Act. On September 2, federal banking regulators issued broad guidance to Gulf Coast banks on how to meet regulatory requirements while assisting customers. With respect to BSA compliance, they said, "Recognizing the urgency of this situation, the agencies encourage depository institutions to use non-documentary verification methods for customers that may not be able to provide standard identification documents, as permitted under the regulation." A week later, last Friday, the regulators issued a set of "Frequently Asked Questions." The FAQs point out that the BSA allows banks to verify customers' identities by using documents (such as a driver�s license or passport), or "non-documentary methods" (such as through searching credit bureau records or other public databases), or a combination of both. So the regulators are going to let Gulf Coast banks exercise wide discretion in customer verification documentation for some time.

Certainly the regulators and law enforcement know that reducing the verification burden presents the opportunity for criminals, including identity thieves and gangs, to create accounts which could then be used to move money for nefarious purposes, including for terrorist activity. But the community banks in the area need regulatory relief to get back into business and to serve the populace, even if just temporarily. The regulators and banks face a difficult test, balancing the need to reestablish the financial institutions in the area versus maintaining anti-money laundering and anti-terrorist financing mechanisms.

Rep. Jeb Hensarling (R-TX) introduced a bill in late July to permanently reduce financial institutions' burdens and costs associated with reporting suspicious account activity, and there will be Congressional hearings on the impact of the hurricane on financial institutions. Absent Hurricane Katrina, his bill would have had difficulty winning passage. It will be interesting to see if the tragedy of Hurricane Katrina results in the enactment of Rep. Hensarling's bill to reduce the burdens imposed under the BSA and the USA PATRIOT Act.

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