Freeze Assets Now, Ask Questions Later

Are banks being too zealous in the race to trace terrorist funds?

When Mohammad N. Ahmad, a manager in the global telecom division of Lockheed Martin Corp. (LMT ), logged on to his Citibank account on Sept. 25, he was greeted with a blank where his balance should be. When he called his branch in Gaithersburg, Md., he was asked to come by. The branch manager referred him to the bank's New York compliance office, which told him they had to freeze his assets. His name, as common in Arabic as John Smith in English, triggered the freeze.

Pakistan-born Ahmad, an American citizen since 1995 and Citibank customer for over a decade, is one of hundreds of Arab and East Asian Americans snared in the net cast by the Administration to locate any and all possible sources of funding for the terrorist acts of September 11. Just two days before his accounts were frozen, the Treasury's Office of Foreign Assets Control issued a list of 27 suspect organizations and individuals to U.S. financial institutions. Mustafa Muhammad Ahmad was on the list, but Mohammad N. Ahmad wasn't. Government instructions, bankers say, were to freeze assets now and ask questions later. The practice is sure to raise more cases of mistaken identity: A second, larger list of individuals and groups suspected of links to terrorism is in the works, according to Treasury officials.

In a sudden reversal, U.S. financial institutions, long loath to snoop for the government, are falling over themselves to comply. They spent millions lobbying against money-laundering legislation and so-called know-your-customer bills proposed in 1999, calling them intrusive and burdensome. Today, they're scrambling to search and seize accounts, partly to dodge stiff administrative fines but also to ensure that their reputations aren't sullied. It's understandable, says Ira L. Sorkin, a partner with New York law firm Squadron Ellenoff Plesent & Sheinfeld and a former Securities & Exchange Commission administrator. "What bank wants to be known as the depository for the Taliban?" he asks.

The banks' reactions, though, are raising the ire of civil libertarians. "I'm appalled by the sweep that's going on," says Bert Ely, head of Ely & Co., who testifies regularly to Congress on privacy issues. "The FBI is asking banks to run this huge dragnet to compensate for the fact that they got caught with their pants down."

Even though his account was restored three days later, the impact on customers like Ahmad is unsettling. "This account is where my paycheck goes and where I pay my bills from," he says. Not only could he not access his money, but Citibank also told him any outstanding checks could bounce, potentially tainting his credit. Since then, inquiries about the outstanding checks and his account in general have been met with "absolute, total silence," says Ahmad. A spokeswoman for the bank's parent, Citigroup, said only that the bank is "cooperating fully" with the government investigation.

"OVERKILL." The hunt raises new questions about how much information banks should have about their customers and to what extent they should cooperate in government investigations. "There is an ongoing battle between privacy and money laundering. Everyone is searching for where the line is," says Vernon W. Hill II, CEO of Commerce Bancorp Inc.

Wherever that line is finally drawn, new rules for banks and tougher scrutiny for banking customers are certainly on the way. Already, an anti-terrorism bill before Congress expands government powers to seize suspected terrorist assets. Banks are stepping up I.D. requirements and background checks for products such as debit cards--terrorists used one to rent a car.

The rules, and the shape of bank policies, are still in flux. But already, measures that seemed intrusive before September 11 now look like common sense, says Peter P. Swire, a law professor at George Washington University and a Clinton Administration privacy counselor. He adds: "We still have to figure out which are overkill."

Right now, the banking industry is erring on the side of excess. "We do see a shift in the banking industry's attitude" to know-your-customer policies, says a senior Treasury official. Some banks are overreacting, he admits, but "it gets worked out very promptly." That's cold comfort if your name is Mohammad Ahmad.

By Heather Timmons in New York, with Mike McNamee in Washington

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