By Telis Demos and Michael Siconolfi
Mary Ann Liegey, a retired teacher in Manhasset, N.Y., was shocked in March when she received a letter from her local parish: "Your $20 check payable to St. Mary's Church...was returned due to Frozen/Blocked Account."
The 75-year-old Ms. Liegey discovered that Citigroup Inc. had blocked her checking and trust accounts after she didn't respond to a notice asking her for personal information to verify the accounts -- part of the bank's efforts to comply with government-mandated rules referred to as "know your customer," or KYC.
The rules are designed to make it harder for money launderers, terrorists and other criminals to finance illicit activities, hide funds or move dirty money around the globe.
But just as airport security inspects every passenger no matter how harmless they may seem, banks review and monitor millions of small accounts and transactions, even those of longtime clients. The process can end up ensnaring even law-abiding customers like Ms. Liegey, a grandmother of two.
"When customers come to us with the required information, we make every effort to keep the account open or reopen it as soon as possible," a Citigroup spokesman said. "We aim to limit these instances as much as possible, and we apologize for any undue inconvenience that may result."
The difficulty and complexity of these reviews are exacerbated by advances in technology that have fundamentally changed the ways people interact with banks. More customers are opening accounts or interacting through mobile apps rather than by walking into a branch and presenting physical identification.
"People may be enjoying digitized experiences in other realms without a hitch," said Chris McDonnell of Greenwich Associates, who advises banks on technology and strategy. "But in banking, regulations that are usually invisible to the customer are beginning to reveal themselves."
Banks have been obligated to collect identification information on their customers for decades to help law enforcement track possible criminal activity. The 2001 USA Patriot Act, adopted after the Sept. 11 terrorist attacks, added new requirements.
More recently, regulators have fined or cited a number of large banks for having insufficient procedures to monitor customers and transactions. The U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCEN, has adopted new due-diligence guidelines as recently as May.
A survey by Thomson Reuters Corp. found that the average spending on KYC-related procedures by financial institutions with more than $10 billion in revenue grew to $150 million last year, with each having about 300 employees directly involved, up from just 68 a year prior.
Banks don't automatically deem a lack of information suspicious, but they are increasingly flagging activity to the government when they can't sufficiently identify the person. For customers using debit cards, for example, banks' suspicious-activity reports filed to FinCEN related to identification issues have more than tripled since 2013, with more than 10,000 such reports being filed annually.
"We take seriously our obligation to protect the integrity of the financial system and as part of our compliance with the Bank Secrecy Act, we periodically review bank accounts to verify and update information to ensure our files comply with federal regulations and Citi policies," a Citigroup spokesman said.
He added that if the bank is unable to update required information after attempts to contact a customer, it can "restrict access to the account, including closure."
It's not clear how many customers have been contacted to provide more information as part of banks' KYC efforts, or how many accounts have been closed or frozen for failing to respond.
But it's clear many large banks are pursuing more information on accounts for which they don't have complete information.
In the case of a person whose spouse opened a joint account decades ago, for example, the bank might not know the person's first name with complete certainty, said Chrisol Correia, director of international financial crime compliance at LexisNexis Risk Solutions, which provides identification data to banks and others. His firm has handled about 100 billion search requests directly.
"Automation is probably smoking out old accounts that slipped through process cracks when it was paper-based," said Greenwich's Mr. McDonnell.
Bill Laderer, who owns a landscaping business in Sea Cliff, N.Y., groused that Capital One Financial Corp. suddenly cut off his credit card because he hadn't provided an employee identification number for his business, which has operated since 1941. Said Mr. Laderer with a shrug: "Every bank is doing this."
Capital One declined to comment.
Donna Griffit has had a Citigroup account for her California-based business, which helps startups craft pitches, for more than a decade.
At the beginning of February, she got a letter saying the bank needed unspecified information from her by month's end or her account could be closed. When she called the bank a few days later, no one could figure out what was needed, and the bank said it would get back to her, she recalled. She thought it was resolved.
But in June, she discovered her account had been frozen. After calling the bank again, she said she was told she needed to speak to the KYC department. "I said, 'Who is KYC?'" she recalled. "I had no idea what that meant."
Eventually, Ms. Griffit said she reached someone who asked a series of questions about her business, such as whether it had additional owners besides her. No, it never has, Ms. Griffit said she told them. She filled out a new ownership form, and answered some further questions, before her account was unfrozen.
Citigroup is among several large banks that have been fined by the Office of the Comptroller of the Currency for failing to complete sufficient improvements in its procedures for complying with rules on monitoring for illicit financial activity.
The bank has invested in an upgraded platform that collects information about new customers, updates data on existing ones, and monitors transactions across the bank's global network, people familiar with the lender said. But it's an evolving system that involves interaction between centralized analysts and branch personnel, they said.
Ms. Liegey, who opened her Citigroup account in 2013, went to her local branch and provided her drivers' license. Her Citi banker apologized in a letter, saying her accounts were blocked "due to BANK ERROR," adding that the accounts "have always been in good standing and remain so."
Later, Ms. Liegey got another warning from Citi that her accounts would be frozen if she didn't provide the signatory page of her trust account -- which someone at her branch said the bank already had.
Then, she said United Parcel Service delivered a letter saying Citi had closed her accounts, and included a check with her funds.
She recalled being frightened that she couldn't get access to her money if she needed it, adding: "They don't have the right to do that...or do they?" She since has deposited her funds at Apple Bank for Savings.
Write to Telis Demos at email@example.com and Michael Siconolfi at firstname.lastname@example.org
(END) Dow Jones Newswires
July 13, 2018 11:44 ET (15:44 GMT)
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