Emergency Regulations Often Make the Next Emergency Worse

During a crisis, governments often impose new regulations that wind up making things worse when the next crisis strikes from some other direction. The TSA checkpoint system adopted after Sept. 11, for example, is now the one point in air travel where a virus‐​fearing traveler is least able to avoid prolonged physical or face‐​to‐​face contact with a stranger, as well as the handling and commingling of high‐​touch personal items on communal trays.

Another set of regulations that took off after Sept. 11 was imposed on the financial sector to combat “money laundering” — that is to say, transfers of funds with little or no documentation. Terror groups were portrayed as having a special proclivity for anonymous payments even though all sorts of innocent persons used them too. Under the Bank Secrecy Act, banks must follow cumbersome “know your customer” rules meant to tease out customers’ identities and roles in the economy and also must monitor and report so‐​called suspicious transactions — anything out of the ordinary for the kind of customer revealed by the profile.

Now that banks are expected to respond quickly to the COVID-19 crisis, the old rules are causing all sorts of problems. For example, the economic shutdown and its resulting uncertainties have combined with stranded family members to jolt many account holders into completely new transaction patterns — asking for sudden cash withdrawals, using only online banking when they’d never used it before, and so forth.

Banks can sort through some of those problems by readjusting the rules for what they count as abnormal and thus suspicious. But another set of holdover anti‐​terror rules is not so easy to work around.

Under the CARES Act relief law, banks suddenly find themselves the point of contact for processing hundreds of thousands of small‐​business applications for short‐​term funds. Unfortunately, under the Bank Secrecy Act, this will require slamming through a huge number of know your customer inquiries. For individuals, these inquiries may be relatively short and routine, but they can be considerably more burdensome for small‐​business applicants, as Bloomberg Law explains:

It doesn’t help that many owners now find themselves stranded away from key files. While many banks previously used an in‐​person meeting at a branch office to walk a first‐​time business client through the know your customer and Bank Secrecy Act process, much can go wrong or get delayed if a teleconference substitute is needed on both ends.

Because banks had already gone through know your customer filing for existing small‐​business accounts, the U.S. Treasury put out word confirming that they didn’t need to do so again. So at least a bit of good news: Existing customers could proceed at once to assembling their federal requests.

Bad optics! Senators promptly blasted banks for supposed favoritism toward their own customers. After all, what could be more evocative of wartime fairness than to make everyone wait in the same queue for needed paperwork, whether or not they’ve already cleared it. Right?

There are many good reasons for deregulation. One of them is that it bolsters resilience when systems are asked to cope with complex new perils.