SPEAKERS CONTENTS INSERTS
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OPERATIONAL OVERSIGHT OF THE FINANCIAL CRIMES ENFORCEMENT NETWORK
FRIDAY, MARCH 21, 1997
House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to call, at 9:35 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding.
Present: Chairman Bachus and Representative Waters.
Chairman BACHUS. I would like to call to order this hearing of the General Oversight and Investigations Subcommittee of the Banking Committee.
Good morning. This is the second of a series of hearings that the subcommittee will hold to review the issues relevant to the fight against money laundering.
Today we will hear from Mr. Stanley Morris, the Director of the Financial Crimes Enforcement Network, sometimes referred to as FinCEN--or more often--I might say. That is the agency that leads the Treasury Department's fight against money laundering.
Page 2 PREV PAGE TOP OF DOC FinCEN evaluates money laundering threats, supports law enforcement agencies and implements the Bank Secrecy Act. Although a small agency, these diverse jobs give FinCEN tremendous potential as a crime fighting tool.
We have asked Mr. Morris to first outline FinCEN's mission for the subcommittee and then address a number of related issues. Specifically, we have asked him to explain FinCEN's role as a support for law enforcement agencies.
FinCEN is responsible for gathering the various forms filed by financial institutions that are required by the money laundering regulations. Today we hope to gain a better understanding of how FinCEN gathers this information and ensures the information is acted upon.
This is a particularly timely topic in light of press stories questioning whether the system may have broken down in regard to transfers of millions of dollars to a Texas bank by a high ranking official in Mexico.
In addition, FinCEN implements the Bank Secrecy Act for the Department of the Treasury. These regulations provide a first line of defense against money laundering and help to ensure our financial institutions are not used for illicit purposes.
We all realize, however, that these Bank Secrecy Act regulations must be efficient. They must provide real law enforcement value for the amount of burden placed on the industry. We hope today to find out how FinCEN is approaching this responsibility.
Last year, FinCEN finalized the Suspicious Activity Report System, a system that streamlines and consolidates the older system by which financial institutions reported possible criminal activities. Although the industry responsible appears to be favorable as the system reduces the regulatory burden, we are anxious to examine any problems being encountered under the new approach.
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For several years now, non-bank financial institutions or NBFIs were identified as a weak link in the regulatory chain developed to prevent money laundering in the United States. Last week, this subcommittee held a hearing on the Use by the Department of the Treasury of the Geographical Targeting Order to address the threat posed by a particular segment of this industry, money transmitters that transmit money from the New York City area to Colombia.
Under Secretary Raymond W. Kelly of the Treasury Department appeared before us and testified concerning the 30 percent drop in transmissions to Colombia and the over $50 million in currency seizures made since the GTO went into effect.
In my view, this is a tremendous success story for your agency, Mr. Morris, and for Under Secretary Kelly and the rest of the Treasury Department and for other local law enforcement agencies in New York that were involved. This subcommittee is very proud of your work and considers that a real strike against drug dealers and the drug cartels.
In 1994, Congress passed the Money Laundering Suppression Act wherein Treasury was given the authority to develop new rules specifically designed to help plug the loopholes in the non-bank financial institutions regulatory structure. In particular, Treasury was directed to register NBFIs. This is an extremely important effort. No one doubts, however, the difficulties involved in developing a regulatory scheme for the hundreds of thousands of NBFIs in existence.
We hope to get an update today on where we stand in this complex effort.
In closing, I note it is the job of this subcommittee to conduct periodic oversight hearings concerning the agencies within its jurisdiction. Although FinCEN was created over 7 years ago, this is the first oversight hearing ever held concerning FinCEN.
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I also want to state for the record that FinCEN was extraordinarily cooperative in providing information to the subcommittee.
[The prepared statement of Hon. Spencer Bachus can be found on page 32 in the appendix.]
I welcome Mr. Morris and Deputy Director Bill Baity to the subcommittee. If there are no other opening statements, I will now turn to Director Morris to make his statement.
Mr. Morris, since you are the only person testifying, I invite you to take the time you consider appropriate in making your opening statement. There will be no limits placed on you.
We appreciate both of you gentleman appearing before us. We would invite Mr. Baity, if he wishes to make comments, to do so, although I think he is not making an opening statement.
STATEMENT OF HON. STANLEY E. MORRIS, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK
Mr. MORRIS. Thank you very much, Chairman Bachus. I am very pleased to be here with our Deputy Director, Bill Baity.
As you note, while FinCEN was created almost 7 years ago, today marks its very first oversight hearing. We congratulate you personally for continuing to focus on money laundering and especially appreciate the opportunity today to describe our programs as you have outlined in your opening remarks and try to lay out some sense of our future.
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FinCEN was originally created to serve as a central source for financial analysis and intelligence retrieval to assist in money laundering and other financial crime investigations. Two-and-a-half years ago, its mission was broadened to include regulatory responsibilities. Now, with its burgeoning international programs, it stands as Treasury's principal support arm for anti-money laundering efforts.
We carry out our mission, as you say, with a small staff, in Federal Government terms anyway, of 170 people in the 1997 budget and just over $23 million, but I think a small and very effective team, some of whom are sitting behind me. I am confident you will share this view at the close of the hearing today.
My testimony will briefly summarize three important areas that you touched upon: first, ways we support law enforcement investigations at the Federal, State and local level; second, a progress report on our regulatory responsibilities under the Bank Secrecy Act--the Nation's primary counter money laundering law; and, third, FinCEN's efforts to guide the international fight against money laundering.
The original mission of FinCEN centered on law enforcement case support. This is still our primary job, but we have expanded it to include specially tailored assistance.
FinCEN has provided, since its creation, to Federal, State and local law enforcement 38,000 analytical case reports involving over 100,000 subjects. Last year alone, we worked with more than 150 different agencies answering more than 7,600 requests. Using advanced technology and countless data sources, our analysts linked together various aspects of a case, finding the missing pieces, so to speak, in the criminal puzzle.
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Our databases provide one of the largest repositories of information available to law enforcement anywhere in the world. Thus, we arrange the detail of personnel from over 30 Federal investigative agencies, and they use those systems at our headquarters in Vienna, Virginia.
In sum, in addition to our case support, we assist law enforcement by offering training, office space and systems access. We also provide on-line support to our State and local colleagues. We do this through a system called Gateway, which provides direct on-line access to the 100 million records filed under the Bank Secrecy Act.
Using FinCEN-designed software, this allows our State and local colleagues to conduct their own research. Every State and the District of Columbia are now on-line. In 1996, Gateway processed almost 50,000 requests for information.
During its research, Gateway electronically captures that information on incoming inquiries and automatically compares it to our other case files in our other databases. This gives us the ability to alert one agency that another has an interest in the same subject, a matter of some considerable interest for an investigator.
Last year, we provided 356 such alerts of duplicative investigations.
FinCEN's Artificial Intelligence system, AI, is another avenue available to law enforcement in the fight against money laundering. Through the use of advanced technology, the system identifies suspicious activity in those BSA currency reports. For the first time in the 25-year history of the Act, every reported financial transaction can be reviewed and evaluated against a set of pre-established rules. This unique state-of-the-art technology provides the ability to link disparate banking transactions, producing leads for new investigations.
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In the last 3 years, AI reviewed more than 39 million BSA reports against those rules for clues in the system, revealing some 3,500 subjects.
FinCEN's goal is to give its customers access to as many tools as possible. I believe, Mr. Chairman, that if we did nothing more than our law enforcement case support, FinCEN would justify those resources that I mentioned. But we do much more.
FinCEN's law enforcement role and its regulatory mission are vital and complementary. Our regulatory challenge is immense. There are more than a quarter of a million financial service providers in the United States. These range from banks located in the largest financial centers to the scattered currency exchange businesses along the Southwest border, with hundreds of variations in between.
In addition, money laundering is a constantly changing phenomenon and to attack it requires creativity and flexibility. There are no quick, off the rack solutions.
FinCEN's regulatory program is developed in close consultation with the Government agencies with whom we work and, more importantly, in many cases the private officials who make up the Bank Secrecy Act Advisory Group.
These individuals permit a frank exchange of views, and they have fostered increased cooperation and understanding between law enforcement and the financial community.
Since its creation in 1994, this group has been viewed as one of the most innovative initiatives in the regulatory arena. Its role as a resource and potential critic increases the care with which we address our regulatory tasks. It is also one of the reasons we have been effective in carrying out our regulatory authorities with so little controversy. Few, if any, of our regulatory proposals are ever published before the water has been tested through informal consultation and discussion with those who would be affected or be responsible for caring out the new requirements.
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Let me now briefly describe some examples of how we balance public and private interest in executing the regulatory authority that this Congress and this subcommittee has given us.
Currency Transaction Reports are required to be filed on cash transactions over $10,000. They provide the basic raw material for FinCEN analyses. But the meaningful CTR data is often obscured by a large volume of information that is not necessary or even relevant, and indeed clogs the system.
Last year, more than 12 million CTRs were filed. This is simply too much unnecessary reporting. FinCEN will soon issue a Final Rule which will exempt most publicly-traded companies from CTR filing.
Also, we plan to issue a Notice of Proposed Rulemaking within the next several weeks further expanding the number of businesses exempt from any form of currency reporting. Our goal, to eliminate 6 million filings by the end of the year, or half of those currently received.
When these draft proposals were first announced, the American Bankers Association made the following statement:
''FinCEN's new Currency Transaction Reporting exemption regulation is a victory of reason over process. These changes will cut down on paperwork, save the banking industry millions of dollars and allow law enforcement to focus on truly suspicious activity.''
Page 9 PREV PAGE TOP OF DOC Let me also note that we have cut, by 30 percent, the amount of information that we collect on each one of those reports, so we take the burdens that we impose on the private sector very seriously indeed, Mr. Chairman.
A new Suspicious Activity Reporting System was put into place last April by FinCEN, the Federal Reserve Board and other bank supervisory agencies. This system merged and revolutionized two older reporting systems that had been in place for over a decade. This new system reduced the reporting burden on banks while allowing more than a dozen Federal law enforcement and regulatory agencies access to these reports. To date, financial institutions have filed almost 65,000 what we call ''SARS.''
The announcement of the new rules was reported in the American Banker newspaper under the headline ''New Anti-Laundering Rules Winning Raves from Bankers.''
FinCEN has also put new rules into place for wire transfers. The world's intricate wire transfer systems move over $2 trillion a day, involving over half a million transactions. In the past, wire transfers offered criminal organizations an easy, efficient and secure method of transferring huge sums of money, anonymously in some cases, and in a very short period of time.
However, two wire transfer rules issued jointly by FinCEN and the Federal Reserve became effective on May 28 of last year. Requiring years to design, these rules preserve a money trail that helps law enforcement agencies trace criminal proceeds and activity.
FinCEN also regulates casinos. Since 1985, when State-licensed casinos were first subjected to the Bank Secrecy Act, casino gaming in the U.S. has increased dramatically. Today, 15 States permit casinos, and they account for nearly half a trillion dollars in wagered funds.
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Given the availability at casinos of bank-like services and the cash-intensive nature of transactions, this industry is vulnerable to money laundering, tax evasion and other financial crimes. FinCEN is working closely with the gaming industry to design new regulations and programs to ensure that effective anti-money laundering programs exist.
In addition, Mr. Chairman, Indian tribal casinos operate in nearly half of our States and account for $50 billion in wagering. As you know, the U.S. has delicate relations with the tribal governments. Therefore, a year ago, FinCEN sponsored a conference designed specifically to address compliance by our Native American populations with new proposed anti-money laundering regulations.
While tribal representatives initially expressed concern over the potential threats to their tribal sovereignty, the final regulations were issued without any complaints.
Our experience in dealing with casinos has taught us that non-traditional financial service providers require special attention, as you noted in your opening statement. Also, a creative and a sometimes flexible regulatory approach to this industry is very important.
Let me turn to that now.
Last week, the subcommittee heard about the Geographic Targeting Order, or GTO, to which 22 licensed transmitters of funds in the New York area are currently subject. The GTO imposes a special $750 threshold on funds sent to Colombia.
Page 11 PREV PAGE TOP OF DOC While this effort, as the Chairman pointed out, has been successful, the GTO is not and cannot be the end of the story. FinCEN has focused a searchlight on a little-understood but very large and very important part of the financial sector. This is the class of non-bank businesses that sell money orders and travelers checks, transmit funds, exchange currencies and cash checks. We call these money services businesses, and they are an important subset of the non-bank financial institutions which include casinos, broker-dealers and the like.
Although the businesses that offer these products are often small, the industry is not. It is estimated that $200 billion passes through over 200,000 businesses each year. Most of the operators and agents of these businesses are law abiding and cooperate with law enforcement authorities, but the GTO indicates that we need to pay more attention to updating the way the BSA applies to them.
Treasury is reviewing a FinCEN proposal that would establish a system of Federal registration designed to capture crucial information about the businesses themselves, while at the same time not imposing unnecessary burdens on the vast majority of essentially small businessmen.
We are also proposing to extend the Suspicious Transaction Reporting requirement to certain categories of money services businesses and require special currency transaction reporting and recordkeeping by money transmitters.
I want to emphasize, though, that, if approved, these would simply be Notices of Proposed Rulemaking. We will look forward to working with the industry groups to help us further refine the proposals, striking that necessary balance to achieve an effective and efficient regulatory environment.
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I think you can see we have been asked to tackle a wide variety of problems and issues on the regulatory side. There is no set of instructions for assembly that comes with these tasks; and there are few precedents, in many cases, for designing these regulatory systems.
As in the case of our law enforcement support operations, I hope you will agree that the taxpayers would be getting their money's worth if FinCEN's resources were devoted solely to designing our anti-money laundering regime. But, still, we are required to, and indeed are, doing more.
The business of laundering dirty money in the United States is being made more difficult. The consequences of these successes in the U.S. are twofold: First, money launderers are forced to move their activities beyond our borders. Second, a growing number of countries recognize the corrosive dangers that unchecked financial crime poses to the integrity of their economic and political systems.
As a result, nations are seeking FinCEN's assistance. We are meeting the challenges created by a borderless marketplace for money launderers.
In just the past 3 years, FinCEN has worked to modernize and revitalize the world's premier anti-money laundering organization, the Financial Action Task Force. Created at the G7 Economic Summit in 1989, it is a 26-nation group dedicated to promoting the development of effective anti-money laundering controls. FinCEN heads the delegation to the FATF.
During the U.S. presidency last year of the FATF, we spearheaded the successful effort to strengthen the Task Force's 40 recommendations, which were originally issued in 1990.
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Another FinCEN goal has been to expand anti-money laundering standards to key regions elsewhere around the world. To this end, we have encouraged the development of sister organizations in the Caribbean and Asia.
Another important development is the creation of FinCEN-type organizations generically called ''Financial Intelligence Units,'' or FIUs, in other nations around the globe. These units serve as the central focal point for a country's anti-money laundering efforts. Just 5 years, ago, there were five such organizations. Today, there are 29.
Under FinCEN's leadership, a core group of FIUs met for the first time in Brussels in 1995, and an organization now known as the Egmont Group was created. This group serves as an international network fostering improved interaction among FIUs. Although differing in size, structure and responsibilities, Egmont members share a common purpose, cooperating in the international fight against money laundering through information exchange and the sharing of ideas.
The effort to increase communication among FIUs has been furthered by our development of a secure Internet web site, which permits members of the Egmont Group to exchange information on money laundering trends, financial analysis tools and technological developments. We cannot emphasize strongly enough the importance we place in the expansion of such units in other countries around the world.
Another multilateral effort is ongoing in the Western Hemisphere. In December of 1995, 15 months ago, Secretary Rubin chaired a conference in Buenos Aires attended by ministers from 29 of the Summit of the Americas nations. FinCEN led the year-long effort of laying the groundwork for the conference by coordinating development of a communiqué, a document which committed each of the participating countries to take steps to combat money laundering.
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Since the communiqué was adopted, Treasury has been offering training and assistance to the Summit of the Americas countries. We are achieving real results. Twenty-five countries in this hemisphere, since the communiqué was signed just 15 months ago, have taken positive steps toward implementing the communiqué by passing laws or issuing new regulatory requirements.
Although money laundering continues to pose a serious threat to the stability of other nations around the world, in the past 2 years more than 25 countries with varied political systems, such as Bulgaria, South Africa and New Zealand, have passed anti-money laundering laws. About a dozen others such as Russia, China, Israel, Ukraine, Mauritius, have draft laws or regulations pending. It is no accident that in this same period FinCEN staff have visited all five continents and more than 50 countries, urging them to take the money laundering threat seriously and to adopt effective, anti-money laundering measures.
In just the past 18 months, we have hosted at our headquarters in Vienna over 300 visitors from over 70 countries to learn the U.S. experience and to help them develop countermeasures in their own countries.
Mr. Chairman, Members, it is clear that in the era of financial globalization no single set of skills or tools alone can protect the financial system from abuse. One reason we are able to accomplish so much with only a few people is the diversity and professional dedication of the men and women of FinCEN. We are former bankers, linguists, law enforcement agents, regulatory officials, academics, lawyers and computer experts; and it is the quality, experience and professionalism of these dedicated men and women that allows us to accomplish so much.
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Let me close by giving you an example of what a small but innovative team can accomplish when it thinks beyond the present and thinks outside of the box.
I am very proud of our study of emerging new payment technologies, often referred to as E-Money. FinCEN was one of the first Government agencies to begin studying this issue over 2 1/2 years ago. Our efforts began in September of 1995 at a colloquium in New York City. Then we began and moved to chair the first international examination by law enforcement of this subject as part of the FATF and issued a report just last month on this subject.
We have been supporting the G10 Working Party on Electronic Money and have conducted computer-based E-Money war games and sought out experts to support and validate our efforts to understand this industry. We are also developing money laundering simulation exercises with the Rand Corporation, the world expert in simulations.
We are not just dealing, Mr. Chairman, with the issues of the past and the present. We intend to be ready for future challenges as well.
Thank you again for holding FinCEN's very first oversight hearing. While we have accomplished much, we have much more to do. The issues that we grapple with are complex. Often, we must act with very limited information. However, this subcommittee has given us the legal tools we need and has held our feet to the fire on more than one occasion, and we look forward to continuing to work with you in the months and years ahead.
Thank you very much. We would be happy to try to answer any questions you might have.
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Chairman BACHUS. Thank you.
[The prepared statement of Hon. Stanley E. Morris can be found on page 35 in the appendix.]
Chairman BACHUS. At this time, I am going to ask you some questions; and then Ms. Waters is going to follow up with some questions. I will probably ask a few and then just defer to her. We are not going to go strictly with the 5 minute rule.
Mr. Morris, last April you issued your final regulations concerning the suspicious activity reports. In your testimony, you have talked about the fact that the financial institutions have been pleased with these new regulations. I would confirm that in that we have had no complaints to speak of. I am not sure we have had any from the financial institutions saying these have created a burden. In fact, what the industry tells us is they are pleased with them, that they have reduced the regulatory burden, and they feel it is an effective tool.
I support your efforts to make these regulations more efficient and am of the opinion that they are working.
However, we have heard some allegations, accusations, some of them from talk radio shows, quite frankly, that have gone out over the airwaves. People call us and say, ''We heard someone talking on a talk radio show''; and they said this or that.
If those allegations are true, they are serious. And I am not saying they are or are not. I don't want to give credence to them, and I don't want to dismiss them. I simply want to ask you about three of those allegations.
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One allegation is that since the regulations use the word ''Suspicious Transaction Reports'' as opposed to ''Criminal Activity Reports,'' that people are reporting suspicious, unusual transactions; and by characterizing them as ''suspicious'' as opposed to ''criminal,'' has led to a great increase in the number of frivolous or incorrect reports over the prior system. Also, that people are busting the system.
Now, I know for one thing that the word ''criminal'' assumes--it would be tough for someone at a bank to file a report saying something was ''criminal.'' That would be a judgment on their part. They could only in my mind characterize it as ''suspicious'' or ''unusual.'' But how would you respond to those critics?
Mr. MORRIS. Well, first of all, Mr. Chairman, it needs to be understood that this new system took two different--actually more than two--but two types of reporting systems and put them together into one.
One system was previously called ''Criminal Referrals'' by the bank regulatory agencies. These were matters in which the bank had experienced in some cases, some loss, bank fraud, embezzlement, check kiting, or other matters of this kind. All of those were handled in separate reporting systems by each of the five bank supervisory reporting agencies before this new system was put in place. Those were commonly referred to as ''Criminal Referrals.''
We had, under the authorities granted by the Congress in the Bank Secrecy Act, a suspicious box, or suspicious reporting requirement on the currency report itself, so that a bank could indicate that a certain currency transaction was, quote-unquote, ''suspicious.'' When we merged the two systems together, we ended up calling it the ''Suspicious Activity Reporting System.'' So that is probably the reason for some confusion.
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The second part of your question is, actually, the number of reports, as I mentioned, approaching 65,000, is actually less than it was under the previous system, for a couple of reasons. We have provided better guidance to the financial institutions. There was a lot of frivolous reporting before, which I think has been largely eliminated.
Second, we all agreed, which was no mean feat, that all five bank regulatory agencies and FinCEN come up with a standard for reporting, so that any loss under $5,000 would not be reported on the basis that those kinds of cases, quite honestly, do not get investigated and prosecuted at the Federal level. They are not prohibited to report them, but they are not required to report them.
So those two actions I think have reduced the amount of reporting in this area, and I think have significantly improved the quality of the information we are getting and eliminated some of the misreporting that existed before.
So the criticisms you are hearing probably applied more to 2 years ago than they do today under the new system.
Chairman BACHUS. These same reports, and again, I am basing those almost entirely on talk radio people that call and say they heard this on talk radio, that the Government is actually paying bank tellers and other bank personnel a percentage of the recovery, or paying them a reward for filing these claims. Would you like to address that?
Mr. MORRIS. That is absolutely not true, and to my knowledge it has never been done, at least by FinCEN and the regulatory agencies. We have no intention of doing that.
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It is our view that the banks and the bank employees have certain regulatory obligations to maintain adequate books and adequate records and report certain matters to the Government. That is their duty, and no rewards would be paid for the carrying out of such duties.
Chairman BACHUS. It has been reported that I know these things are going on but that I am assisting in their cover-up. I want to confirm for the record I have asked you to report to me on whether or not you all were paying rewards, or percentages, of recoveries. And I have asked you that, have I not?
Mr. MORRIS. You have, indeed.
Chairman BACHUS. And you have responded unequivocally that is not going on?
Mr. MORRIS. Absolutely not now, not then, and not in the future.
Chairman BACHUS. All right, thank you.
Has FinCEN asked the banks to start filing reports when people come into the bank with old money or crumpled money?
Mr. MORRIS. No, that is not a part of this system.
There is a system that the Federal Reserve manages that provides training, I believe, and information on what kinds of currency no longer should be used, and the banks provide assistance in that. But that is not a part of our responsibilities.
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Chairman BACHUS. So that is actually just old currency that needs to be taken out of circulation because it is musty----
Mr. MORRIS. That is correct.
Chairman BACHUS.----And could be confused, I suppose. That is a good explanation.
We have got to vote. We are going to recess until such time as we can return. We will be back as soon as we can. Thank you.
Chairman BACHUS. I will call back to order the subcommittee proceedings.
Mr. Morris, you have already testified that one of FinCEN's primary responsibilities is to offer support to law enforcement agencies involved in financial crime investigations and to manage the Bank Secrecy Act and its database. I have got some questions concerning how your agency fulfills those obligations.
First of all, would you just describe to the subcommittee what happens to a CTR when it is filed by a bank today?
Mr. MORRIS. Certainly. About 67 percent of the currency transaction reports are filed electronically with the IRS Detroit Computing Center. Those basically, once they are filed, are available to a number of different agencies in the Treasury Department. They are also available, as I mentioned, to States through our Gateway Program, and they are available to the many different agencies at FinCEN who work with us.
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The remaining 33 percent are filed by paper. Those are data entered, usually on contract, into the system, so it takes a little bit longer before they are posted. But they then are data entered and added to the system.
We have been pushing the banking industry to, of course, increase the amount of electronic filings, because in electronic filing, just as in taxes and others, there are fewer mistakes and less cost, ultimately both to the bank and to the Government. But that is the process by which 12 million or so are filed each year.
Access to those is fairly broad. It has been our goal to broaden it as much as possible, so that we have multiple uses of them. Internal Revenue uses them both for their criminal investigation, but they also use them, for example, for tax administration.
Chairman BACHUS. All right. You mentioned the IRS. What have you all done with the huge amount of CTR data which had previously been maintained? This data was previously maintained by the IRS, was it not? What have you all done with that?
Mr. MORRIS. The database is still maintained by the IRS at the Detroit Computing Center. Indeed, about half the resources of the Detroit Computing Center are devoted to supporting FinCEN's anti-money laundering efforts, not just the CTR, but the new Suspicious Activity Reporting System, a new registration system, when it goes into effect, and the like. So they are a very, very important part of our Nation's anti-money laundering effort.
Indeed, let me do a small advertisement, if you will permit me. One of the concerns that we have at the Treasury Department is, while we are examining and assessing the future directions of the Internal Revenue Service, much attention, of course, focuses on its specific tax responsibilities.
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The finest financial investigators, I believe, in the world are the men and women of the Internal Revenue Service Criminal Investigation Division. The computing support that we receive from Detroit is absolutely essential. They devote more resources to managing our data than I have, and I would prefer that kind of arrangement continue rather than to enlarge the size of FinCEN or to deal with some other organization. So they continue to maintain that data.
The advantage of new technology has permitted us to now actually exploit that data in ways that were not possible before. So a lot of the criticisms that were heard in the past about, ''You have all of this data, you are not using it,'' is no longer true.
Large amounts of it can be used, even though the database is huge, because we take data off-line through servers. We run it through our Artificial Intelligence system. We can do a lot of different manipulations with the data that simply were not possible before. We have also developed some very interesting software applications that have made it useful. However, having said that, there is still too much reporting. We felt that there was too much information being collected.
As I mentioned in my statement, we reduced for the first time in the 25 years of the Act, the amount of data being collected on each individual form by nearly one-third, and it is our goal within the next year or so to cut it by at least half the number of filings.
We do not really need to know whether Hecht's is bringing cash in to Riggs Bank three times a week. At present in many cases, that information is going into the database. We are working on ways to reduce that.
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Chairman BACHUS. This Detroit Center where the CTRs come into, it is maintained by the IRS? Or is it an IRS facility?
Mr. MORRIS. It is an IRS facility, and it is basically funded under the IRS appropriation.
Chairman BACHUS. Do you have FinCEN personnel at the Detroit Center, or do you just have electronic access?
Mr. MORRIS. We have, of course, electronic access. We have almost a weekly meeting with them of one fashion or the other. We have given some consideration to having a detailee, either somebody from Detroit at FinCEN or somebody from FinCEN at Detroit. I think we probably will be doing that. It was less important when the regulatory requirements were static, but the regulatory requirements are no longer static. Given the new requirements of the laws and the new regulations that are coming on-line, any time you make major changes in large mainframe operations you test the ability of those operations. So we clearly have found ourselves having to have closer and closer and closer working relationships with them.
One of the things we were hoping to do, however, and why it is so important to cut back on the reporting, or to simplify the regulatory requirements, is that will reduce the work load in Detroit. This will allow us, with no additional cost to the taxpayer, to then add new requirements.
So if we can quit doing things that are not as important and do the things that are very, very important, we think we can change without an increase in cost.
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Chairman BACHUS. All right. The information comes in to Detroit. The IRS Computing Center is there. Do you get a duplicate of all CTRs, for instance, or do you have it available to you through that Center?
Mr. MORRIS. Both. We basically have on-line access to the Currency and Banking Retrieval System, and we get downloads of the data in order to manipulate it off-line.
Chairman BACHUS. How do you get it to law enforcement agencies? Can they either request information, or when you see something you think is suspicious, do you then report it to the law enforcement agency? How does that work?
Mr. MORRIS. It works in several ways. First, all of the Treasury agencies have direct on-line access to it.
Chairman BACHUS. To Detroit?
Mr. MORRIS. Either to Detroit. I think the IRS uses it that way. In the case of Customs, they download it and put it within their own database systems. So essentially every Customs officer has access to the data through the Treasury system, Treasury Enforcement Communication System, managed by Customs.
You also have the IRS, which has direct on-line use, as does, I believe, Secret Service. We also permit on-line access by our State and local counterparts. The Justice agencies usually work through FinCEN or through Customs in accessing it.
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As I mentioned in my statement, we have people from almost all of the major Federal investigative agencies at FinCEN, and they have access to it for the purposes of their investigations.
So there are a range of ways. It is our goal really to provide as many different avenues to these databases as possible. That, of course, increases the benefit and utility of the data, the more people that can use it for their investigations.
Chairman BACHUS. State law enforcement authorities have access to it. How do you assure that they don't just go to it--can they go directly to the Detroit Center and just start looking for information?
Mr. MORRIS. They can go directly to the Detroit Center, and access it through a computer screen. There is a password, and we have trained some 400 or so State and local officers in the use of the system. They basically enter through Computer Collection Devices so that we know who is accessing it, when they are accessing, how much use they are providing, and the like.
We also know the subject that they are looking at, and it is that subject that we can then run against our other databases to identify other agencies with a similar interest in the same subject.
Chairman BACHUS. Are there any safeguards to see that they are not just exploring for information?
Page 26 PREV PAGE TOP OF DOC Mr. MORRIS. Well, we know when the subject comes in, we can examine it. Maybe I ought to ask Bill Baity. He is giving guidance. I may be off point here.
Mr. BAITY. I think, Mr. Chairman, the answer is that in terms of protecting the information, they are trained, as Stan mentioned, with a password. They have to tell us what they are looking for. That is the quid pro quo of using the system. So when they come in, while they look at it, we know what they looked at. As our computer would call it, they leave the ''footprint,'' so we know what they looked at, so that way we protect the integrity of the system from any misuse.
Chairman BACHUS. Have you ever called into question any request? Or have you ever reviewed them to see if there might be abuse?
Mr. MORRIS. We had one situation in a State where we were informed that a person who had access was the subject of an internal investigation, and in that case we moved to eliminate their access. In a post audit of the activity, however, we found no misuse.
But your questions are quite appropriate because this, of course, is a very important matter, that we maintain the integrity in the use of the system. It is a very, very serious matter. We have a security office that is expert specifically in these areas.
Chairman BACHUS. All right. Is it FinCEN's job to make actual referrals to law enforcement agencies, or just to develop cases, or help them work with cases that they have already identified?
Page 27 PREV PAGE TOP OF DOC Mr. MORRIS. Again, Mr. Chairman, we do it several different ways. First and primarily, we will receive probably 7,000 or so requests to check our various databases on various subjects for certain suspected criminal activity. However, as we see matters arriving, or as we use our Artificial Intelligence system, some of that we determine proactively. That is, we identify a problem or hear of a problem, and in those cases we would call the appropriate law enforcement agency and suggest to them what we have and determine whether or not it warrants an investigation on their behalf.
We of course are not an investigative agency, we are a support agency to our law enforcement colleagues.
Chairman BACHUS. Have there been indications that you actually identified activity and reported it to an agency and they developed a criminal case?
Mr. MORRIS. Yes.
Chairman BACHUS. All right. Which Federal law enforcement agency would you say is your main customer or user of your services?
Mr. MORRIS. It is not as easy a question as it might sound.
Chairman BACHUS. What are some of them?
Mr. MORRIS. The FBI, ATF, Customs, IRS. If you took them as a group, the Inspectors General, probably, and then of course State and local. There are a lot of different State and local agencies. As we examine it, those are probably the primary ones.
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Chairman BACHUS. You mentioned the FBI. Has FinCEN made referrals to the FBI in the last few years? Maybe that word ''referral'' is not the right word.
Mr. MORRIS. We work quite closely with the FBI, actually. They have an agent and several analysts assigned to FinCEN. They handle some of their most sensitive cases, which are, in many cases, driven by profit motive, and we have got very broad financial databases. The FBI is in the top four or five users.
Chairman BACHUS. They have a database. Have they been allowed to integrate their database into FinCEN's database, or has there been a sharing?
Mr. MORRIS. They have a number of databases, and indeed while we don't have direct access to all of those databases, we do have FBI personnel who do have access to it. I think they are in the process of setting up a direct-line access. They prefer to deal through their own employees, rather than providing access directly, and that is fine with us.
Chairman BACHUS. I notice that the Justice Department asset forfeiture fund, the share that was allocated to FinCEN in 1993, was over $1 million. It was zero last year. Do you have any comment on that?
Mr. MORRIS. The primary purpose early-on in FinCEN's life was to do basic asset seizure work. The availability of the databases that we were using became increasingly available to Justice agencies. The allocation actually for our asset forfeiture monies have gone up each year. Justice has reduced theirs to zero as Treasury has increased theirs, and it was because Justice felt the kind of service they needed could be done directly by the agencies who are making the investigation, something, Mr. Chairman, we actually support. We are not in the business of trying to become a monopolist on data or monopolist on analysis. We have, as I mentioned in my opening statement, we have plenty of work to do, and to the extent others can do some of it, we are more than happy to share it.
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Chairman BACHUS. Now, you mentioned those studies that you have done in the past. I know law enforcement agencies have said that your studies on money laundering trends have been very useful to them. The case studies you have done in the past have assisted them. Are you still preparing or producing such studies today?
Mr. MORRIS. Yes, in a number of different areas. As a matter of fact, we have just completed one we will be presenting in the next couple of weeks in the Miami area, and we are also doing a broad examination of a category of activity that we are seeing as a major new money laundering trend, which is the operation by essentially Colombian money brokers and the use of U.S. bank accounts. It is very, very complex.
In that regard we have been supporting the interagency coordination group which was established by MOU a couple of years ago between the various agencies, including the FBI and DEA and Customs and IRS and Postal Inspection. What we have been doing, along with Justice, is providing staff support and analytic support and then providing leads essentially. At just one meeting in the last month or so, we had over 100 people at FinCEN from those agencies, as well as some State and local, trying to see the big picture.
In many cases, investigators are driven because of their workload in looking at individual pieces. One contribution that FinCEN can make through its computers and its analysis is to take all of the pieces together and try to see what the matter looks like in totality. The result of that has been about 200 subpoenas issued, again furthering information.
But it really is a partnership. FinCEN would be irrelevant as an organization without the broad support of all of the law enforcement agencies with whom we work.
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Chairman BACHUS. All right. You probably read recent press reports about the large asset forfeiture case involving Mario Ruiz Massieu. When I read about that, the fact that he had a courier, his lieutenant was coming into the country filing reports with Customs, and on each occasion was carrying over $10,000 in currency, basically going through the system and complying with the system, and generated, I think his testimony was, on more than 20 occasions in late 1994 to 1995.
Had FinCEN noticed this activity?
Mr. MORRIS. We did not have any notice of the activity in 1994. We did look at the matter in 1995.
Chairman BACHUS. Was that after the Mexican government basically reported to you their suspicions that he was money laundering drug proceeds?
Mr. MORRIS. Yes.
Chairman BACHUS. Why? The question I think is a fair question, knowing you have this system, and knowing there is a large volume of paperwork. You said you are going to reduce that to try to focus and eliminate some of that like from Hecht's or a department store, IBM, which would help you reduce the paperwork and be able to focus on a smaller universe. But why wasn't there a red flag raised in this case?
Mr. MORRIS. Well, I can't speak to the initiation of the investigation, obviously, by the investigative agencies. I do believe that to a large extent the system worked. Indeed, I think probably part of the challenge here is that his lawyer actually, as it would look on the documents, filed CMIRs precisely when he left the airport. The amount of money reported in the CTRs was similar, very closely related to those CMIRs. They were reported diligently and accurately by the bank.
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The bank thought the matter unusual. In the old system--it would have been a SARS today--but in the old system the bank completed a suspicious CTR, and indeed that paper trail, those records, were absolutely essential to the case that was brought, the civil case that was brought in Texas and concluded last week. The assistant U.S. Attorneys who prosecuted the case said the case probably couldn't have been made if they didn't have all of the records. So from that standpoint, the issue, I think, is a success in terms of the value of the information.
I think the question you are asking is should the matter have been investigated earlier? Money laundering is complicated. In many cases, I think most cases, we see of money laundering, we see clear surreptition. We see efforts to structure transactions away from reporting it to the Government. We see efforts to falsify documents and the like.
Here was a case in which a well-known Mexican official was being quite overt about it. But the records were there, the material worked, and finally a civil case was brought, and the funds were forfeited.
The issue of when and the nature of the investigation is not what FinCEN does.
Chairman BACHUS. I would agree with you that we did have a high-ranking Mexican official, who was easily identified, who, as you say, was being very overt about bringing large amounts of currency into the United States, and did so in what was obviously a pattern, and it was a tremendous amount of money, even triggering a bank saying, ''We may have some money laundering activities here.'' The bank actually filed reports on suspicious activity, which would mean, as a result of all that, that FinCEN either had knowledge of it or they didn't.
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Now, by knowledge, obviously, the information was there in a database. That doesn't mean it was used. It would be like me receiving 300 letters today and being able to say I read them all. So I understand that possession of them would not mean that if you pulled them all out and looked at them, you may have gone after him.
But did you know, had it raised within FinCEN or any other agencies a red flag before the Mexican government raised concerns?
Mr. MORRIS. Well, it did not within FinCEN. My understanding is that our colleagues were aware of the transactions because of the report, and, as I said, any examination of the records would show a close parallel in terms of where the money was coming from. That is, it was not criminal activity in the United States, it was basically being brought in from Mexico. That, of course, always makes an investigation somewhat more difficult than those where you have criminal activity being conducted within the United States.
Chairman BACHUS. You say your colleagues at other agencies. Do you know who these were?
Mr. MORRIS. I think just from the press reports, I think Customs and IRS--again, this is from press reports--were witnesses in the civil trial that ended up in the forfeiture.
Chairman BACHUS. As you say, as far as in the prosecution of this case, once it began, the information developed here was very helpful in getting a conviction. I would agree. There was a trail there, and it helped lead to the forfeiture, actually the loss of this money, in a civil proceeding.
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Mr. MORRIS. Right.
Chairman BACHUS. This is probably not a question for you, but, well, I think it probably is a question for you. Obviously this was a civil proceeding where $7.9 million was--on Saturday a jury held it would be forfeited. I don't think your job is over in this regard. This obviously indicated criminal activity, and no criminal charges have been brought to date against this individual. I will just say that and move on to maybe a broader subject.
Let me ask you this, going back to that. Have you all taken that case study and looked at maybe what you could have done better?
Mr. MORRIS. We do that all the time, Mr. Chairman. Indeed, one of the issues we are working on as we speak is examining some of the rules within our Artificial Intelligence system to determine whether or not they would have, or should have, in some fashion identified the activity.
It is important to note here, however, and I know that this is perhaps counterintuitive, but we receive 12 million currency transaction reports a year. Most of those are cash into bank accounts in large amounts. And there are certain people who are very comfortable in dealing in large amounts of cash, and it is not something familiar to me as a Government employee of long standing. I think I have only seen a couple of $100 bills, mostly being shown off when it came out, the new one. But that is not true of even certain ethnic groups.
So large amounts of cash in and of themselves are not only not illegal, but in some cases, not even particularly suspicious. So what we have to do is be very careful as we design our software and our Artificial Intelligence efforts to make sure that we are getting the needles that are clearly warranted here, and not simply handfuls of hay in which from time to time a needle exists. And that is not as easy as it might sound.
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The whole investigative process finds itself in the same fashion. Judgments get made, because we will receive this year 40,000 suspicious reports related to violations of either the Bank Secrecy Act or suspicions of money laundering. That is a huge amount of activity that our investigative agencies and our systems need to weed through to find out those that are genuinely suspicious.
So it is a difficult challenge for all of us. We clearly need to do it better. But, as you say, we need to constantly update our tools to identify where, in fact, we may have let a needle slip through.
Chairman BACHUS. OK. As you know, because I think you testified before the subcommittee last summer when we looked at laundering of drug proceeds in Mexico, we talked about the Administration developing a coordinated effort with Mexico, coordinated money laundering strategy, where we would have a transfer of information, as I suppose maybe was done in this Ruiz Massieu case.
Can you discuss FinCEN's involvement in this process and the strategy that the two countries are developing?
Mr. MORRIS. Certainly. First of all, we have been very active in recognizing that as we become better at dealing with the money laundering problem in the United States, the money launderers will go to places where there is less attention. And indeed we have pushed the problem south. In some cases, we have pushed it into the Caribbean and into a lot of other developing nations.
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We have worked closely with the Mexican Treasury Hacienda. We have even worked some cases with them. We have provided training. We have been there to help them in the setting up of their computers. They are in the process of establishing a FinCEN-like organization within Hacienda.
At the strong encouragement of the United States, this month they will have established both currency and suspicious reporting obligations so that when the U.S. currency goes south to Mexico, it will be subject to very similar kinds of paper trails as we discussed earlier.
We have had senior officials here at our headquarters in Virginia. Bill Baity was down there a couple of weeks ago and met with a number of the senior officials discussing progress of their regulatory and, finally, analytic efforts. It is a very important obligation that General McCaffrey, Secretary Rubin, and Attorney General Reno are committed to make work. It is difficult. It took us many, many years in the United States to establish the system that we have in place, and as we have discussed here, it is not perfect. But, nevertheless, we have a strong obligation to work with our Mexican colleagues to try to achieve progress.
Chairman BACHUS. I want to ask you about two other questions. Then I am going to stop at the end of that subject matter and let Ms. Waters ask you questions.
You mentioned the money headed south. It goes south, and then there is a desire to move it back into the United States. From the testimony before the hearing, I don't know if it was last summer or last fall's hearing, was a large amount of that was being moved back in bank drafts. There was some discussion then about developing regulations as to the problems by requiring reporting of large transfers from foreign banks to U.S. institutions via bank drafts. Have those been finalized? What is the status of that effort?
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Mr. MORRIS. They were finalized, and a proposal for public comment was issued a couple of months ago. That comment period closes in 3 weeks, I believe.
The trick here was that while we were focusing on the problem of Mexican bank drafts, which is basically you can go to Mexico, as you pointed out, with a large amount of cash and turn it into an instrument, a bank instrument drawn on their correspondent bank in the United States. That instrument is essentially negotiable, and you do not have to worry about lugging around $40,000 in U.S. currency. It also avoids any bumps in the valuation of the peso. It serves a lot of different purposes.
But we could not write a regulation that fixed just that. So what we had to do was craft one that focused on foreign bank drafts opting outside of the normal bank clearance process. As you know, Mr. Chairman, nothing is ever as easy as it seems, and we wanted to make sure when we came up with a new reporting requirement for these instruments, that we didn't end up having adverse consequences in terms of foreign trade or commercial transactions and the like. I think we have done that, and that regulation will probably be out in the next couple of months in final form.
However, I would like to point out that that is not everything that can be done. That is simply a reporting requirement as a part of the CMIR that we mentioned in the Ruiz Massieu case.
There are two other parts of this that are important players. One, which we have already mentioned, on the Mexican side, is that the banks there have an obligation to report these purchases because they are purchased in large amounts, and they have an obligation to report suspicious activity. And we work with the Mexicans and have access to those data, and we will basically make the appeal of these instruments significantly less, because the anonymous nature of them will go away.
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On the other side is the correspondent bank in the United States. We have issued an advisory to our banks on this side to pay very careful attention to those transactions. We are in the process of setting up a means upon which to examine that.
So it really has to be a strategic look at the problem, not just an examination of the middle. Although obviously the great value of having these instruments made reportable is if they are not reported and they are identified, they can be seized simply for the fact of not being reported; therefore, it also increases the vulnerability of the instrument, and we believe, therefore, the interest in it from the standpoint of the money launderers.
Chairman BACHUS. OK. We talked about coordinated money laundering strategy between Mexico and the United States which we are developing, which implies sharing of information. Have they been cooperative in sharing information with us?
Mr. MORRIS. I think generally as it relates to FinCEN, reasonably cooperative. The problem that they have is that they don't have a lot of information at present to share, and that is why these new regulatory requirements we think are so important, because they will now have greater data to work with us on.
Our feeling at the Treasury Department is that while there are always going to be frustrations and difficulties and bumps, in the long relationship we have had with the Government of Mexico, and the people of Mexico, we have to work out ways to cooperate.
Chairman BACHUS. As I understand your testimony, they are developing an ability to monitor and report these transactions, much as we have?
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Mr. MORRIS. Yes, sir.
Chairman BACHUS. And their failure to date has been just as much the lack of having that information as opposed to a failure to share it?
Mr. MORRIS. That is correct.
Chairman BACHUS. What type of timeframe do you think there is on them being able to develop a system?
Mr. MORRIS. The regulations went into effect, or are going into effect, May 1.
Chairman BACHUS. Of this year?
Mr. MORRIS. Of this year. They will go into effect. They have been promulgated, and I guess that is the effective date.
Chairman BACHUS. I guess there is a commitment on their part to share information?
Mr. MORRIS. We have a financial exchange agreement with Mexican authorities that was signed by Secretary Bentsen a couple of years ago, and that would work. We also have a tax agreement with them as well.
Chairman BACHUS. What about our database? What type of sharing arrangement do we have with them? What access do they have to FinCen's database?
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Mr. MORRIS. They have, under that particular agreement, the authority to ask us for information, and we will provide it to them, assuming that there are no reasons not to provide it to them. Basically, it comes to us in a formal paper request and we respond to it accordingly.
Chairman BACHUS. OK. And my last question is this: There was a report in yesterday's New York Times that the Treasury Department had notified Mexico that there was $184 million in a bank account in Mexico. This was drug money. And that when the Mexican government seized the account that there was only $18 million in the account.
First of all, the Mexican government claimed that was all that was in the account, and $184 million was not the amount that had been moved in and out of the account, and that there was actually $18 million in the account.
Assuming that the story in the New York Times is correct, should we believe the Mexican government? Or do we have sufficient documentation to confirm whether or not their explanation is correct? Or have we asked for that information?
Mr. MORRIS. If you will forgive me for a piece of whimsy here, this is, I like to say, ''This is why God made deputies.''
You can answer that, Mr. Baity.
No. Obviously, Mr. Chairman, this matter is under investigation on both sides of the border. There have been expressions which are correct, as reported in the newspaper, of concerns by the Treasury Department regarding the results of that. I really don't know any more than that, and it would be, I think, inappropriate for me and Mr. Baity to comment.
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Chairman BACHUS. But I am glad that the matter is being investigated and documented. We are going to be very interested in the results of what you find out, and this will be a continuing story.
In closing, before I turn to Ms. Waters, I referred to the Ruiz Massieu case earlier and why it has been handled as it has, and do you have any more information you would like to share with us on maybe why an arrest has not been made or a criminal case? Or do you think it might be inappropriate?
Mr. MORRIS. I think that would be clearly outside my responsibilities and, even more importantly, outside of my knowledge.
Chairman BACHUS. That was one of those questions I wondered whether I should ask.
OK. Ms. Waters.
Ms. WATERS. Thank you, Mr. Chairman.
Chairman BACHUS. We appreciate your participation.
Ms. WATERS. Well, you are certainly welcome, and I appreciate your taking the time and putting forth the effort to help us understand better the resources we have available to deal with money laundering and the tracking of suspicious resources, and so forth.
Page 41 PREV PAGE TOP OF DOC I have two areas I am interested in. I understand much of the responsibility over enforcing money laundering laws falls under Treasury but it also seems like too many agencies share a small piece of the anti-money laundering pie, making coordination cumbersome and costly. In fact, a GAO report requested by Mr. Gonzalez and issued last year pointed out that foreign countries looking to cooperate with the U.S. on money laundering think there are too many agencies involved in anti-money laundering activities and they simply don't know who to go to.
What is your reaction to the idea of creating a single entity, say, a money laundering czar, that would serve as the coordinator of anti-money laundering policy across Federal agencies?
Mr. MORRIS. Well, Congresswoman Waters, part of the problem that our foreign colleagues have in dealing with the United States is the reality that we have not centralized our law enforcement authorities, for lots of different reasons, not the least of which is our healthy distrust of centralized law enforcement authority.
It is simpler in other countries to do one-stop shopping, but I would also say that I don't know of any country in the world that prosecutes more money laundering cases; I know of no country in the world that makes as many convictions; there is no country in the world who makes as many seizures; and I don't know of any country in the world that has as broad a set of regulatory laws and regulations in place. So what is broken perhaps is the perception of messiness that our governmental system sometimes appears to be.
We have, for example, five different bank supervisory agencies. No other country in the world would do that.
Page 42 PREV PAGE TOP OF DOC The amazing thing is is that it all works reasonably well, and I think the results speak for themselves. Clearly, in my judgment, the Secretary of the Treasury and Under Secretary Kelly have the primary lead responsibility in the area of money laundering.
The Department of Treasury devotes the most resources to the matter. It has the regulatory authorities, the anti-money laundering regulatory authorities that we have been describing here under the Bank Secrecy Act. So there is a lead agency. There is coordination, as I mentioned, with the interagency coordinating group.
But you are quite correct that not only does the Federal Government have many different agencies involved here but so do the States. As a matter of fact, I think we should all take great pride in the fact that 3 years ago 21 States had anti-money laundering statutes and 3 years later we have increased that by--my math, as Mr. Chairman knows, isn't very good--to 30, which I think is about a 25 percent, 30 percent increase.
So I think that collapsing all of the activities of the FBI and the DEA and Inspectors General and IRS and Customs and FinCEN into some super agency would be ill-advised.
Ms. WATERS. Thank you.
Let me just kind of share something with you. For the last 6-, 7-, 8-months I have been involved in trying to get to the bottom of serious allegations that were made by the San José Mercury News about a drug traffic ring that operated in South Central Los Angeles that kind of fueled the explosion of crack cocaine.
Page 43 PREV PAGE TOP OF DOC The principals in this case were a man called Danilo Blandon and another man called Norman Meneses from Nicaragua. In looking through all of the documents that I have been able to look through, as we kind of wait on the investigations to take place, there is a name that popped up. Orlando Murillo, who was in charge of the money laundering for this drug ring operating out of Florida, with one of these agencies that we have been--a company-type company that I think we have been describing--that we wanted to get registered, money remitters.
What is interesting about this name, or this person, his name is in the documents that we saw, associated with the case, the money laundering. He pops up again in Nicaragua. He has just been named by the president to chair Nicaragua's national investment funds. He has a long history. He has been involved for a long period of time operating out of Miami. Everybody seems to know about him, the DEA, the CIA. Now he gets a chance to get his hands on our money, because of the position that he is in, he will be working with the International Monetary Fund and all of those agencies.
It is documented, for example, that he had one--he formed a company called Precious Woods Industries--and it is connected to another country, and someone out of Colombia named El Nica, and it is documented that this company recently shipped 1,200 kilos of cocaine hidden in wooden bars into Florida during the latter part of the 1980's.
Now, I guess I say all of that to say this: It appears that Mr. Murillo has operated for a long time. Money laundering is his business. Some of our agencies know about it. Does anybody at Treasury know about it?
It is unfair for me to expect you to know this right now. But if I sat down and talked with these guys, sent deputies that you have, or something, would anybody--would this name pop up somewhere? Would they know about someone who has got a history of money laundering, who now has just been appointed to a high post in Nicaragua, I mean?
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Mr. MORRIS. Well, I don't know, obviously, specifically about that individual. The answer is that if he has been a known money launderer, then he would show up in a number of our databases as well as other elements in the Customs and IRS and Secret Service and other pieces within the Department of Treasury, as well as within Justice.
So we could certainly sit down and determine what we know about this individual and we could come up and let you know what we do know and what the issues are. If he was a money remitter in the State of Florida, money transmitter of some fashion, he would have had to be registered. They have a registration system in Florida.
If the activities that he is conducting in other areas were illegal, then probably some actions could have been taken within Florida. I don't know the specifics on this, but the short answer, Congresswoman, is that we could certainly, if you like, do an assessment of what we do know and brief you or your staff.
Ms. WATERS. I would like that very much.
Now, as I understand it, your responsibilities stop with investigation and compiling of information and you would give it to law enforcement?
Mr. MORRIS. Yes.
Ms. WATERS. Who would you give--for example, if you took a look at this name and you were able to put something together, who would you give that to?
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Mr. MORRIS. Well, it would depend a little bit on what the underlying illegal activity was. If it was strictly money laundering, then that would either go to Customs or IRS.
In Florida, we have a high intensity drug trafficking area program, where FinCEN, along with a number of other agencies, work with a strong focus on financial crimes and money laundering. And so our approach would be if we had information like that, and it fit into several different areas, we would probably put it into that task force, but it depends a little bit on what the underlying criminal activity is.
Ms. WATERS. Let me give you another aspect of this. Our USAID money would be going directly to this man to administer. What then is your responsibility? I mean, where would you send it if that was the description of the complaint rather than the other aspect that you and I were alluding to a moment ago?
Mr. MORRIS. Well, it would depend, again, if there was criminal activity or, indeed, if there was waste, fraud, abuse, alleged or potentially alleged, then that subject would be the responsibility, because this would be State Department funds, would be the responsibility of the Office of the Inspector General of the Department of State, who we work quite closely with and provide a number of case supports with them. Again, it depends a little bit on what the perceived criminal activity is.
Ms. WATERS. Does your work take you in, directly in, to other countries such as Nicaragua where you could seek cooperation from authorities there to work with you? I don't know what they have down there that would be synonymous with what you do or who you are, but do you have a working relationship down in Nicaragua?
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Mr. MORRIS. In Nicaragua, you are asking a harder question. I wasn't ready for a Nicaragua question.
The generic, the general answer is that we have a lot of international activity, bilateral activity, with a lot of countries around the world. And we have been very active in this hemisphere.
Secretary Rubin chaired a conference 15 months ago, in Buenos Aires. I believe that Nicaragua was there. They signed on to a communiqué that would have required certain kinds of actions.
We do not have an exchange agreement with them. You know, we have had a long, sort of a strained relation with Nicaragua, which is changing. They do not have a FinCEN-like organization. I don't know what the status of their money laundering laws are, but I think they have taken some steps, since the meeting, because I have a list of the countries that have not taken steps and I don't see them on it.
But, again, we could provide more detail for the record. It is very important to us to see countries establish parallel regulatory regimes, as we have in the United States. One, because we think it makes it harder for organized crime to operate if they have difficulty laundering their money. Second, it is fair because our financial institutions operate in many countries around the world and we think there should be a level playing field, that all financial institutions should meet at least certain minimum anti-money laundering standards. But I can provide greater information if I can get back to the office and do an assessment of Nicaragua.
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[The following information was provided to the subcommittee at a later date by Hon. Stanley E. Morris]
Nicaragua is not considered an important regional financial center. The banking system is quite small and too primitive to be used to hide vast sums of money. However, the country is used as a transit point for drugs. In January 1997, a new government was installed in Nicaragua, and just last month, the new government drafted an anti-money laundering bill which would criminalize money laundering. It is believed that the draft legislation includes requirements for financial institutions to report significant currency transactions.
In addition, Nicaragua participated in the Summit of the Americas Ministerial on Money Laundering in December 1995, and signed a communiqué, in which they agreed to take specific actions against money laundering. Nicaragua also participates in the Caribbean Financial Action Task Force, a sister agency of the Financial Action Task Force, created by the G7 to promote the development of effective anti-money laundering controls and cooperation around the world.]
Ms. WATERS. What could trigger your aggressive efforts to get some country like Nicaragua involved with you if there was a feeling that there was a great need to do that based on some information that would kind of document money laundering that is creating problems for us here in this country?
Mr. MORRIS. Well, there are a number of things. The Department of State has been very aggressive in pressing the anti-money laundering agenda, both in this hemisphere and elsewhere. And most of our Ambassadors and DCMs are aware of the priority that the President and the Treasury Secretary place on this.
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As I said, the Secretary himself met with 30 countries, just 15 months ago, and then followed it with a meeting with all of the Finance Ministers less than a year ago. While there were a range of issues discussed with all of the Finance Ministers, one of them was the importance of addressing the issue of money laundering.
We have also had discussions with the Inter-American Development Bank, which provides development loans in a lot of these countries, and they are beginning to now, for the first time, recognize the importance of establishing preventive measures within the countries.
In our judgment at the Treasury Department, a financial system that has integrity and that takes steps to ensure that organized crime can't launder its money and that corruption doesn't undermine the democratic process, that then is as important, indeed I would suggest more important, than roads and dams and the like, which is where a lot of the development money has gone in the past. And so this is a significant new initiative for us to use the multilateral development banks as additional leverage in bringing these matters to the interest of the Government.
Plus we have all of the other tools that the United States has. We have used even our commitment to deal with anti-money laundering into such things as our trade discussions in the Asian Pacific Economic Council, for example, on the belief that you can't have a fair trade policy if some governments are taking in illicit proceeds as a part of their capital development.
So we have a number of tools, Congresswoman Waters, and we will use them. And if we see problems in a country growing, particularly in a developing democracy like in Nicaragua, then we will bring all the necessary attention to bear.
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Ms. WATERS. Well, let me just say this: The Inspector General of the Justice Department and the Inspector General of CIA and both Intelligence Committees of the House and the Senate are all involved in this investigation. I will be talking with the Inspector General of the Justice Department about his work with this drug trafficking ring and the connections in Nicaragua and taking a look at this gentleman who pops up again as a money launderer who now has a big role in government and may be spending our USAID money on other things. Because I think that whatever agencies we have that can come to--I mean, can take a look at this overall drug trafficking and money laundering that has been going on for so many years connected to Nicaragua, then we all ought to get involved in it. So I am certainly going to pursue, you know, requesting your assistance, perhaps in several ways.
Mr. MORRIS. Happy to help.
Ms. WATERS. Thank you very much.
Chairman BACHUS. Thank you. I would like to sort of follow up on something that Ms. Waters mentioned to you. She mentioned the money remitter or transmitter and the role that it played in the matter that she brought before you.
I want to ask you two questions about the non-bank financial institutions and, of course, this includes not only money transmitters or remitters but also check cashers, currency exchanges, your 7-Eleven stores, and we heard quite a lot about that in the testimony by Under Secretary Kelly in our hearing a week before last on the GTO and your work on that.
Page 50 PREV PAGE TOP OF DOC But when he appeared before us he made reference to the fact that some of these NBFIs are engaged in money laundering, some but certainly not all or the majority because we are talking about a legitimate industry, and that this was basically, in many ways, a hole in the bottom of the bucket in our efforts to suppress money laundering.
And he also mentioned the need to register these NBFIs. In fact, in the 1994 Money Laundering Suppression Act, Congress called for the registration of these institutions.
I think Under Secretary Kelly made reference to this, it made it a crime to be unregistered and to operate. But we still don't have that registration process.
Can you give us some timeframe on that or what difficulties you have been experiencing and when we can expect some closure on this?
Mr. MORRIS. Certainly, Mr. Chairman. Again, a certain bit of whimsy, probably very few Government officials have been up before this Congress in the last 4 years being asked why they are not regulating faster.
The challenge that we face under the statute here is that what we refer to as the subset of non-bank financial institutions. Because we include casinos and broker/dealers and others in the subset, in order to make this easier--not any easier to pronounce, I might add, than NBFIs--we call them money service businesses, and that is really what they are doing, whether they are cashing checks or exchanging currency or remitting money or selling money orders or travelers checks and the like.
Page 51 PREV PAGE TOP OF DOC Our problem has been struggling with the issue of definition. We don't want to come up with a system that includes Safeway as a registrant because there are very powerful penalties involved, civil penalties as well as criminal. A failure to register is subject to a $5,000 fine for each day that you have not registered, and we wanted to make the system focus clearly on the problem at hand rather than including everybody, and we thought it was very important to be as careful as possible.
We asked Coopers and Lybrand, through a contract, to examine the industry for us. This was undertaken for us to get a better sense, to make sure that we knew as much about this money services business as we do--as we could. That study is completed. A draft, I think, was made available to your staff last week.
We have come up with a proposal for registration. It is narrowly designed, and we think that it probably will result in perhaps fewer than 10,000 actual registrants because we would rather register the industry business, the major business, rather than the sub-agents, except in certain circumstances.
Take Western Union, for example, who has 45,000 agents or something like that. That would be a major burden.
So what we want to do, and it took us awhile to craft this, was have a way that we would create a registration for Western Union that would be sent to us and a registration that would be a recordkeeping requirement within Western Union that would be available to law enforcement and regulatory oversight.
Page 52 PREV PAGE TOP OF DOC We think we have worked our way to begin to have crafted that. We had discussions as long ago as 18 months ago. Indeed, we even had a draft of a form, registration form, but our problem was one of definition.
That is the reason that this Act was passed in the fall of 1994, and in the spring of 1997 I am telling you that probably within the next month a proposed rule will be out. We have drafted it, had an opportunity to brief in some detail both the Under Secretary and the General Counsel on it, and I think we have done as good as we can at the first set, but we do need to continue to work with the industry.
We have had very good working relationships, and I mentioned Western Union, but with Money Gram and American Express and others who are the large organizations, very much committed to setting in place anti-money laundering programs here.
Again, we want to focus our attention on the problem and we want to maintain the kind of good working relationships that we have established with the industry in other areas.
Chairman BACHUS. All right. Now, you know we basically are discussing two things here. One is registration and the other is the special requirements of recordkeeping and transaction reporting.
Mr. MORRIS. Right.
Chairman BACHUS. You were talking somewhat about the second thing, which is the recordkeeping and the record reporting, the reporting of transactions.
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Now, let me focus on that one for a minute. How necessary is that? I mean, you were talking about how we wanted more regulation. My question really was about the registration. The GTO, the targeting, the monitoring of these institutions, some ability to monitor them, as with the GTO, you know, that is a possibility. And also you were mentioning with registration that the penalties may be so high in certain cases that it eliminates an option.
We would hope that you would come back to us sometime, or the Treasury would, and report whether there may be problems with certain provisions of the law; we would like to do this but this provision of the law gets in the way of doing that; if it didn't say this, we would have better options.
I would invite, first, for you to tell us where you have a problem with the law, not here today. But also would you comment on maybe whether you have looked at just a monitoring requirement or use of this GTO-type thing as opposed to a broader regulatory scheme?
Mr. MORRIS. Yes. What we----
Chairman BACHUS. Do you understand the question?
Mr. MORRIS. Yes, I think so.
Yes, we have looked at this. At present, these businesses, when they transact above $10,000, are subject to the same reporting requirement as are banks. And it is important to note that they also have the same reporting requirement. But we don't really know who they are. It is very difficult for us to discipline that system.
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Also, the nature of their business is different and we really need to tailor our regulatory approach and our working relationship differently.
These businesses provide a very, very valuable service. Banks have left a lot of our inner cities, for example, and a lot of our rural areas. And so that the only financial services available to a lot of people are the check cashers or the money remitters who are not the Bank of Americas and the Citibanks and the like.
So what we are trying to do is establish a registration system that is sensitive to the fact that these are small businesses, and then begin to do the second part of this, which we think is important, and that is some mechanism for suspicious reporting.
So that if they see people coming in and purchasing--the same person purchasing--a whole series of $1,000 money orders, that they view as a money laundering activity, that they have an obligation and a duty to report. We think that is fair. The banks have that obligation. They have that.
But we think we should do that in a way that recognizes that these are small businesses operating, in many cases, you know, in providing multiple services.
In a third area, we believe, at present, and again it is something we need to talk with the industry about, but we think that cash-purchased money remittances going offshore deserve special attention. That has been our experience in GTO.
Page 55 PREV PAGE TOP OF DOC The value of the Coopers and Lybrand study was we determined that the average purchase in cash is about $300. Most people don't go in and put $3,000 down and say, ''Send this off, in cash,'' to somebody.
So we are looking at a reporting requirement that would be different for money remitters than it is for banks, because there is no customer relationship. And the experience we have had is that a large percentage of the activity we saw in New York, and we see no reason why this wouldn't apply in a lot of other areas, was for money laundering purposes because these were operating outside of a fair set of standards.
So we are very sensitive to the concerns, as this subcommittee has been, in making sure that we take our regulatory responsibilities with the sensitivity and the burden reduction orientation that I think we all share. And I think we can design a system that does not impose significant burdens and, in fact, helps the professional parts of these businesses squeeze out the illegal activity, which is a small part of it. Because of the size of the business and the fact that it has largely been unexamined at least at the Federal level and only partially examined at the State level, regulation will bring a greater professionalism to the business but not increase their costs in any way that would affect their ability to provide the important services that they do.
Chairman BACHUS. Good. Thank you. That concludes my oral questions to you. I have about four or five written questions I am going to submit to you. One concerns the Money Laundering Suppression Act mandate from Congress or request that the National Conference of Commissioners on Uniform State Laws work with the States in developing uniform State laws regulating the NBFIs, and what your participation in that may be.
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I also want to ask you, you mentioned the CTRs and exempting part of the industry, and I want to make some inquiries into that.
Third, I am just trying to think--know your customer, that the Fed has developed, I have a question or two on that. And the final thing is the IRS, some of the questions that this hearing is about--maybe what your involvement is and sharing that information.
Mr. MORRIS. OK.
[The information referred to can be found on pages 56 and 92 respectively in the appendix.]
Chairman BACHUS. With that, Ms. Waters, do you have anything?
Ms. WATERS. I have no further questions.
Chairman BACHUS. OK. This concludes the hearing. We very much appreciate, as I said earlier, your cooperation with us, and your participation. Thank you very much. I commend you for your work. I know it is complicated. Thank you.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[insert offset folios 31 to 126 here.]
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