Patriot's Price

Nearly four years into the USA Patriot Act, few federal laws remain that are more publicly contentious among Americans. The rhetoric can be fairly breathtaking.

For proponents, the act is a crucial tool in fighting the war on terrorism waged from within the country's borders. And for them, its effectiveness is gauged most unambiguously on the number of terrorist attacks on American soil since the law went into effect: zero. In effect, they claim, it is a superb success in the war on terrorism.

For others, however, the law is loathed as an attack on fundamental American civil liberties of freedom and privacy, giving the government undue authority to monitor individual American's activities. In effect, they say, it's a failure in the war on terrorism because it denies rights just as terrorists would.

For both groups, it is a litmus test of the efficacy of President George W. Bush's war on terrorism. And, at press time, it appears the law is destined for renewal by the Dec. 31 expiration deadline, with most of the current provisions remaining intact.

But the Patriot Act has far more concrete, if less political, effects that impact financial institutions and

businesses dealing with large amounts of money, plus many other businesses simply working with banks. The paperwork burden alone can be extremely time-consuming and costly.

In Southwest Florida, banks and other financial institutions, telecommunications companies and others in the information technology sector are among the businesses hardest hit by the cost of compliance with Patriot-as it is often called by those dealing with its provisions regularly.

"It impacts our business because it takes a lot more of our time," says Jeff Trunzo, vice president of regional compliance and security for Colonial Bank in Naples.

Yet it goes beyond that.

After Sept. 11 and the revelations of how easily the 19 terrorists who attacked the World Trade Center and the Pentagon were able to move about in America, Bush and Congress enacted USA Patriot on Oct. 16, 2001. The idea was to better monitor potential terrorists, particularly those using laundered money.

In general terms, the act requires financial institutions to ensure that new clients-not existing clients-are who they say they are, are doing what they say they are doing, and are not on the government's watch list for terrorists. So institutions such as banks, savings and loan associations, credit unions, securities brokers, credit card firms, mutual funds and futures traders fall under Section 326 of the law. That section requires them to verify the identity of new clients, keep records used to verify the identities, monitor and report suspicious activity, and check names against the government's terrorist watch lists.

This level of compulsory detail has meant hard costs to banks, but not debilitating costs. Interestingly, while the costs are real and some banks quantify them separately, the monetary burdens triggered by the law do not appear to have been a drain on the financial industry.

For instance, Colonial Bank has hired three additional people to work on Patriot Act compliance, incurring an ongoing expense of $150,000. Plus, the bank spends another $100,000 annually on legal opinions, and it spent $250,000 on new financial security software.

But for a bank with a net income of $175 million in 2004, those costs are absorbed without damaging the bottom line or pass-through effects to customers. In fact, Colonial posted a 17-percent increase in net income from 2003, with the act's provisions fully in force, suggesting that Patriot has not hurt its business in any significantly measurable sense.

That's pretty much the way Martha Bibby sees it, also.

Bibby, senior vice president and senior affiliate risk officer for Fifth Third Bank in Naples, says the corporate headquarters in Cincinnati put together a team to help comply with Patriot. But she adds that much of the information required was already being collected by banks. "Banks always did that," she says. "Now we have to document the information we receive; that takes time." But there have been few other local costs.

Banks have substantial resources to throw at compliance, and they have the ability to absorb the costs of those resources. But sometimes small businesses and startups do not. And those are just the types of businesses that fall under Section 326, says Trunzo. The amount of documentation required of such new clients can place a heavy burden on some of them.

Banks and bank customers are not the only ones impacted by Patriot. The telecommunications industry is required to comply with a complex set of rules governing comprehensive surveillance obligations. Because of this, the Patriot Act has allowed a flood of subpoenas that have forced telecoms to add workers to keep up with the load.

And the advance in technology has opened new avenues for law enforcement. One subpoena can gather an enormous amount of material. For instance, all cell phone calls in a town or portion of a city within a small segment of time can be provided to investigators. This has made for possible fishing expeditions which, aside from the civil-rights issues, cost the cell phone companies money.

Under the Patriot Act, prosecutors can bypass the approval of a judge and obtain surveillance subpoenas through grand jury investigations. This again raises civil liberties questions and runs directly to a telecom's bottom line.

Brokerage firms also are required to collect and maintain data on customers under Patriot. The TowerGroup, a research and advisory firm focusing on the financial-ser-vices industry, estimated that up to $700 million will be spent by the brokerage industry this year to comply with the act. But the lion's share of that investment is in hardware and software, and once it is all in place-and most of it now is-the annual costs will drop substantially.

But as with banks, the telecommunications and brokerage industries have been posting healthy profits in recent years that follow the trajectory of the national economic recovery beyond the weighty provisions of the Patriot Act.

And the law of unintended consequences wrought a positive work through Patriot, creating an upside, albeit a forced upside, for many institutions. "It has brought us to a level at the bank to where we really know our customers," Trunzo says.

Beyond financial institutions and tech companies, many other businesses share the onus of compliance with the Patriot Act. They include car dealers, pawn shops and travel agents (firms with the potential to conduct large cash transactions or provide services that involve possible security matters).

"We are large enough at this point where we have to be careful," says Scot Congress, president of Congress Jewelers, referring to Patriot Act compliance. Besides selling high-ticket items in the United States, the company does business overseas, requiring even more caution.

As a member of Jewelers of America, Congress helped draft Patriot Act guidelines for his industry to follow. In general, dealers who annually buy and sell more than $50,000 in specified goods must adhere to the Patriot Act's beefed-up Anti-Money Laundering program-although there are a few exemptions.

For Congress Jewelers, which operates three stores locally and one in the Keys, the program has "not been cumbersome," he says and for years, jewelers have been bound by an anti-money-laundering law under the U.S. Treasury Department's Financial Crimes Enforcement Network.

Many of the fears about the Patriot Act have not materialized. About the worst that has happened is that some honest-to-gosh bad guys have been caught by investigators using the act's provisions-but they weren't terrorists, just garden-variety domestic criminals. Critics have charged that as being an abuse of the law.

And there remains a frustration among bankers regarding federal handling of the Patriot. The original idea was that federal agencies and private institutions would be partners in information-sharing. The financial companies would share information up the line to the feds, who would share down the line to banks.

It hasn't worked that way.

"We're upstreaming information to government agencies for investigators," says Bibby. "But it's been a one-way stream of information." Because of that, bankers don't have a good feel for how well the Patriot Act is actually working-unless they have firsthand knowledge.

Trunzo would not say if the Patriot Act had helped Colonial to finger any terrorists or potential terrorists. But he was confident that the act has been successful in its purpose. "From my perspective, it has been," he says with certainty. "The time we take has been useful."

Just not free. There are real costs involved with Patriot. But the good news seems to be that they are not unbearable costs and they have not risen to the level of damaging companies or industries.

Phil Borchmann contributed to this article.