    OFFICE OF THE ATTORNEY GENERAL . STATE OF TEXAS

    JOHN     CORNYN




                                                   August 7,2002



The Honorable Burt Solomons                                  Opinion No. JC-0540
Interim Chair, House Committee            on
  Financial Institutions                                     Re:    Whether a bank may use information
Texas House of Representatives                               contained in the magnetic stripe of a driver’s
P.O. Box 2910                                                license (RQ-05 14- JC)
Austin, Texas 78768-2910


Dear Representative       Solomons:

          Your predecessor asked this office for an interpretation of section 521.126 of the
Transportation Code, which restricts the use of the magnetic stripe information on a Texas driver’s
license to law enforcement and governmental purposes.’ He suggested that the recent enactment of
the USA Patriot Act of 2001 (the “Act”), Public Law 107-56, and in particular of title 3 of that Act,
the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, might
require a reconsideration of the conclusion of Attorney General Opinion No. JC-0337 (2001) that
“[magnetic stripe information] may be used only by law enforcement and other governmental
officials.” See Tex. Att’y Gen. Qp. No. JC-0337 (2001) at 1. While that interpretation of section
521.126 has been partially overruled by an amendment to the Alcoholic Beverage Code, see
TEX. ALCO. BEV. CODE 8 109.61 (Vernon Supp. 2002); Tex. Att’y Gen. Op. Nos. JC-0423 (2001)
JC-0499 (2002), the “general prohibition against use of driver’s license magnetic strips in the
Transportation Code,” remains in full force and effect. Tex. Att’y Gen. Op. No. JC-0499 at 9.
Section 521.126 does not permit bank personnel to use magnetic stripe information.          See TEX.
TRANSP. CODE ANN. 8 521.126 (Vernon Supp. 2002). By its terms, the Act does not preempt section
521.126. See USA Patriot Act of 2001, Pub. L. No. 107-56, 115 Stat. 272. So far as we have
determined, relevant federal regulations under section 326 of the Act, concerning means of
identifying customers of financial institutions, have not yet been proposed or published by the
United States Secretary of the Treasury as the Act mandates. See id. 9 326(a)( l)( 1). Due diligence
requirements have been proposed under section 3 12 of the Act; but nothing in those requirements
would preempt section 52 1.126 of the Transportation Code. See id. 9 3 12(b)( 1). It is possible that
future federal regulations under section 326 might preempt Texas law. However, at this time they
do not do so.


           ‘Letter from Honorable      Kip Aver&t, Chair, Committee        on Financial     Institutions,  Texas House of
Representatives,   to Honorable John Cornyn, Texas Attorney General (Feb. 19,2002)        (on file with Opinion Committee)
[hereinafter Request Letter]; Letter from Christopher L. Williston, President and CEO,    Independent Bankers Association
of Texas, to Honorable Kip Aver&, Chair, Committee on Financial Institutions,             Texas House of Representatives
(Jan. 7,2002) ( on f 11e with Opinion Committee) [hereinafter Attachment to Request        Letter].
The Honorable Burt Solomons         - Page 2            (JC-0540)




       Section 521.126 of the Transportation          Code reads:

                    (a) The department [of Public Safety] may not include any
               information on a driver’s license, commercial driver’s license, or
               identification certificate in an electronically readable form other than
               the information printed on the license and a physical description of
               the licensee.

                    (b) The department shall take necessary steps to ensure that the
               information is used only for law enforcement and governmental
               purposes.

                   (c) Unauthorized        use   of    the   information   is a Class   A
               misdemeanor.

TEX. TRANSP. CODE ANN. 8       521.126 (Vernon Supp. 2002) (emphasis added).

          This office first interpreted this provision in Texas Attorney General Opinion No. JC-0337
(2001). In that opinion, we were asked to consider who might use such magnetic stripe information
and for what purpose. The particular basis for the opinion request was a proposed rule by which the
Department of Public Safety would have restricted the use of magnetic stripe information to “law
enforcement and governmental agency personnel acting in their official capacity.” See Tex. Att’y
Gen. Op. No. JC-0337 (2001) at 2. Attorney General Opinion No. JC-0337, based largely on the
legislative history of the provision, concluded that the Department of Public Safety’s interpretation
of the statute was correct. See id. at 5.

       The Seventy-seventh Legislature modified the result of Attorney General Opinion No. JC-
0337 for the specific purposes of the Alcoholic Beverage Code by the adoption of Alcoholic
Beverage Code section 109.61, which provides in relevant part:

                    (a) A    person may access electronically readable information on
               a driver’s      license, commercial driver’s license, or identification
               certificate    for the purpose of complying with this code or a rule of the
               [Alcoholic       Beverage] commission, including for the purpose of
               preventing      the person from committing an offense under this code.

TEX. ALCO. BEV. CODE ANN. 5 109.61(a) (Vernon Supp. 2002). See also Tex. Att’y Gen. Op. Nos.
JC-0499 (2002) (state law does not permit private clubs to use or retain electronically readable
information to obtain member’s driver’s license numbers for purpose of creating and maintaining
membership lists); JC-0423 (2001) (use of magnetic stripe information to prevent under-age drinking
does not violate federal Driver’s Privacy Protection Act).
The Honorable Burt Solomons         - Page 3           (JC-0540)




       “Consistent with this statutory scheme,” Tex. Att’y Gen. Op. No. JC-0499 (2002) at 8, the
Department of Public Safety has restricted access to magnetic stripe information by rule:

                Except for purposes of complying with the Texas Alcoholic Beverage
                Code or a rule adopted by the Texas Alcoholic                  Beverage
                Commission,    . . . only law enforcement and government agency
                personnel acting in their official capacity can utilize the information
                provided in this format.

LATEX. ADMIN. CODE 8     15.47(b) (2002). The only exception       to the prohibition against private access
to electronically readable driver’s license information thus       has to do with the enforcement of laws
and rules regarding alcoholic beverages. Neither section           52 1.126 nor the Department of Public
Safety’s rule would permit access to such information              by the personnel of private financial
institutions.

         A bill considered by the Seventy-seventh Legislature, Senate Bill 293, would have limited
the scope of section 521.126 by making it an affirmative defense to prosecution under section
52 1.126 that a person accessing the electronically readable information was an officer or employee
of a financial institution transcribing information in the course of a financial transaction, or capturing
and maintaining that information in order to comply with federal or state law. However, Senate Bill
293 was not enacted by the legislature. Subject only to the limited exception afforded by section
109.6 1 of the Alcoholic Beverage Code, section 52 1.126’s prohibition on the use of the information
encoded on the magnetic stripe for any but “law enforcement and governmental purposes” by law
enforcement and governmental personnel remains in effect.

        A letter sent to the attention of your predecessor by the Independent Bankers Association of
Texas, however, suggests that a governmental purpose may be presented by the USA Patriot Act of
2001, and in particular by title 3 of the Act, the International Money Laundering Abatement and
Anti-Terrorism Financing Act of 2001. See Attachment to Request Letter, supra note 1, at 1-3.
Passed by the Congress in response to the attacks on the United States perpetrated on September 11,
2001, the Act is intended to provide new methods to combat the perils of international terrorism.*

          Title 3 of the Act finds that “money laundering, and the defects in financial transparency on
which money launderers rely, are critical to the financing of global terrorism and the provision of
funds for terrorist attacks.” USA Patriot Act of 2001 5 302(a)(2). Accordingly, it seeks “to ensure
that all appropriate elements ofthe financial services industry are subject to appropriate requirements
to report potential money laundering transactions to proper authorities, and that jurisdictional
disputes do not hinder examination of compliance by financial institutions with relevant reporting
requirements.” Id. 8 302(b)(ll).



          *Press Release, The Department of the Treasury, Office of Public Affairs, Remarks on the Patriot Act
of Treasury Under Secretary for Enforcement Jimmy Gurule Before the Bankers Association for Finance and Trade
(Mar. 12,2002), available at http://www.ustreas.gov/press/releases/po1082.htm (last visited May 24, 2002).
The Honorable   Burt Solomons     - Page 4          (JC-0540)




         Among the new requirements of title 3 of the Act are expanded due diligence requirements
for private banking and correspondent bank accounts involving foreign persons and institutions
under section 3 12, and minimum standards for the identification of persons applying to open
accounts with financial institutions under section 326. Section 3 12(a) requires financial institutions
that establish, maintain, administer, or manage private banking accounts or correspondent accounts
for foreign nationals and banks to “establish appropriate, specific, and, where necessary, enhanced,
due diligence policies, procedures, and controls that are reasonably designed to detect and report
instances of money laundering through those accounts.” Id. 0 3 12(a)( 1). Subparagraph (a)(2)(B)
of section 3 12 requires banks that maintain correspondent accounts for offshore banks, or banks
licensed in countries judged either by the United States to be uncooperative in efforts against money
laundering or by the Secretary of the Treasury to warrant special measures because of such concerns,
to take enhanced due diligence measures. See id. 4 3 12(a)(2)(B). Such procedures require, among
other things, that the financial institution take reasonable steps to ascertain the ownership of the
foreign bank, to conduct enhanced scrutiny of the account to guard against money laundering, and
to find out to which other banks the foreign bank itself may provide correspondent accounts. See
id. Further, subparagraph (a)(3) requires the financial institution to take steps to ascertain the
identity of the nominal and beneficial owners of private banking accounts held by foreign nationals
so as to guard against money laundering, and to conduct “enhanced scrutiny” of such accounts
maintained by senior foreign political officials, their family members, and close associates. See id.
9 3 wm*

         Proposed regulations to implement section 3 12 were published in the Federal Register by the
United States Department of the Treasury and the Financial Crimes Enforcement Network on May
30,2002. See Due Diligence Anti-Money Laundering Programs for Certain Foreign Accounts, 67
Fed. Reg. 37’736-44 (proposed May 30, 2002) (to be codified at 31 C.F.R. pt. 103). Under the
proposed regulations, which if adopted will become in relevant part 3 1 C.F.R. $8 103.175-. 178,
financial institutions are required to maintain due diligence programs for correspondent accounts
maintained for foreign financial institutions, including “policies, procedures, and controls that are
reasonably designed” to allow a financial institution to detect and report money laundering through
those accounts. See Prop. 3 1 C.F.R. 8 103.176(a). The proposed regulations further require, in
certain instances, documentation of any other foreign banks for which the foreign bank in question
itself maintains correspondent accounts and the identification of the foreign bank’s owners. See id.
§ 103.176(b). They also require financial institutions to take reasonable steps to ascertain the
identity of nominal or beneficial owners of the private banking accounts of foreign nationals, to
ascertain whether such nominal or beneficial owners include senior foreign political figures, and to
take reasonable steps, in such instances, “to detect and report transactions that may involve the
proceeds of foreign corruption.” Id. 5 103.178(c)(2). It should be noted that, while both section 3 12
of the Act and the proposed implementing regulations speak of the necessity for banks to exercise
due diligence in the identification of certain persons or entities, neither the statute nor the proposed
rules require the presentation or, more significantly, the verification by the bank of driver’s licenses
for the purpose of such identification, whether through electronically readable information or by any
other means.
The Honorable   Burt Solomons     - Page 5          (JC-0540)




         Section 326 of the Act focuses on requirements of verification of identity. See USA Patriot
Act of 2001 9 326. It requires the Secretary of the Treasury to prescribe regulations that will set
minimum standards for financial institutions with respect to customer identification in connection
with the opening of an account, including reasonable procedures for verifying the identity of any
person seeking to open an account, maintaining records of the information used for that purpose, and
consulting information provided by any government agency that might identify such a person as a
known or suspected terrorist. See id. 5 326(a). We are unaware at the time of this writing of any
proposed regulations implementing section 326.

         The Constitution and laws of the United States are “the supreme Law of the Land . . . any
Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. CONST. art.
VI, cl. 2 (the “Supremacy Clause”). As the Texas Supreme Court explained the preemptive effect
of federal law under the Supremacy Clause in 1998:

                A state law is preempted and “without effect” if it conflicts with
                federal law. A federal law may expressly preempt state law.
                Additionally, preemption may be implied if the scope of the statute
                indicates that Congress intended federal law to occupy the field
                exclusively or when state law actually conflicts with federal law. A
                state law presents an actual conflict with federal law when “it is
                impossible for a private party to comply with both state and federal
                requirements” or where state law “stands as an obstacle to the
                accomplishment and execution of the full purposes and objectives of
                Congress.”

Hpndai Motor Co. v. Alvarado, 974 S.W.2d 1, 4 (Tex. 1998) (citations omitted). Federal law,
however, does not supersede a state’s “historic police powers . . . unless that [is] the clear and
manifest purpose of Congress.” Id. at 5 (citations omitted).

          Nothing in the USA Patriot Act of 2001 of which we are aware expressly requires financial
institutions to have the power to access electronically readable information from state-issued driver’s
licenses. Nor would it be impossible for financial institutions in the exercise even ofheightened due
diligence to acquire the information about their customers required by title 3 of the Act by means
other than such access, although it is certainly possible that such access would be of use to them.
If the Secretary of the Treasury were to promulgate regulations implementing section 326 of the Act
that required banks to have access to such electronically readable information, then such regulations,
which the Secretary is authorized to promulgate under the Act, might preempt section 52 1.126 of
the Transportation Code. However, there are at the present time no such regulations.
The Honorable Burt Solomons        - Page 6       (JC-0540)




                                        SUMMARY

                        Section 521.126 of the Texas Transportation Code does not
               permit financial institutions to access magnetic stripe information on
               Texas driver’s licenses. The restrictions on access to magnetic stripe
               information on Texas driver’s licenses under section 521.126 of the
               Texas Transportation Code are not preempted by the USA Patriot Act
               of 2001, Pub. L. No. 107-56.




                                              Attorney General of Texas



HOWARD G. BALDWIN, JR.
First Assistant Attorney General

NANCY FULLER
Deputy Attorney General - General Counsel

SUSAN DENMON GUSKY
Chair, Opinion Committee

James E. Tourtelott
Assistant Attorney General, Opinion Committee
