Overcoming Account Opening Impediments to the Bank Secrecy Act

There are 40 million persons living in the U.S. who lack a bank account. Many of these "unbanked" individuals lack sufficient identification necessary to meet banks' customer identification verification procedures, which are required by the Bank Secrecy (BSA) and USA PATRIOT Acts. Research shows that insufficient identification is one of the top three reasons for account denial and that customers who are denied a bank account once often do not return to a bank again.

The Passageway Account Proposal

This proposal suggests a potential policy solution to help address the identification issues that prevent millions of individuals from accessing a traditional deposit account. Dubbed a "Passageway Account" for the purposes of this proposal, a restricted deposit account could be offered when a customer holds basic identification information, but not enough to pass the bank's standard Customer Identification Program (CIP) protocol. Federal banking regulators could encourage financial institutions to offer these accounts in order to provide unbanked consumers a gateway product to the traditional banking sector.[1]

This proposal does not attempt to change the BSA regulations; instead, it merely supports a more flexible approach to satisfying the BSA's CIP requirements. The justification for a more flexible account opening procedure is that the Passageway Account would have more narrow constraints on the use of the account, which would reduce the account's likelihood and appeal for use as a money laundering instrument.

The customer would still be required to provide the minimum identification material required under the BSA regulations. Likewise, the bank would continue to do account monitoring. However, the inability of a bank to "verify" a certain aspect of the identity information provided by a customer, such as a permanent address against a credit bureau database[2] or the validity of a foreign consulate ID card, would not necessarily preclude a customer from accessing an account. Furthermore, the bank would continue steps to prevent fraud, by asking for more than one piece of identifying information and offering a Passageway Account only after a scrutinizing a customer's information through their traditional deposit account CIP process.

A Passageway Account could offer a secure way for banks to establish relationships with customers whose identities are difficult to verify. Banks will come to "know" their Passageway Account customers through observing transactions, which would ultimately be used to graduate them to traditional deposit accounts. In addition, customer identification data provided during Passageway Account opening would enter the data aggregation arena, and those new to the financial system would thus be verifiable in the future.

Front End: Identification Method for Opening a Passageway Account

To better understand how this proposal could help to identify hard-to-know customers for basic accounts, the following are the types of customers who could be served with the accounts and the identification method for verifying their identities.

An individual who does not possess a Social Security Number (SSN) or Individual Taxfiler Identification Number (ITIN), nor hold an application for such a number. Nonetheless, the customer holds two forms of government issued identification, one with a photo. Under the Passageway Account, these two identifiers could be from either a U.S. or foreign government. Bank tellers could use the picture and any biometric data (height, weight and eye color) contained on the government issued photo ID in conjunction with a secondary government issued identifier, in which the key information (name and date of birth) information matches to protect against fraud.

A number from the photo ID could be used as a customer's identifying number in place of the absent SSN or ITIN. Mirrored here are the types of ID that are accepted by the IRS for ITIN applications; they would also serve as the optional documents necessary to open a Passageway Account. They include:

• Passport (the only stand-alone document)
• U.S. Citizenship and Immigration Services photo identification
• U.S. state identification card
• Visa issued by U.S. Department of State
• U.S. driver's license
• U.S. military identification card
• Foreign driver's license
• Foreign military identification card
• Foreign voter's registration card
• Civil birth certificate
• National identification card
• Medical Records (valid only for dependents under age 14 (under age 18 if a student))
• School Records (valid only for dependents under age 14 (under age 18 if a student))

An individual who is transient and does not possess official proof of address, such as a utility bill. This situation could arise in multiple scenarios. A person may have been in the financial system before but entered the financial system using a different address and lacking current proof of address. Likewise, the customer may have never been in the financial system and holds no official documentation of address.

To open a Passageway Account, the individual would have to possess a government issued photo ID (U.S. or foreign) in conjunction with one of the below in order to protect against fraud:

• A verifiable SSN/ITIN
• An original Social Security Card
• The watermarked paper sent from the IRS indicating an ITIN has been issued
• An IRS issued tax refund
• A secondary form of government issued ID (photo or non-photo) from the list in the first scenario

After obtaining this identification, the bank may verify the customer's address by sending the Passageway Account debit card and authorization password in two separate mailings to the customer's reported address.

Finally, an individual who lacks a secondary non-photo government issued ID, could be granted a Passageway Account if they consent to providing the bank a thumbprint. While state laws differ on whether thumbprints are allowable, some banks do require them. Under this proposal, this biometric data would be given to law-enforcement only in cases of reported fraud on the account, and a signed consent form explaining this to the accountholder would be required.

The offering of the Passageway Account could only occur if the customer does not provide suspicious information during the account-opening process. Examples of suspicious activity include if a customer provides a name, identity number or date of birth that contradicts information with the credit bureaus and other databases used by the bank. An example of mismatching information may be a SSN that does not correspond with the number provided by the customer. Address information, however, should not be factored into this assessment, as many of the intended customers for this account are transient and may not have a permanent "verifiable" address.

Back End: Account Parameters for a Passageway Account

In order to provide greater flexibility with regard to account opening procedures, the Passageway Account would have parameters that would reduce the likelihood of money laundering or other illegal activities with the account, and thus reduce the need for Currency Transaction Reports (CTR) and reduce the likelihood of activities that would warrant Suspicious Activity Reports (SAR).

Those constrains would focus on the allowable balance in the account, the rate at which monies could be added and removed from the account, and the access and ownership of the account. Below are example parameters in those categories, which are intended to facilitate dialogue to determine the most effective constraints. These example parameters are not fixed and their advantages or flaws should hold no bearing on the overall concept of the Passageway Account:

An account ceiling would be imposed, and an account balance could not exceed $5,000 at any given time.

This amount is large enough to allow account users, all of whom have no savings account within the U.S., a secure place to hold a portion of their money. However, it is half the aggregate transaction amount needed to generate a CTR ($10,000). It is also low enough to reduce the likelihood that the account will be used to "structure" transactions around CTR requirements. Based on observed pre-paid card behavior, we anticipate that the vast majority of Passageway Account customers would rarely hold more than a few hundred dollars in their account. Nonetheless, this much higher ceiling was chosen to provide the unbanked consumer a secure place to store money while transitioning to a normal deposit account.

To reduce the international money-laundering potential of the account, the account could be constrained so that it is not accessible from anywhere but the U.S. (neither online nor at an ATM). Additionally, no money in the account could be electronically sent to an account residing outside of the U.S.

An indirect effect of this restriction is that it would remove any direct remittance capability. However, this is unlikely to diminish the attractiveness of the account to consumers, as only 3 percent of remittances are currently sent through bank accounts. Remittance fees at most banks are substantially higher than those charged by money services businesses such as Western Union.[3] If the money services business accepts the customer after performing their own identification procedure, nothing would preclude the customer from debiting money at a well known money services business, such as Western Union.

This also would allow banks to more clearly understand the counterparties with whom a Passageway Account customer transacts as foreign counterparties may be more difficult to scrutinize.

Constraints on the ‘velocity' of money going into and out of the account would be applied.

For example, no more than $1,000 dollars in aggregate could be transferred to any unknown account per month. This restriction would reduce the number of SARs needed both for behavior reasons and for CTR avoidance structuring. BSA requires banks to report transactions that are suspicious, or that differ from a customer's normal behavior. This restriction limits the value of "outside-of-normal-behavior" transactions that a customer may perform. Thus, while a customer may still complete "outside-of-normal-behavior" transactions (a large unexpected payment to a handyman, for example) the money laundering risk is reduced. It also eliminates the need for CTR reports as it would be impossible for a customer to amass transactions to one account that amount to $10,000 in aggregate. Nonetheless, customers would still be permitted to transact higher values with well-established businesses. Each bank may generate its own list of trusted counterparties.

An additional parameter could be that customers would not be permitted to take out more than $200 of cash per day from an ATM, teller, or at a POS terminal.

This restriction would force customers to transact directly with retailers in a debit-card fashion. This restriction would reduce the ease with which money laundering can occur via cash. It also serves to provide banks with a more detailed transaction record of the customer. This record may be used for SAR purposes. Having a thorough transaction history would also aid banks in determining when the customer should move to a standard deposit account.

Finally, each person could be limited to one Passageway Account with any U.S. institution.

This restriction would eliminate the ability of a customer to double the balance limits and withdrawal restrictions by simply having more than one Passageway Account. Active and closed Passageway Account information could be shared among institutions via an intra-bank system. If a customer is offered a Passageway Account at a new bank, part of the account opening process will include determining whether the individual already has such an account with another institution.

Migrating Passageway Accountholders to Traditional Accounts and Products

A primary objective of this proposal is to provide hard-to-verify consumers with an account option that ultimately results in their participation and integration into the traditional financial system. By enrolling the customer who is not verifiable under the institution's typical CIP protocol in a Passageway Account, the bank would be able to observe the consumers' transactions, which could then be used to migrate the customer to a traditional deposit account. After a customer spends a predetermined amount of time in a Passageway Account, banks will have gained a sufficient level of "customer knowledge" to open a traditional account.

This raises the issue of whether a customer's money laundering potential can be assessed within the bounds of a restricted account. The ability of banks to establish and record the transaction behavior of a customer would provide transaction history and, thus, substance to the monitoring performed once the customer graduates to a traditional deposit account. CTRs are generated fairly automatically while SARs require a more investigative approach. SARs are partly based on transactional behavior - thus, an out-of-the-norm transaction may generate a SAR. Banks will already have a transaction history from which to draw when monitoring an customer who has graduated from the Passageway Account.

Finally, the credit bureaus and/or ChexSystems would have access to the identity information provided by the customer during the account opening process as another means of integrating the individual into the mainstream financial services system.

Key Considerations

If implemented, this proposal would have several indirect yet dramatic implications on banks' current relationships with the unbanked, as well as their interpretations of BSA CIP regulations.

While the Passageway Account proposal will not alter current BSA regulations, it could have the indirect effect of changing current interpretation of those regulations. An underlying issue is that BSA regulations, by design, leave much discretion to the banks on how they interpret them. Thus, by authorizing a specific CIP for a specific account - the Passageway Account - the government would be giving an example of what level of scrutiny is appropriate given a specified amount of risk. This example could become a form of de-facto guidance.

Not all banks, however, interpret BSA requirements in the same way.
Some banks offer very lenient interpretations of the laws. In conversations with immigrant aid groups in Washington, D.C. for instance, we heard that some banks in the area widely accept passports and other forms of foreign ID and do not always ask for a utility bill in order to verify a potential deposit account customer's address. This proposal does not explicitly recommend that a more lenient bank would need to change. However, a possible indirect implication of government authorization of the Passageway Account is that banks that are currently lenient with respect to their traditional deposit account CIP may become stricter. This is because one could interpret the authorization of the Passageway Account CIP as a circuitous message that the CIP for a traditional (unrestricted) account should be stricter than that of a restricted account. Therefore, this may encourage banks to apply a strict interpretation of the BSA's CIP requirements to their traditional accounts. As a result, those potential customers who in the past may have been granted a traditional account at a lenient bank would instead be offered a Passageway Account. Likewise, those who were denied a traditional account at a strict bank would instead be offered a Passageway Account.

Due to lack of account-rejection data, it is impossible to quantify the potential net effect on consumers. Nonetheless, based on a FDIC 2009 survey, an estimate can be made. According to the survey, only 38 percent accept the ITIN as an identification form and only 27 percent accept the Matricula Consular Card as an identification form. Furthermore, roughly 50 percent of banks employ a check against some data aggregation system - systems that usually exclude alternative ID data. From these statistics and from our discussions with large progressive bank representatives, who note that the compliance wind is blowing toward a flight-to-safety rather than an easing of account-opening procedures, a conclusion can be drawn that the strict branches outnumber the lenient. The Passageway Account would be a net positive for the hard-to-identify unbanked.[4]

Thus, while fewer consumers may be offered a traditional account at the outset, fewer would be outright denied any form of account, and the goal of including more people in the financial system will be met. After a set amount of time in the Passageway Account, customers would be non-documentarily verifiable via data aggregation systems and, thus, fully incorporated into mainstream banking.

This proposal does not seek to ignore the fact that not all of the hard-to-identify unbanked possess the identification required to open a Passageway Account. Even with full implementation of this proposal, some potential customers would still be locked out of the system. For now, we view this as an insurmountable obstacle as identification programs at banks are not only in response to BSA regulations and money-laundering concerns but also in response to fraud concerns and "Red Flag" rules within the FACT Act.[5] Incorporating customers with no identification would require a dual regulation change, which is outside the scope of this proposal.

A final consideration is the potential attractiveness of the account to consumers. While some could view this as an inferior product compared to other deposit accounts given the account's restrictions, it is worth noting that financial institutions commonly offer a variety of accounts with differing terms and conditions, whether it is a deposit account or a line of credit. This account is intended to be a transition product for the customer who is unable to access an account. Its purpose is to serve as an entry point to the traditional financial services industry for millions of individuals who are effectively shut out. To serve as that product, the Passageway Account must meet the consumer's needs, while also helping the bank mitigate the unknown risk of serving a customer whose identity is hard to verify.

Conclusion

Although there is not one ‘silver bullet' that will remedy all of the challenges of providing bank accounts for consumers whose identities are more challenging to verify, the Passageway Account could offer a scalable, pragmatic solution that addresses the needs of consumers, the accountability born by financial institutions in protecting against criminal activities, and the safety and soundness needs for the financial system as a whole.

Appendix: The South African Example

A similar restricted account with minimal Know Your Customer requirements was implemented in South Africa in October 2004; this account is called Mzansi and it has been widely hailed a success. The Mzansi account is an entry-level bank account developed by the local banking industry and launched collaboratively by the four largest commercial banks together with the state-owned Postbank. Today, at least one in ten South African adults currently has an Mzansi account; and one in six banked people are active Mzansi customers[6].

Mzansi was established mainly to deal with the KYC impediments that arise from transience - the same key hurdle that locks out potential accountholders within the U.S. The KYC regulations mandated by South Africa's Financial Intelligence Centre Act (2001) require that financial institutions obtain and verify a customer's name, date of birth, national identity number and residential address. The official South African identity document fulfills the first three items but does not facilitate verification of the residential address. Since up to a third of South Africans do not have formal addresses, and no doubt a higher proportion among the unbanked, the inability to verify this population proved a major impediment to opening basic bank accounts. Thus, in South Africa, only a South African ID card is needed to open a Mzansi account.

The parameters placed on Mzansi accounts are as follows:

• Debits from the account cannot exceed $500/day or $2,500/month
• Funds cannot be transferred to anywhere outside South Africa
• Account balance cannot exceed $2,500 at any time
• Each person is limited to one account "of a similar nature" with the same institution.

South Africa's model has numerous implications for both the design and implementation strategy of the Passageway Account. The collaborative launch strategy should be considered when determining how to implement such an account in the United States. Likewise, the advantages and drawbacks of Mzansi Account restrictions should be studied when specifying the parameters for the Passageway Account.

[1] A similar type of bank account, the Mzansi Account, is offered in South Africa. It is described in the appendix.

[2] A 2008 survey of banks by the FDIC shows that 87 percent of banks require a third-party screen before they will open a checking account. http://www.fdic.gov/unbankedsurveys/

[3] According to Dr. Manuel Orozco, director of remittances and development at the Inter-American Dialogue.

[4] FDIC 2009 Bank Survey completed in conjunction with Dove Consulting: http://www.fdic.gov/unbankedsurveys/faq.html

[5] FTC Red Flag rules: http://www.ftc.gov/bcp/edu/pubs/business/alerts/alt050.shtm

[6] FinMark's review of the Mzansi Account: http://www.finmark.org.za/documents/R_Mzansi_BFA.pdf