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REVIEW OF A TREASURY DEPARTMENT STUDY OF CASH SURPLUSES AT THE SAN ANTONIO BRANCH OF THE DALLAS FEDERAL RESERVE BANK
THURSDAY, MAY 15, 1997
House of Representatives,
Committee on Banking and Financial Services,
The committee met, pursuant to call, at 10:35 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach [chairman of the committee], presiding.
Present: Chairman Leach, Representatives Bachus, Lucas, Metcalf, Barr, Paul, Weldon, Gonzalez, Schumer, Vento, Flake, Waters, Maloney of New York, Velázquez, and Kilpatrick.
Chairman LEACH. The hearing will come to order. The committee meets this morning to examine whether a $3 billion cash surplus at the San Antonio branch of the Dallas Federal Reserve Bank is tied to drug-related money laundering along the Texas/Mexico border.
Let me say at the outset that the impetus for this hearing was a request from the distinguished Ranking Member, Mr. Gonzalez, who has so distinguished himself in his dedication to combat money laundering. Mr. Bachus, who has emerged in this and the last Congress as a preeminent authority on money laundering issues, strongly concurred that the issue under discussion today should be considered at the full, rather than the subcommittee level.
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Mr. Gonzalez has reported that the Federal Reserve, FinCEN and IRS have been unable to adequately explain the cause of what he described as a startling increase in surplus currency in the San Antonio branch of the Dallas Federal Reserve. Although the IRS and FinCEN have identified a variety of the nine economic and political factors that may contribute to the surplus, some in law enforcement suspect that excess cash is ultimately linked to the laundering of drug-related money.
We are here today to test that thesis and discover from our witnesses what, if any, causal relationship can be established between criminal money laundering and large cash surpluses in banks, and whether U.S. Government agencies have the necessary tools to answer definitively the questions raised.
Money laundering is a pernicious manifestation of criminal activities, and the scale of illegal business worldwide can be judged by the fact that international experts have estimated that nearly half-a-trillion dollars a year is laundered by those engaged in criminal misconduct. Despite the enactment of major domestic anti-money laundering laws, stiffer criminal penalties and increased reporting requirements, criminal syndicates still find ways to legitimize the proceeds of their illegal activities. The decision of the Houston jury in March, linking millions of dollars in the Texas bank account of former Mexican official Mario Ruiz Massieu to drugs, demonstrates the continued vulnerability of the U.S. banking system to money laundering activities of Mexican origin.
It is hoped that as a result of Congressional action to increase our domestic arsenal of money laundering countermeasures, American banks will become a progressively less attractive means for drug money laundering attempts. Unfortunately, financial institutions in other parts of the world, from Mexico to Russia and beyond, are increasingly becoming beltways for money laundering rather than legitimate institutions for traditional deposits to be made and loans provided.
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As a result, some American banks, particularly in gateway locations such as Texas, stand to be, at best, unwitting harbors for drug profits already laundered abroad.
It is no secret that some drug traffickers, seeking to avoid the net of U.S. antilaundering measures, simply ship bundles of cash south over the Texas border for delivery to unquestioning Mexican banks. In fact, just last month, Customs Service inspectors in El Paso seized $5.6 million in U.S. currency hidden in a hidden ceiling compartment of a Mexico-bound tractor-trailer. The Customs agent in charge said that hidden currency in this quantity ''is more than likely drug money.''
Clearly, Mexican citizens who profit from the illicit drug trade must be held accountable by the Mexican Government. But at the same time, we in this country must also take responsibility for this 20th Century scourge and our role in sustaining it.
We have recently seen how successfully the United States and Mexico can work together on a matter of urgency. Two years ago, the United States stepped forward amongst great controversy to provide an unprecedented financial rescue package for the Mexican economy and the Mexican peso. Early this year, and 4 years ahead of schedule, Mexico closed its books on this rescue package, which incidentally produced a half-billion-dollar profit for the American taxpayers.
Thus, Mexico and the United States were mutual beneficiaries of this arrangement.
In this context, it is incumbent on those of us north of the border to recognize how impressive the new Mexican Government's commitment to a more disciplined macroeconomic policy has been. All governments and central banks can be criticized for not doing better, and while economic conditions remain difficult for many Mexicans, few expected Mexico to lay the basis for renewed economic growth as rapidly as has occurred. It is my hope that the same kind of partnership that led to the successful conclusion of the peso crisis will become the hallmark for joint efforts to resolve other problems of mutual concern, such as the trafficking of illicit drugs and the laundering of profits from it.
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In closing, I would like to add that the full committee and the Subcommittee on General Oversight and Investigations, which is chaired by our distinguished colleague Mr. Bachus, held several hearings on money laundering in the 104th Congress and have continued this work in the current Congress. Two hearings have been held recently to examine aspects of the Treasury Department's anti-money laundering efforts. Chairman Bachus has laid out an impressive record with respect to Congressional oversight on this problem.
Appearing before the committee today are several Executive branch witnesses, including Treasury Assistant Secretary for Enforcement, James Johnson; FinCEN Director Stan Morris; IRS Deputy Assistant Commissioner for the Criminal Investigation Division, Edward Federico; and State Department Deputy Assistant Secretary for International Narcotics and Law Enforcement, Jonathan Winer.
We will get a nongovernment perspective from our second panel consisting of Mr. Jack Blum and Mr. Charles Saphos, both of whom bring to bear considerable expertise on the subject.
Chairman LEACH. At this time, I yield to our distinguished colleague Mr. Gonzalez for an opening statement.
Mr. GONZALEZ. Thank you very much, Mr. Chairman, and thank you for your leadership in these hearings.
I consider this a very important hearing. This so-called money laundering question is something that I go back on for many, many years; I guess from the very first time I became a Member of this committee. I think that as today's hearing will show, I continue to be, and intend to in the foreseeable future, involved in this work.
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It wasn't too long ago that criminals of all kinds, of all stripes, colors, could walk into a bank, deposit the profits from their dirty deeds without even a wink from law enforcement. Nevertheless, stronger laws and a sound partnership between law enforcement and the banking community have forced the criminal to resort to other methods of concealing the dirty cash.
Our progress is clear. Banks are now full partners in the fight. Their costs of compliance and self-policing are lower, and law enforcement is successfully fighting the new types of money laundering enterprises, such as the currency exchangers and the wire remitters. With the help of our law enforcement agencies, we devised the best anti-money laundering tools a government could possibly have.
The results, I believe, are encouraging. However, it is no secret that criminals are more adaptable to changing conditions than government. While we have significant cooperation from the United States financial institutions to deter money laundering inside our borders, drug traffickers routinely smuggle billions of dollars in cash out of the United States, especially across our Southwest border. These same U.S. institutions that comply fully with U.S. law repatriate cash, including an unknown amount smuggled out and laundered abroad, in the normal course of business, through corresponding banking relationships with Mexican banks.
I emphasize, no one really knows how much repatriated cash is laundered drug money.
The witnesses today will tell us that billions of dollars leave the country illegally each year, and that billions return after already having been laundered in Mexico. We will also hear that nearly half of the surplus currency coming into San Antonio, my hometown, the Fed member banks there, originates on the Mexican border. And last, we will hear that Fed cash surpluses have many plausible explanations.
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According to FinCEN, the cash surpluses may not be, in and of themselves, money laundering. What these surpluses tell you, however, is that a great deal of unexplained cash is moving through a particular area.
All of these issues raise important questions about the future course of our fight against money laundering. We hope to address them today, at least many of them.
There are also some egregious cases that demand scrutiny, particularly the ones where law enforcement has been duped. Take the case of the former Mexican drug prosecutor Mario Ruiz Massieu, whose courier made 24 deposits of $200,000 cash each at a bank in Houston. Illegal? Well, not necessarily. Suspicious? You bet your life.
The bank did its job. It reported ten of the transactions as suspicious, but law enforcement seems to have missed the boat. Not one law enforcement agency raised an eyebrow over these transactions. Why not? The answer came to light in a civil trial much later that the nearly $9 million deposited by Mr. Ruiz Massieu was linked to the narcotics trade in Mexico. Clearly, a case such as this one poses a serious challenge to our regulatory system. It also raises questions about our enforcement efforts.
We are here today to find the best way of dealing with these challenges. Today's hearing is a culmination of months of work on the part of FinCEN and the IRS to better understand mass currency flows from Mexico to the United States and their links to money laundering. I asked the Treasury to examine this issue in the context of a $3 billion cash surplus at the San Antonio branch of the Federal Reserve. The Fed surplus presents a test case for FinCEN, an opportunity for the Agency to show the world its ability to conduct proactive work, put itself on the forefront of money laundering trends.
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As our Nation's, and probably the world's, foremost anti-money laundering outfit, we have high expectations that FinCEN can meet these great challenges. If our statutes need to be adjusted to keep up with changing conditions, then let us explore the best ways of doing so. That is our fundamental job anyway.
Mr. Chairman, I want to commend you for holding this hearing and look forward to hearing testimony from the witnesses. And I am very grateful to you.
Chairman LEACH. Well, thank you, Mr. Gonzalez.
We will next hear from the distinguished Chairman of the Oversight Subcommittee. And let me say, I don't think anyone has dedicated more time to this issue recently than Chairman Bachus, and we are very appreciative of his efforts.
Mr. BACHUS. Thank you, Mr. Chairman and Mr. Gonzalez.
First, I would like to take this opportunity to thank Chairman Leach and Mr. Gonzalez for their consistent interest in money laundering issues. It is a primary task, or one of the primary tasks, of this committee to ensure that law enforcement places the proper emphasis on money laundering, and that it has the necessary tools to eradicate it. And I will say that Mr. Leach and Mr. Gonzalez have done much to ensure that this committee is meeting its responsibilities.
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Over the past year, as you said, Chairman Leach, the Oversight Subcommittee, which I chair, has held a series of hearings examining various money laundering problems. Last September, the Oversight Subcommittee reviewed the problem of money laundering associated with the U.S./Mexico border. I would like to thank Mr. Johnson, Mr. Morris and Mr. Winer for their cooperation in those hearings, supplying us a lot of information, being very cooperative, and Mr. Kelly; also Mr. Johnson.
The U.S. law enforcement agencies estimate that the amount of cash laundered through Mexico each year ranges from $10 to 30 billion. At the September hearing, the subcommittee learned that the vast majority of these illegal proceeds are laundered through the process known as ''cash smuggling.'' ''Smuggling'' is something of a misleading term, however. All drug dealers have to do is simply load up a truck in Los Angeles, Chicago, or my hometown of Birmingham, and drive it to and across the border into Mexico. At the September hearing, the Commissioner of Customs, Mr. George Weise, indicated that traffickers using this method faced virtually no chance of getting caught. They often don't even slow down at the border.
I was also disturbed to learn, at the time of that hearing, that Customs has dedicated virtually none of its resources to stopping this ''outbound'' smuggling of cash.
Why do the drug traffickers do this? It is very simple. Although Mexico has money laundering laws in place, they are not enforced with the same rigor that similar laws in the U.S. are. It is very easy for drug traffickers to deposit large quantities of cash in Mexican banks. Once in the financial system, the cartels have many options. They can spend their cash, they can send it on to Colombia and other source countries, or they can wire it back to accounts in the U.S. to fund their trafficking and drug operations here.
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I commend Representative Gonzalez for asking the Treasury Department to study cash surpluses. There has been a long-standing assumption in the law enforcement community that these cash surpluses at regional Federal Reserve banks are the direct result of money laundering. However, from what I understand, the Treasury Department representatives before us today will state that is not the case.
The reason is obvious. Once the traffickers cross our border into Mexico with their drug proceeds, they have won the battle. When we get the currency back from Mexico and it ends up in Federal Reserve banks, it is too late. The money is laundered, and there is no way that we are going to figure out whether the money was originally clean or dirty money.
At last September's hearing, Deputy Assistant Secretary Jonathan Winer, who is here to testify today, stated, and I quote: ''The porous 2,000-mile border between the U.S. and Mexico allows bulk cash to be smuggled out of the U.S. and into Mexico with relative ease. Because Mexico is only now developing suspicious reporting and large currency transaction reporting requirements, these illicit proceeds have been placed into Mexican banks and non-bank financial institutions with virtual anonymity.''
I hope we will learn today whether anything has changed since last September's hearing. Unfortunately, I am not confident that we will hear that any progress has been made, and there are several reasons for this.
Mr. Morris, who is testifying this morning, has appeared before the Oversight Committee several times recently. At last September's hearing on Mexican money laundering, he commented that Mexico is still unwilling to undergo an evaluation of their money laundering safeguards, and therefore was not permitted to join the Financial Action Task Force. FATF is the leading international organization dedicated to promoting the adoption of anti-money laundering provisions. The decision by the Mexican Government not to cooperate with FATF hardly seems like the course of action a country legitimately concerned with combatting money laundering would choose.
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Another reason I am pessimistic about the money laundering problem in Mexico is the simple reality that, even assuming the Mexican Government wants to get tough on money laundering, it will still be many, many years before Mexico achieves the stability and infrastructure necessary for it to clean up its banking system.
As a result, if we are going to get tough on Mexican money laundering, we are going to have to do it on our side of the border. We always hear a lot of talk from Mexico, but, as the saying goes, ''Actions speak louder than words.'' It is for these reasons that I joined with many of my colleagues in Congress in asking President Clinton not to certify Mexico as a cooperative partner in the war against illegal drugs.
Today we should ask three questions. One of the responsibilities of this committee is to make sure that the Administration is doing all it can to address the money laundering problem. We must ascertain, first, if the State Department is being realistic in negotiating bilateral agreements with a country with a history of corruption such as Mexico. We must know if the Treasury Department is using powerful tools, such as the International Emergency Economic Powers Act, sanctions to control money laundering originating in Mexico. To my knowledge, they are not. We must determine if FinCEN is using its vast array of computer technology in the most efficient manner to deal with money laundering. Hopefully, we will be able to answer some of those questions here today.
As I have said in the past, criminals don't commit crimes as a public service. They do it for the billions in profits they rake in. If we are to eliminate their motive, we must hit their bottom line: Their profits. To do so, we must crack down on money laundering.
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Nothing that I said in my statement today is meant, or should be taken as denigrating the efforts of our law enforcement agencies, or the agencies that are appearing before us today, or these witnesses that are to testify. I am fully aware that you have a difficult task, and you have limited resources.
What I do want to stress is that we have to be realistic. The bottom line is we are not getting much cooperation from Mexico.
Chairman LEACH. Thank you, Chairman Bachus.
Does anyone else have an opening statement?
Ms. WATERS. Mr. Chairman, thank you very much for calling this important hearing to examine the cash surplus in the San Antonio Federal Reserve Bank and the question of whether this cash surplus and others like it in other Federal Reserve branches may be an indication of money laundering activity.
I would also like to thank Ranking Minority Member Henry Gonzalez for his consistent leadership on the money laundering issue and his work to ensure that the 1994 revisions of Federal money laundering statutes are successfully implemented.
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I am pleased to work with the Chairman to focus on the San Antonio Fed surplus as a way to review the effectiveness of the government's money laundering investigatory apparatus.
I would like to thank Mr. Bachus for his leadership and his generous cooperation working with me to explore some of these issues.
What we can learn from this hearing focused on Texas has major implications for the rest of the country as well, and especially the border States like my home State of California. While the Federal Reserve Board reported a $3.2 billion cash surplus in 1996 at the San Antonio Federal bank in Los Angeles, for the same year they reported a cash surplus of more than $14.3 billion.
I am particularly interested in the opportunity we have at this hearing to discuss the movement of huge amounts of money across our borders that may represent money laundering activities. The same report from FinCEN that estimates some $2.5 billion in total currency in 1996 was repatriated from Mexico through San Antonio Federal Reserve member banks estimates that in California $4.2 billion came across the Mexico/California border into Los Angeles member banks.
The existence of such a cash surplus may not provide definitive proof of money laundering activities, but combined with the evidence of billions of dollars that flow across the border into the Federal Reserve member banks should set off alarm bells. This issue deserves close scrutiny.
I have spent a large amount of my time over the past year and a half on the subject of the devastating drug trade in our communities, specifically focusing on the activities of a Mr. Danilo Blandon and Norwin Meneses, who were engaged in the crack cocaine trade in South Central Los Angeles during the 1980's as a means to fund the Contras.
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Through my work, I have become aware of the nature of the relationship between drug smuggling and money laundering and the critical need to focus on money laundering in our fight against the scourge of drugs in this country. Specifically, I have been looking at the activities of Mr. Orlando Murillo, a Nicaraguan national who has been identified as the principal money launderer for Mr. Blandon and Mr. Meneses.
I have found that the investigation of money laundering activities is difficult and requires the work of sophisticated investigatory agencies. We located Mr. Murillo in Nicaragua, where he had been appointed to head one of the agencies of the Nicaraguan Government. This money launderer, identified in a number of DEA reports, was now responsible for receiving foreign support money for Nicaragua and investing that money in private companies and setting up additional companies for the privatization efforts of Nicaragua. Mr. Murillo knows very well how to set up companies. That's what he did so well in the United States in his money laundering efforts.
The activities of agencies like FinCEN and law enforcement agencies in the area of money laundering are essential in pursuing a successful strategy to fight drug trafficking and money laundering.
I look forward to the opportunity to hear from our panelists and to discuss the ways in which we can more effectively identify and take action to combat and prevent these dangerous and deadly activities.
Mr. Chairman, I would like to take this moment to focus both the Chairman and the Ranking Member and the Chair of our Oversight Committee on the fact that Citibank is now under investigation, accused perhaps of laundering over $200 million of money placed in the bank by the brother of the former President of Mexico, Mr. Salinas, Mr. Raul Salinas. And that investigation is going to be very instructive for all of us. We need to pay attention to this investigation and understand why it was possible for Mr. Raul Salinas to deposit this amount of money in Citibank with no questions asked.
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But we also need to take this opportunity to commend Chase Manhattan Bank. Mr. Salinas first took the money to Chase Manhattan Bank. They turned it down and would not take it, and we need to give credit where credit is due and find out why Citicorp, in fact, took the money.
So, while that is not the subject of this hearing today, it is the subject of a further investigation, and I look forward to working with the Chair of our Subcommittee on Oversight and Investigations as we look at these critical issues.
I am convinced we will not be able to stop the drug trafficking until we tackle the money laundering. If we can cut off the profits from drug trafficking, we can stop drug trafficking in our society.
I thank you very much, Mr. Chairman.
Chairman LEACH. Well, thank you very much, Ms. Waters.
Let me just say briefly in response, the Chair is very aware of your personal dedication to this issue and the extraordinary efforts you have made to lead a caucus in the United States Congress to make this the highest priority.
The Chair is also very aware that you have raised some issues of CIA complicity, at least its' possible complicity, and I would simply report for the record here that a comprehensive bipartisan investigation is underway within the House Select Committee on Intelligence, headed by Porter Goss, as well as Inspectors General of both the CIA and the Justice Department. A comprehensive inquiry is underway. If there are any aspects of that at an appropriate time that fall through the cracks that fit our committee's jurisdiction, we will look at it. But, only time will tell. But, we will listen very attentively to your concerns in large measure because you have become such an expert at your own personal volition.
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Does anyone else have an opening statement?
Yes, Mr. Metcalf.
Mr. METCALF. Thank you, Mr. Chairman. I will be very brief.
I want to thank the Chairman for holding these hearings and also thank Ranking Member Gonzalez for his work on this important issue and for bringing it before the committee.
Clearly, Mr. Chairman, we need to understand what is happening at our Southern Federal Reserve banks. We have already had staff from this committee investigate the huge cash surpluses at the Los Angeles Federal Reserve branch. Questions need to be answered also about the surpluses at the Miami, Jacksonville and San Antonio banks. One would certainly suspect that a correlation exists between the geographic location of these institutions and illegal narcotics activity.
I know that both Treasury and the IRS have focused time and effort on these questions. I look forward to the comments from our friends at Treasury and IRS, and I look forward to the opportunity for questions.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Metcalf.
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Ms. VELÁZQUEZ. Thank you, Chairman Leach and Chairman Gonzalez, for convening this latest hearing on the problem of money laundering. Although we will focus on San Antonio and other border cities today, everyone should know that these criminal enterprises have worked their way into almost every city across this country.
Before I begin, though, I would like to thank Under Secretary Johnson, Mr. Morris, Mr. Federico and Assistant Secretary Winer. Your agencies' coordinated efforts to combat money laundering through the El Dorado Task Force in Jackson Heights, Queens, made the streets in my district safer. Please keep up the good work.
My colleagues, New York City enjoys the distinction of being the financial capital of the world. Unfortunately, it also enjoys the dubious distinction of being a major money laundering center as well. Money laundering doesn't, however, confine itself to the gleaming skyscrapers of Wall Street or Midtown. The reality is that it is attracted to low-income and immigrant communities like the ones I represent.
In fact, there is a section of Roosevelt Avenue in Jackson Heights that prosecutors and investigators call ''ground zero.'' That neighborhood is home to many hard-working, low-income families. The tragedy is that it is also home to an exploited wire remitter industry that transfers up to $1.3 billion in illegal drug proceeds to South America.
The legitimate companies struggle to provide valuable services to the poor and immigrant families in those neighborhoods, neighborhoods that do not have easy access to banks and other financial institutions. Meanwhile, criminals set up shop in businesses ranging from beeper outlets to travel agencies to corner convenience stores. They do not bring investment dollars or a better way of life to my constituents. They bring drugs, fear and danger.
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Continuing initiatives like El Dorado and helping countries improve their anti-money laundering efforts are a huge step in ridding communities like Jackson Heights and East Elmhurst of these criminals, but consider the sheer size and the changing nature of money laundering enterprises, and consider the burden on local law enforcement officials.
Local police departments and prosecutors are expected to battle crime networks with budgets bigger than some States. They must fight crime syndicates that can relocate anywhere at any time.
At past hearings I have told stories about the crime-fighting efforts of Queens District Attorney Richard Brown. He and his fellow prosecutors have been in the trenches battling the cartels and winning. They have the ingenuity and energy to stamp out these criminals enterprises, but they need our help.
It is time for Washington to reach out and become a real partner in this war. Everyone combating this financial crime has to be brought to the table and consulted. Efforts must be coordinated and stronger relationships formed with those fighting on the front lines.
Most importantly, greater attention must be paid to areas at high risk of money laundering activity. Participation by local law enforcement and even the private sector in those areas must be fostered. If localities are going to keep winning, they have to have all the best tools.
Mr. Chairman, and Mr. Gonzalez, thank you again for holding this hearing and focusing the Nation's attention on an issue that truly affects the quality of my constituents' life. I look forward to today's testimony and hope that we can come up with some real solution to the widespread money laundering that plagues New York, San Antonio and other communities. Let me remind all of you, money laundering, drug trafficking and related crimes just don't impact New York or San Antonio or Los Angeles. They impact all Americans. By working together, we can make all of our communities safe and crime free.
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Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Ms. Velázquez.
Does anyone else on the Republican side wish to make an opening statement?
Ms. KILPATRICK. Thank you, Chairman Leach, for your leadership and for calling this hearing. Drugs remain the cancer of America, and whether this country will be great as we move to the new millennium really depends on what we will do with the drug crisis. And to our Ranking Member, Mr. Gonzalez, for your leadership, sir, over all these years, for providing the wisdom that we need to excel as people.
Since joining this Congress, I have been a member of the Drug Caucus, which is a bipartisan caucus here in the Congress; have attended several meetings where General McCaffrey, the Admiral of the Coast Guard, and others have presented to us, and at our most recent meeting last week, they told us that 850 megatons of drugs are leaving other places, coming to America; that is 600 megatons get into this country; that they are only able to stop perhaps, and they estimate 20 percent, which means that 80 percent of the drugs destined to America get here. I am bothered by that.
I am happy that we are having this discussion, and I want all of us to continue on this. America, again, cannot be great unless we deal with it. The money laundering, as has been said before me, must be stopped. We can do this. I consider it a national emergency, and I want all the force of America behind it.
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It is important to me that we have a Customs Department within the Department of Treasury who does a good job, that people are dedicated there. But when I read reports that over a million trucks come across these borders and that armored trucks are categorized in the ''truck'' category, and not having them in a specific category, that bothers me, because, though we have put limits in reporting requirements on $10,000 transactions on the one hand within our country, we turn around and let armored trucks come right through the borders, counted as other trucks.
I am anxious to hear what we will be talking about this morning. I commend Chairman Leach and Congressman Gonzalez for their leadership on this issue. We must do something about the drug trade in this world. America is where all the drugs are shipped; 600 megatons get in here. Money laundering. We can do it.
I am looking forward to the testimony. Thank you very much.
Chairman LEACH. Well, before turning to the panel, I want to make just one other quick observation; that is, in noting that the influence of druglords is perhaps too endemic in the Mexican political process, I think it is important for this committee to recognize that based on the number of murdered Mexican police officers for attempting enforcement, there has been great heroism in some parts of the Mexican police community.
Second, in the background is the United States, where we have not done a very good job at dampening demand.
Finally, I would stress that this hearing may, thus, relate to law enforcement problems in the U.S. and Mexico, but we are looking primarily at the enforcement of the United States laws here.
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Let me begin with Mr. Johnson and also with an apology to Mr. Winer, whose name I mispronounced when he was first introduced.
STATEMENT OF JAMES E. JOHNSON, ASSISTANT SECRETARY FOR ENFORCEMENT, DEPARTMENT OF THE TREASURY
Mr. JOHNSON. Thank you, Mr. Chairman.
Mr. Chairman, Congressman Gonzalez and distinguished Members of the committee, good morning. Thank you for providing me with the opportunity to appear before you today to discuss money laundering on the Southwest border.
Seated here with me is Edward Federico, who is the Deputy Assistant Commissioner of the Internal Revenue Service's Criminal Investigation Division; and Stanley Morris, who is the Director of the Financial Crimes and Enforcement Network.
With your permission, Mr. Chairman, I would ask that Mr. Federico's testimony, as well as the longer version of my own testimony, be included in the record of these proceedings.
Chairman LEACH. Without objection, that will apply to all of our witnesses.
Mr. JOHNSON. Within the time allowed, I would like to summarize my longer statement.
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Along with Mr. Morris and Mr. Federico, on behalf of Treasury, I will be happy to answer any questions you may have at the conclusion of the opening statements.
I would like to discuss three things: First, the principal findings of the IRS study of the cash surplus in the San Antonio Federal Reserve area. Second, I plan to address some of the implications of the study for our counter-money laundering programs. And finally, I will report on recent developments in Mexico's anti-money laundering capabilities and the effect that these developments should have on our joint efforts.
The most significant findings of the studies were as follows: First, the existence of the cash surplus, in and of itself, does not indicate drug-related money laundering. Several factors account for the surplus, and some predate the escalation of the drug trade. Indeed, the San Antonio Federal Reserve District has run a surplus every year since at least 1951, arguably more than 15 years before drug trafficking reached its current level in Mexico, and more than 30 years before money laundering was a crime in this or any other country in the world.
Second, one of the most significant impacts on the cash flow in the San Antonio Federal Reserve District was an affirmative campaign by south Texas banks in 1993 and 1994 to solicit currency shipments from Mexican financial institutions. Prior to 1993, U.S. currency was sent by Mexican banks to various large money center banks located mainly in the New York Federal Reserve district, and to a lesser extent, South Florida. The south Texas banks embarked on this campaign to expand business opportunities with Mexican banks.
Third, Mexican banks have increased their currency shipments to south Texas banks. An analysis of 1995 Bank Secrecy Act data indicates that banks in the San Antonio Federal Reserve District filed Currency Transaction Reports reflecting currency deposits of approximately $8.8 billion. Of that amount, at least $2.05 billion, almost 25 percent, was received from Mexico. Approximately $1.68 billion of that amount represents transfers of bulk currency from the three largest Mexican banks to U.S. banks.
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Fourth, tourism and retail sales can affect cash activity in the San Antonio Federal Reserve District as well. The North Atlantic Free Trade Agreement, or NAFTA, however, the IRS has found, has had little or no impact on cash activity.
Finally, and I think we all recognize, the IRS hypothesized that based upon its investigative experience along the Southwest border and that of other Treasury bureaus, some portion of the currency in Mexican banks that is being repatriated to the San Antonio Federal Reserve District was at one time in the hands of narcotics traffickers. Unfortunately, no information was available to the U.S. banks or to law enforcement about the source of the funds already placed in Mexican financial institutions to determine the legality of the funds or their sources.
Just as in the U.S., the placement of physical currency into the financial system begins the process of eroding the link between laundered money to its criminal origins. These were the principal conclusions of the study.
At this point, I would like to talk about some of the broader implications.
Money laundering is often understood as occurring in three phases, phase one being placement of funds into a banking system. Phase two involves layering of the funds; that is, engaging in multiple transactions to disguise the original source of the funds. And finally, phase three involves the integration of the funds into regular commercial channels with the appearance of legitimacy.
Page 23 PREV PAGE TOP OF DOC As Mr. Gonzalez pointed out, 20 years ago drug dealers and other criminals could waltz into any bank in this country and deposit satchels of money with little fear of detection. Today, through enforcement of the Bank Secrecy Act regulations, America's banks have raised significant barriers and virtually closed avenues for the wholesale placement of criminal proceeds.
Mr. Chairman, this committee shares much of the credit for strengthening the BSA enforcement regime. This committee supported amendments to the Bank Secrecy Act that have closed loopholes and have expanded the scope of our regulatory authority. Today the U.S. system of anti-money laundering regulation is among the most stringent and effective in the world.
We can do more. We have found that as free access to U.S. banks for initial cash placement has been denied, the criminals have been forced to seek other paths to launder their funds. As a result, banks in other countries where controls are less stringent, or nonexistent, have become targets for initial cash placement.
The relationship between foreign banks and their U.S. counterparts highlights the limitations of the U.S. regulatory efforts to prevent and detect money laundering. While the BSA may be extremely effective at preventing and detecting initial cash placement, and even subsequent layering transactions within U.S. institutions, it is much more difficult to prevent the introduction of funds already placed with financial institutions in other nations.
Once illicit proceeds have been placed with a financial institution in a foreign country and their criminal origins obscured through intervening transactions or commingling, U.S. financial institutions and law enforcement authorities are hard-pressed to identify the funds as suspect when they arrive in the U.S.
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Mr. Chairman, to effectively counter the problem, we must rely, to a certain extent, on the existence of effective controls in the country of origin. Without such controls we encounter the same kind of difficulties identified during the IRS studythat is, we will have difficulty identifying the source of the funds and coming up with definitive answers on bank-to-bank transfers, for instance, from Mexico. More generally, without effective cooperation from law enforcement authorities and financial institutions in the countries of origin, our ability to address foreign-born money laundering is hampered significantly.
Recognizing that effective money laundering controls in the U.S. are but one part of the equation and an essential part of the equation, the Treasury Department, along with the Departments of State, Justice and the Office of National Drug Control Policy, have been working with the Government of Mexico to enhance its own capacity to combat the problem. This work has produced some significant results. Things have changed since the last hearing was held on this particular issue.
We think that over time these results, these changes, should provide additional answers to the questions that the IRS study raised, and, more importantly, they should enhance our ability to combat money laundering that is sourced in Mexico. In the last year, the Government of Mexico, with our support, has criminalized money laundering, establishing a wide range of predicate offenses and enhanced penalties.
The Government of Mexico has recently implemented new regulations designed to do two things: one, to insulate Mexican financial institutions, banks as well as casas de cambio, from money laundering; and two, to facilitate the investigation and prosecution of money laundering cases. The new regulations are an important step, and we look forward to working with the Mexicans as they build on this new regime. They have made an important step in this area, but we feel that more can be done. We are confident, based on their rapid progress in certain areas, that more will be done.
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With State Department funding, the Mexican Treasury Department, Hacienda, has put in place the elements of a financial intelligence unit designed by the Financial Crimes Enforcement Network which, when fully functioning, will be able to process the new reports that are required under regulations that just went into effect on May 2nd.
New rules and laws would be without any value at all if they are not effectively enforced. To this end, we have assisted the Government of Mexico with institution building. The IRS and FinCEN have provided training to Mexican investigators from Hacienda and from the Mexican Attorney General's office within the last 6 months. They have been trained in the investigation of money laundering cases and the processing of the reports that they will receive under the new regulations. The Department of Justice has offered to provide training to Mexican prosecutors in the conduct of money laundering investigations. Moreover, there have been notable joint investigative efforts, prosecutions and seizures.
I recognize that there are significant major shortcomings along with these successes. I share the concern that this committee undoubtedly harbors that corruption continues to threaten the integrity of Mexican anti-narcotics efforts. Still, our intolerance for setbacks should not obstruct or view of the tangible progress Mexico has made on this important issue. We are heartened by some of the recent developments in Mexico. At the same time, we will continue to work diligently with our Mexican counterparts to ensure that Mexico capitalizes on the momentum generated by recent advances using the new weapons at their disposal to prevent money laundering, and to bring swift and certain prosecutions against money launderers and to seize their ill-gotten gains.
Page 26 PREV PAGE TOP OF DOC Again, thank you for the opportunity to appear before you, and I look forward to the committee's questions.
Chairman LEACH. Thank you very much, Mr. Johnson.
Mr. FEDERICO. I do not have an opening statement, sir. I will just wait and answer any questions that you have. Mr. Johnson covered all of the aspects of the findings.
Chairman LEACH. Very well.
STATEMENT OF MR. STANLEY E. MORRIS, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK (FinCEN), U.S. DEPARTMENT OF THE TREASURY
Mr. MORRIS. Thank you, Mr. Chairman. I, too, have a longer statement which I would like to summarize.
Chairman Leach, Mr. Gonzalez and Members of the committee, FinCEN appreciates this opportunity to continue the dialogue we began several years ago on the subject of combating money laundering along the Southwest border. Since FinCEN's creation some 7 years ago, this committee has made very significant contributions to our efforts in establishing an anti-money laundering program. It has enacted two major laws in that period.
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As our prevention, detection and enforcement techniques have improved, money laundering has become substantially more complex and more sophisticated. Money launderers are being forced to devise increasingly more time-consuming and costly ways to place their illegal profits into legitimate financial systems. The effectiveness of our regulatory regime and the cooperation of our financial institutions in complying have, in fact, pushed criminals to look beyond our borders for ways to camouflage the real nature of their profits. Large deposits of illegally derived cash can no longer be placed in U.S. banks with impunity. Also, regardless of whether currency is involved, U.S. banks for the last year have been required to file a Suspicious Activity Report if the activity falls outside of normal business patterns and the bank can find no reasonable explanation for it.
The evolution of our efforts to combat money laundering has been characterized by a continual identification and expansion of both tools and relationships necessary to address this problem. However, the progress we achieve by each additional step we take and each new tool we add to our anti-money laundering arsenal is never enough. Money laundering is, by its nature, a constantly mutating process.
In 1994, as a consequence of the growing problem along the Southwest border, Mr. Gonzalez held a field hearing in San Antonio, which examined the merits of expanding FinCEN's network to the State and local level. You may recall that we took that opportunity to announce a pilot effort designed to allow States to have direct on-line access to Bank Secrecy Act data. That program, known as Gateway, was first tested in Texas and has now grown into a premier intelligence research system for State and local law enforcement agencies. Every month, State and local law enforcement query Gateway nearly 5,000 times, giving them the opportunity to link together case information from various sources. Begun in Texas, every State in the Nation is on-line to that program.
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In addition, that hearing illustrated the need for new measures to assist Treasury's anti-money laundering efforts. In fact, several months later Congress enacted the Money Laundering Suppression Act. The legislation, with its emphasis on reducing regulatory burden by making the Currency Transaction Reporting SystemCTRsimpler, strengthening activity reporting, and leveling the playing field between banks and non-banks, laid the foundation for a re-engineered anti-money laundering program. With the authority the committee provided in this legislation, Treasury has developed a comprehensive program designed to engage the financial community in a very constructive partnership. Many of the opening comments made today referenced that.
More recently, FinCEN and other Federal agencies were asked to study the currency surpluses in the San Antonio Federal Reserve Bank to determine whether or not these surpluses reflect money laundering activity. Assistant Secretary Johnson has outlined much of what was found.
FinCEN, through various studies and analysis it has undertaken in the past, has always suspected there to be little relationship between these surpluses and money laundering. Thanks to the outstanding work of the Internal Revenue Service's Criminal Investigation Division, we can now say today definitively that cash surpluses at Federal Reserve banks are not indicators of money laundering.
As I wrote to Mr. Gonzalez last fall, extracting and analyzing gross aggregate financial information is not sufficient to identify money laundering. One of FinCEN's roles is to provide indicators of criminal activity to law enforcement agencies in the field for their review. The feedback from those to whom information is sent is used to determine what, if any, additional assistance FinCEN could provide to develop more long-term strategic intelligence. Our experience has shown that the information we developed from our available law enforcement regulatory financial and commercial databases becomes far more valuable when it is used in conjunction with information from an examination by analysts, law enforcement agents, regulatory and financial officials in the area, who are more intimately familiar with the local issues, entities and economic activity pertinent to their region.
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It was for this reason that FinCEN felt that a thorough examination of the issue of cash surpluses in San Antonio required the expertise of persons in the field and requested that the High Intensity Drug Trafficking Area Task Force in San Antonio assist in this effort. The committee also wrote to IRS Commissioner Richardson, and as a result IRS-CI agents in San Antonio and Phoenix assumed the leading analytic role and began the comprehensive review that has been described to you. The findings from the study will help us ultimately improve the way in which Treasury attempts to measure the magnitude of money laundering and the location of money laundering centers, as well as our efforts to combat the problem.
I think there are several points which merit repeating. First, currency surpluses at Federal Reserve branch banks do not indicate money laundering. In fact, relying on a surplus as an indicator can suggest a problem that might not exist and, perhaps more damaging, suggest that there isn't a problem where one actually exists. I point out the fact that cash deficits exist in large amounts in New York. I think no one here would suggest that money laundering is not a major rampant activity in the City of New York.
Second, while currency flows into a bank do not correspond exactly, in some cases they can contribute to a surplus at a Federal Reserve branch. Such flows are, at the very least, we believe, today, a better analytic tool than surplus figures.
However, I think the most important theme is the recognition that once the physical currency leaves the criminal's possession to an intermediary, be it another person, a peso exchanger, a money remitter or a bank, the paper note has effectively been placed. The nexus between the currency and the criminal is lost. The money is no longer dirty.
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Let me give you an example of how physical currency is placed in the financial institution and then how it is ''layered.'' In a U.S. city, a drug dealer receives U.S. dollars from the sale of narcotics. At this point, the physical currency in his possession is, in and of itself, the proceeds of illicit activity.
He brings the currency to a ''stash house,'' which serves as a collection point for his illicit activity, and perhaps other drug dealers. Some of the money is then used to buy, say, money orders at a non-bank institution, which are then deposited in the drug dealer's bank account in the U.S. The bank then, on behalf of its customer, wires those proceeds from the bank account to Colombia, where the drug dealer's supplier needs to be paid.
The rest of the currency is smuggled across the border in a suitcase or in the trunk of a car, as pointed out by some members. It is deposited into the drug dealer's account at a Mexican bank and then wired to the same supplier's bank account at the Colombian bank.
Let's assume that all of this activity occurs on the same day. During this day, the Mexican bank receives not only the drug dealer's deposit, but also receives additional U.S. currency from numerous legitimate sources. At the end of the day, the Mexican bank has more U.S. currency on hand than it needs for its operations. The Mexican bank ships the excess currency to a U.S. bank, where it has a correspondent account relationship. At this point, there is no information available to U.S. law enforcement or the U.S. bank about the ownership or source of the portion of the currency which originated from that illicit activity.
So, while the nexus between the criminal and the currency may be lost, however, that is not to say that we have hit a dead end. We have other countermeasures to use against this illicit financial activity, those tools that this committee gave us in 1992 and 1994. The measures are directed at non-cash activities, such as funds transfers, monetary instruments and the like, which are more difficult to detect than bags of currency.
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As the committee recognizes, following the movements of the drugs is not the same as following the money generated from the sale of the drugs. The drugs, while they can change hands many times, remain what they are: illegal. The financial transactions connected to those drugs may begin and do begin as illegitimate, but they soon transform themselves into legitimate financial activity, commingling or using legitimate money instruments to disguise illicit proceeds. So, we must recognize that following the money goes way beyond tracing cash.
In the example above, the fact that a currency deposit was made by a Mexican bank will not indicate to law enforcement the existence of money laundering. However, other financial information and investigative intelligence will be helpful in following the money. Law enforcement may have developed information which leads to a raid of a stash house, or the particular suitcase was inspected as it crossed the border. What is more likely to occur, given the volume of activity, is that the regulatory programs FinCEN has developed with the U.S. financial community will now come into play.
A CTR may have been filed if the money orders were purchased in sums above $10,000. The issuer could also notify the U.S. if the money orders were purchased in a manner to evade the Currency Transaction Report requirement. Or perhaps, the bank who accepted the money orders may have felt that the activity fell outside the normal activity of its customer and, after further review and finding no reasonable explanation, may have filed a Suspicious Activity ReportSAR. This report would contain a description of activity, and it would also include the names and account numbers of all of the persons involved. Thirty thousand reports of such activity were filed with FinCEN last year.
Page 32 PREV PAGE TOP OF DOC Further, banks are obligated to keep a record of the identity of the person and other information with respect to any wire transfer in excess of $3,000. In addition, once currency is deposited into a Mexican bank's U.S. account, the U.S. bank may review subsequent non-cash transactions involving that account.
For instance, the Federal bank regulatory agencies have issued guidelines as to how U.S. banks should monitor ''payable through'' accounts, and FinCEN has issued an advisory on foreign bank drafts alerting banks to the use of these certain instruments for money laundering purposes.
In addition to the steps we are taking in the U.S., as Assistant Secretary Johnson mentioned, Treasury has been coordinating an interagency bilateral effort to provide Mexico assistance in establishing a more effective anti-money laundering regime. This assistance is gradually beginning to produce results. As I stated in my testimony before this committee last September, FinCEN is working with Mexico's Hacienda to help establish a financial intelligence unit, an FIU, and to urge the passage of laws and regulations needed to establish a legal and regulatory anti-money laundering framework in Mexico. We are encouraged, as the Assistant Secretary said, by the fact that Mexico, as of this spring, now has both a unit in place and legislation which makes money laundering a criminal offense.
Hacienda has also been working with us to refine its cross-border reporting system, and we will expand our analytic assistance to include Mexico's newly enacted currency reporting and suspicious reporting requirements. It is through this type of cooperative review of Mexico's reporting mechanisms that we hope to be able to identify ways to strengthen both Mexican and U.S. regulatory defenses along the Southwest border. We also anticipate that if Mexico's planned regulations on unlicensed casas de cambio along the border are effectively implemented, it will begin to close off that avenue to money launderers.
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It has been pointed out by some Members that even with Mexico's demonstrated cooperation in key areas, we would be deluding ourselves to think that Mexico is going to be able to effectively implement anti-money laundering measures overnight. As we have seen in this country, attitudes do not change easily. We must continue to urge the Mexican Government to broaden and strengthen the cooperative relationships we have developed with the officials in Hacienda to include policymakers throughout the government. Perhaps even more importantly, partnership should be extended to the private sector, and particularly the private banking sector.
In conclusion, as Assistant Secretary Johnson has described, we are in some ways the victims of our own success. We are what we are today because it is difficult to place currency into the U.S. system without detection. This means that our jobs become even harder, as money laundering becomes more complex and more international.
The U.S. response to money laundering, as this committee noted in the Money Laundering Suppression Act, began moving away from concentrating on currency to develop better means to detect money laundering and to measure our effectiveness. I think this hearing is a continuation of that process, and I would like to thank the committee for pushing us harder to think smarter.
Chairman LEACH. Thank you, Mr. Morris.
Page 34 PREV PAGE TOP OF DOCSTATEMENT OF MR. JONATHAN WINER, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL NARCOTICS AND LAW ENFORCEMENT, U.S. DEPARTMENT OF STATE
Mr. WINER. Thank you, Mr. Chairman.
The committee has asked the Department of State three questions, and I would like to try and do the best I can to answer each of them.
The first question is: Why does the Department of State consider Mexico to be a major money laundering center?
Based on Administration-wide consensus and review, the State Department noted in its 1997 International Narcotics Control Strategy Report, the INCSR, that several factors combined to create a serious money laundering problem for Mexico, including the emergence of a closer working relationship between Colombian and Mexican drug cartels; endemic corruption with Mexican political, judicial and law enforcement systems; inadequately trained law enforcement agents who must enforce criminal and fiscal tax laws regarding money laundering; a lengthy land border shared with the United States which facilitates smuggling currency into Mexico from the U.S.; lax fiscal regulations coupled with resistance by Mexican banks and money exchange houses to new legislation designed to regulate money transactions; and the ready acceptance of U.S. dollars shipped in bulk to Mexico.
Moving drug proceeds from the U.S. into Mexico can be accomplished through relatively simple, direct means. Currently, bulk shipment of U.S. currency remains the most popular method. U.S. dollars derived from drug sales are concealed and transported by either courier or cargo, either by land or air, often in the same vehicles used to transport drugs into the United States. Once placed into the banking system in Mexico, the drug money can be placed into virtually any international location.
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Money laundering occurs in large scale in Mexican banking and non-banking institutions, through casas de cambio and other businesses with the capacity to wire transfer funds. Checks drawn on Mexican banks are transported or mailed into the U.S. and deposited or exchanged for U.S. cashier's checks. Mexican officials estimate that roughly $30 billion in drug cash was repatriated to Mexican drug cartels in 1994, and an even higher amount was moved into Mexico for repatriation to Colombia during the same period.
Mexican officials have also stated that corruption within the financial supervision and enforcement systems is an additional important factor facilitating money laundering in Mexico. Indeed, money laundering activities are enormously profitable for compromised financial institutions, corrupt banking officials and money brokers, and others willing to exploit the weaknesses in the Mexican financial system.
What my colleagues have described as being victims of our own success is described by academics as the problem of differential regulation. When you have a jurisdiction that has high levels of regulation next to a jurisdiction that has low levels of regulation, the unwanted activities flow to the area with low regulation. In the globalized economy, that means you need to have standards and norms at a relatively high level everywhere. That is why the international task is so important and so difficult.
The second question I was asked to answer: What measures has Mexico taken against money laundering? Over the past 12 months, Mexico has carried out a number of actions against money laundering. The two initial extremely important acts took place a year ago. In March of 1996, President Clinton and President Zedillo established a High Level Contact Group to ensure that important areas of the bilateral relationship, including money laundering concerns, received regular attention at the most senior levels of government, both to press for even greater cooperation and also to resolve disputes. Indeed, under the auspices of that group, the Presidents of our two countries last week signed a Mexican-U.S. alliance against drugs, which, among other things, promises to strengthen bilateral anti-money laundering efforts and cooperative measures against it.
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Most significantly, however, Mexico finally passed money laundering legislation on April 29th, 1996. That was an absolutely critical action. Until you have money laundering legislation, until you criminalize money laundering, law enforcement officials on the one hand and bankers on the other hand, or financial institution officials on the other hand, have very little to do with one another unless somebody has robbed a bank. Short of a bank robbery, they don't spend a lot of time talking to one another. Money laundering legislation begins to require these two different disciplines, these two different types of people, to come together and begin to work on one another's problems, and that is now happening in Mexico with the passage of that law.
This March, March 10, the Government of Mexico published new regulations regarding suspicious and large Currency Transaction Reporting, which came into effect just 2 weeks ago on May 2. These are designed to impose obligations on financial institutions to deter and expose money laundering. Enforcement of these provisions will help to deter money laundering and will also generate valuable investigative information for law enforcement authorities seeking to identify and dismantle money laundering operations.
The U.S. Treasury assisted Mexico in developing these regulations, as well as designing a computerized database to house and analyze the information generated by the reporting regulations. The Department of State provided funding for the project. The Mexican Government will be working with the Mexican banking sector for the rest of the year to develop guidance manuals for the banks.
In the meantime, there has been some visible action, not just words, from the Mexican Government. Over the past year, 13 defendants have been convicted of money laundering. The Mexican Treasury, or Hacienda, has referred some 16 money laundering cases involving 96 defendants to the Mexican Attorney General's Office for prosecution. There have been some 26 cases involving money laundering referred by the Mexicans to the United States for investigation, and there have been some 40 joint money laundering investigations between Mexico and U.S. law enforcement agencies.
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Remarkably, a Hacienda official provided testimony in two major narcotics trafficking/money laundering trials in the U.S. The Mexican Government assisted the U.S. in seizing over $4.5 million in trafficker monies. So, there have been some practical steps that have taken place.
Again, we need to reduce the level of differential regulation by getting greater implementation of existing laws on both sides of the border.
What about the International Emergency Economic Powers Act? I was asked to address this question, and all I would like to do is to offer some general comments.
We have an obligation to do everything we can to attack the economic power and resources of druglords. Freezing their assets is an essential tool. The International Emergency Economic Powers Act, through which the President invokes his emergency powers to restrict commercial and financial dealings with foreign entities which threaten the United States, is a very powerful tool. It is an extraordinary power that must be used carefully and wisely so as not to diminish its value or erode its support.
There are certain prerequisites to its use against major international criminal organizations like the Colombian traffickers. First, the President must determine that an unusual and extraordinary threat is posed from outside the United States to the national security, foreign policy or economy of the United States, and that specific extraordinary measures are necessary to address the threat. Then, those charged with administering such embargo measures, normally the Department of Treasury with the assistance of the law enforcement community, must have sufficient evidence to support the designation of particular individuals and front companies to be targeted as the personification of that threat in order to stop that threat.
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When those prerequisites are met, I am confident that all U.S. Government agencies will play their part to ensure that any IEEPA action is a success and that the front companies of these criminal organizations will be frozen in their tracks, unable ever again to do business with our country, our institutions or our people.
Thank you, Mr. Chairman. I am happy to answer any questions.
Chairman LEACH. Well, thank you very much, Mr. Winer.
Let me begin with what might be described as an unserious question, and I don't want to imply I am advocating a particular result here, but it comes to mind. In my home State of Iowa, we have a number of farms that feed hogs, and as one drives by, one describes the odor as the ''smell of money.''
And the query I have from this observation is: Does money have a smell? That is, are there such things as dogs trained in smelling the ink on bills? Has it ever been considered at Treasury, putting a dog-smelling aroma in a bill? And I don't advocate this, but I just raise it as a tangential query, Mr. Johnson.
Mr. JOHNSON. I believe that money does have a scent. In fact, we areand I will get back to you to confirm thisbut I have had discussions within the last month or so about the use of dogs to actually detect money based on the scent of the inks.
Chairman LEACH. Well, I think that if humans aren't very competent, maybe a dog could be more so. It will be an interesting way to go about it.
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Mr. FEDERICO. Mr. Chairman, if I may add?
Chairman LEACH. Yes, please.
Mr. FEDERICO. We routinely utilize the narcotics-trained dogs to sniff currency when we seize it at a stash house or from other locations, to see if that is at least an indication that the money had some involvement in the narcotics trade.
Chairman LEACH. Interesting.
Mr. Johnson, during a hearing last September, DEA's Chief of Domestic Operations, Donny Marshall, testified that service-oriented businesses with a high cash flow are often used for laundering, and that, quote, ''Businesses on both sides of the United States and Mexican border are being used to launder money by over-invoicing to legitimize drug-related proceeds.''
If this is the case, doesn't that undermine the suggestion in the IRS study that much of the cash surplus in the San Antonio District may simply be attributable to legal, routine cash intensity of border trade?
Mr. JOHNSON. It could, but I think I would defer to Mr. Federico to see whether or not it actually does undercut the underpinnings of the study.
Mr. FEDERICO. If it would be possible, could you again repeat the premise of the question?
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Chairman LEACH. The premise of the question is that the DEA has suggested in a study last year, and I quote, ''Businesses on both sides of the United States and Mexican border are being used to launder money by overinvoicing to legitimize drug-related proceeds.'' If this is the case, doesn't that undermine the suggestion in the IRS study that much of the cash surplus in the San Antonio District may simply be attributable to legal, routine, cash-intensive border trade?
Mr. FEDERICO. Well, there is no doubt that legitimate businesses are being utilized. The problem, again, though, is that the money, as Mr. Morris alluded to, has already been placed into the system, and that the trade itself is covering up the illegal activity. The money itself has been cleaned and has just become part of the money flow.
Chairman LEACH. I don't take that very seriously. I mean, you describe a process. Money never becomes clean if it is tied to money laundering. It becomes more hidable. And is that a valid observation?
Mr. FEDERICO. I think that is a valid observation.
Mr. MORRIS. It depends on what you are talking about in terms of money, Mr. Chairman. If you are talking about the proceeds of crime, that is, the profits made, then, yes, those proceeds of crime are always illegitimate. We deal with these at the integration phase when we seize the proceeds of crime, which may be property, which may be jewelry.
What we are saying is that the cash transaction itself, the currency itself, is no longer the proceeds of crime. It has essentially been layered into the system so that the cash is no longer a matter of law enforcement interest at that juncture.
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Mr. WINER. Mr. Chairman.
Chairman LEACH. That doesn't strike me as very logical.
Mr. WINER. If I may separate two different issues here, which I think will be helpful, to the extent that one is talking prophylactically, trying to reduce vulnerabilities in the system or to catch the money laundering activity, and one focuses as a matter of Customs on the problem of underinvoicing and the problem of invoices not matching, you may be able to catch money laundering activity in the invoicing area by focusing on the importers and exporters who are engaged in that act of fraud.
By contrast, trying to trace the origins of the cash, the cash, the source of the cash as a placement issue at that point is somewhat fruitless. From my perspective, over- and under-invoicing are critical elements of money laundering. They are the second phase after the money has been placed by which the money gets disguised.
I have no information as to whether that is taking place in this case or not, but they are critical issues which are mostly dealt with on a regulatory basis by Customs.
Chairman LEACH. I mean, the premise of the question is that if it is stated by a prominent United States official that this activity occurs, and then it is stated by another United States official that there is no particular problem, it kind of defies logic. It just means that it is a more sophisticated money laundering at a later stage, but it is nonetheless money laundering.
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Mr. MORRIS. Absolutely.
Chairman LEACH. That is the point I am trying to make.
Mr. MORRIS. There is nobody here that disagrees with what Donny Marshall said. False invoicing in trade is a serious issue, and we do see that as a problem, and it deserves examination. The point, I think, we are trying to make is that the existence of a surplus at the Federal Reserve branch is not relevant or indicative of false invoicing. That is not the place to see the issue. That is, I think, the point we are trying to make.
Chairman LEACH. Well, again, I don't follow that.
Mr. GONZALEZ. Thank you, Mr. Chairman.
Mr. Morris, does Treasury know how much of the currency coming into the San Antonio Fed from Mexico represents laundered money?
Mr. MORRIS. No.
Mr. GONZALEZ. The answer is no?
Mr. MORRIS. The answer is no.
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Could I perhapswould it be helpful if maybe I elaborated on that ''no''?
Mr. GONZALEZ. Certainly.
Mr. MORRIS. Money coming back from Mexico does not go directly to the San Antonio Fed. The banks in Mexico have correspondent relationships with the U.S. banks in Texas. When the Mexican banks at the end of the day, or the end of the week, determine that they have an excess of U.S. cash for their business needs, that cash is then delivered to the U.S. bank, usually by armored car. The U.S. bank files a Currency Transaction ReportCTRon that deposit transaction.
The U.S. bank then may use that currency in its normal activity, and it may, depending on what its normal business needs are at the end of the day, purchase additional currency from the Fed or deposit the excess currency with the Fed. But the U.S. bank has no knowledge of the activity that is going on in the bank in Mexico, such as the commingling of funds, clean and dirty, assuming money laundering is there. The currency surplus results from the U.S. bank's normal cash-in, cash-out activities, and the suplus is what goes to the Fed.
So, the point that FinCEN and IRS have come to is, the place to examine the issue of money laundering must be at the bank in the U.S. and the bank in Mexico. The surplus at the San Antonio Fed, as Assistant Secretary Johnson described, used to be going to New York. It is now going to San Antonio. It is not an accurate indicator of money laundering in Texas. The money could just as easily be brought to Los Angeles. If it is cash coming back from Mexico, some percentage of it is being laundered there, on the basis of what Deputy Assistant Secretary Winer said.
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But if you ask us at that juncture within the Federal Reserve branch bank whether that money, or which bills, or what percentage is laundered money, we have to answer, ''No, we don't know.''
Mr. GONZALEZ. I think that is the fundamental challenge to get an accurate grasp of the immensity of this movement.
Mr. Winer, the drug trade in the Southwest is valued at a considerable amount, in the tens of billions of dollars. The Mexican traffickers routinely harass and intimidate border residents who refuse to allow smuggling through their property. Customs tells us that billions of dollars are smuggled out of the United States. It is clear that the drug trade and money laundering are a threat to our national security. The President of Mexico has said the same thing about his own country.
In the State Department's view, what other conditions are needed to declare a national security threat?
Mr. WINER. Well, Mr. Gonzalez, Mr. Ranking Member, you have asked a very profound question. I think that President Clinton, in the end, makes those decisions, rather than Deputy Assistant Secretaries like me. I would say that in the first instance.
Clearly in the case of Colombia, President Clinton felt comfortable in October of 1995 to declare that there was a national security threat which justified the use of his economic war powers to freeze the assets of, and forbid American individuals and institutions from doing business with initially some 200 entities and individuals, and I think it is now 300 or 400 separate entities or individuals. A number of them have been added since the original announcement. And clearly, the President will be looking at, as he announced in October 1995, whether to expand that kind of action to locations beyond drug traffickers based in Colombia.
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Until such time as the President makes that determination, I am not in any position to comment about it.
Mr. GONZALEZ. Mr. Johnson, your testimony points out that there is no information available to the United States banks or the law enforcement agencies about the legality or the illegality of the funds placed in Mexican financial institutions.
What is the state of, so to speak, of law enforcement's knowledge about the laundering activities of the Mexican cartels?
Mr. JOHNSON. Well, going first to the issue of the state of our knowledge about what is going on in the Mexican banks, it is true that before the promulgation of the regs and the enforcement, the actual effective date of the regulations that were recently promulgated by the Mexicans, we were notthe Mexicans did not know sufficient information or have sufficient information about the transactions to pass that on, either to act on it themselves or pass it on to us.
We anticipate that we will be getting additional information about the transactions, not on a routine basis, but through the use of a variety of legal tools. One is the Financial Information Exchange Agreement, and the other is the traditional Mutual Legal Assistance Treaty, or MLAT, process. And as to the state of money, we view the problem as a significant problem in Mexico, and we think the vulnerabilities, as Deputy Assistant Secretary Winer has described, to their systems were significant, which is why we embarked on the efforts we did in the last year to get them to shore up their legal and regulatory regime against money laundering.
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That is why we have embarked on an effort to train their investigators and train their prosecutors to battle what we view as a very, very serious problem.
Chairman LEACH. Thank you, Mr. Gonzalez.
Mr. BACHUS. Thank you.
We talked about money-sniffing dogs. I don't know if you have considered using teenagers? You might want to try that.
In fact, Dave Cohen on my staff says he has an ex-girlfriend that can sniff cash at 5 or 6 miles.
Ms. Waters brought to mind a question I had not intended to ask, but it is such an obvious question. We talked about seemingly legitimate businesses engaged in legitimate transactions but money laundering being involved, and all the safeguards we have in the United States, all the countermeasures that you all talked about today against money laundering. But then we have this case that sort of sticks out like a sore thumb with Raul Salinas, $100 million, Citibank. That is not something that occurred in Mexico. That occurred right here in the United States.
We are investigating that; is that correct, Mr. Johnson?
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Mr. JOHNSON. As with all investigations, I can simply say that we are looking into it, but there is nothing further that I can say about the investigation.
Mr. BACHUS. OK. When do you think you might have a comment onor when does Treasury? Because this is such an obvious example of something that occurred right here in New York City, despite all of our safeguards, despite all of our countermeasures, you know, $100 million. You are not talking about two unknown entities. You are talking about a Mexican Government agency that is funded at $1.2 billion a year and one of our biggest banks. When do you think Treasury might give us a sense of when we might get a report?
Mr. JOHNSON. Mr. Bachus, I am no longer an employee of the Justice Department, but I do have some of their equities in mind, and one thing that I learned as a prosecutor is that you can never give a firm date by which you would be finished with an investigation. We are often left in the position of asking folks simply to stay tuned, and we are working on it.
Mr. BACHUS. OK. Good. That is a good assurance. I wish I wouldn'tI tell you, I think that is a very high priority of this committee, because we talk about a lot of things that are difficult and shady and hard to prove, and we have to rely on Mexican sources, but this is something that we ought to be able to get our hands around and do it expeditiously.
Could you give me your sense of what private bankingor tell this committee how it may have played a role in the Citibank matter? Is it a threat? Is private banking a threat todoes it pose a threat in regard to money laundering, or is it just in this one case?
Page 48 PREV PAGE TOP OF DOC Mr. JOHNSON. I think what I would do is defer to our bank regulator, at least on the money laundering side, Stan Morris.
Mr. BACHUS. OK.
Mr. MORRIS. Making no comment at all, Chairman Bachus, on the issue of Citibank, private banking practices in the United States are subject to exactly the same kind of requirements as retail banking practices, and that is they are required today to file reports of currency, they are required to maintain records, they are required to take a whole range of actions like that, including filing the Suspicious Activity Reports.
Private banking exists usually for wealthy customers who are provided a broad range of services that are not made routinely available by commercial retail banking. There have been concerns expressed about the kind of relationship, because of the amounts of money involved, that could, in fact, create a situation in which a standard was reduced. I think that is what you are alluding to.
But as a matter of law and as a matter of oversight, both from the standpoint of the bank regulatory agencies as well as the money laundering aspects, the private banks are subject to the same rules and requirements as other banks.
Mr. BACHUS. I think that answers my question. They have the same standards, the same regulations, so there is nothing about it being a private banking transaction that would have allowed it to go on?
Page 49 PREV PAGE TOP OF DOC Mr. MORRIS. I make no comment on the
Mr. BACHUS. I am not talking about that.
Mr. MORRIS. Generically.
Mr. BACHUS. But the anti-money laundering regulations that exist for private banking are as stringent as those that exist for traditional banking? It shouldn't be easier for money laundering to occur at private banks?
Mr. MORRIS. That is correct.
Mr. WINER. Congressman Bachus, it shouldn't be easier. I have had conversations with banking compliance officers from major institutions who have expressed concerns to me that in practice, sometimes it is easier in the private banking departments as opposed to the rest of the banking, and that they, as security and compliance officers, don't always have the ability to put the same practices and procedures into place, and that it may well be a useful area for the Congress to look at as to whether private banking departments are, in fact, dealt with operationally within the industry the same way as the rest of their banking operations are.
Mr. BACHUS. I thank you, Mr. Winer.
Let me ask one quick question. Mr. Morris, you mentioned the Money Laundering Suppression Act of 1994, and in that Act we charged you with developing regulations for your non-bank financial institutions. I understand you are very, very close to having those regulations announced, but we were very, very close last September. Are we any closer today than we were last September?
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Mr. MORRIS. You have given me the opportunity, Mr. Bachus, to return the favor that the Assistant Secretary gave to me. Do you want to respond to that, Mr. Johnson?
Mr. JOHNSON. Certainly. We are much closer than we were in September.
Mr. BACHUS. OK. That means we will have them. Can you give us a date?
Mr. JOHNSON. I would anticipate that within the nextin the coming weeks we will have finished with the clearance process, and we will have at least the proposed rules.
Mr. BACHUS. That is less than a month?
Mr. JOHNSON. Yes, sir.
Mr. BACHUS. OK. Thank you.
Chairman LEACH. I think we will go to one other. I wanted to set a precedent of going to the Chairman of the subcommittee and then the Ranking Member. Is that all right?
Mr. VENTO. All right.
Chairman LEACH. What I thought we would do is then, after Maxine's question, we will recess for the vote. Is that all right, Bruce?
Page 51 PREV PAGE TOP OF DOC Mr. VENTO. OK.
Chairman LEACH. Maxine.
Ms. WATERS. Thank you very much.
Could you give this committee some idea of the penalties for banks that would be found guilty of money laundering? While I am not asking for any specificity on any one offense, I guess my question is, could we literally put a bank out of business for violating our money laundering laws, or are they all civil? Do we have stiff enough criminal penalties by which to close down a bank that is caught with activities that are clearlyor are indicted or convicted?
Mr. MORRIS. Yes, we could. The Congress passed very strong authorities following the activities at BCCI, and the bank supervisory agencies have that authority, as well as very serious criminal penalties against individuals in the bank who are, you know, involved in money laundering.
Ms. WATERS. The other question is, if we have a bank with a branch or a bank in Mexico and the United States, and there was a deposit made from Mexico straight to the American bank, could the American bank, the bank in the United States, turn around and wire transfer money from its Mexican bank to the Cayman Islands or other offshore banking operations? If the money didn't show up in Mexico, but it actually showed up in New York, and you took that money and you wire transferred it to the Cayman Islands, could you turn around and do it through the Mexican bank that did not receive the money in the first place?
Page 52 PREV PAGE TOP OF DOC Mr. MORRIS. Everybody is telling me, yes. They obviously understand the question better than I. I will go with my colleagues. Yes.
Ms. WATERS. Actually, what I am saying is this money may not have shown up where we had taken a look, if it had shown up at the Mexican bank. So, it was actually received in New York, but the Mexican bank was used as the point of origination to wire transfer it out to offshore banking operations. And is that a loophole, and do we need to do something about it?
Mr. FEDERICO. If I understand you correctly, the money initially showed up in New York?
Ms. WATERS. That is right.
Mr. FEDERICO. At that point, if it was over $10,000 in currency, a Currency Transaction Report would have been filed, or the banker would have noticed something unusual in the transaction
Ms. WATERS. That is right.
Mr. FEDERICO.And would have filed a Suspicious Activity Report with the Treasury Department. So, at that point, the government is put on notice that the transaction has taken place in currency over $10,000.
Ms. WATERS. That is right.
Page 53 PREV PAGE TOP OF DOC Mr. FEDERICO. It would then enter into the banking system, and then the customer would instruct the bank as to what it would like to do with the proceeds of the transaction.
In your example, it could be wired through any other bank in the world to its ultimate destination.
Ms. WATERS. Yes.
Mr. FEDERICO. So that
Ms. WATERS. So, that if our banking laws shine the light on that transaction, one way to get around it is not to be under the banking laws of our country, of our Government. But, if you use your Mexican bank, then, to do the wire transfer, would they escape the laws that would require the disclosure?
Mr. FEDERICO. It depends on how much cooperation we can get from the other banks in the other countrieswhether we can utilize the facilities and the vehicles that Mr. Johnson alluded to, such as getting information from the Mexican bank. If we have an investigation on the individual that entered the money into the U.S. bank, the trail could stop there or it could start there.
Ms. WATERS. In the case that I am thinking about, no questions were asked of the person who deposited the money. The thing that interests me is the person was from Mexico. They didn't take it to the Mexican bank.
Page 54 PREV PAGE TOP OF DOC Mr. FEDERICO. They took it to one of our banks?
Ms. WATERS. They took it to the New York bank, but then I think the New York bank wire transferred the money from the Mexican counterpart off to the Cayman Islands. Did they escape bank scrutiny laws by doing that?
Mr. FEDERICO. In this hypothetical, my judgment is that the bank in New York, their records would reflect that there had to be a debit or a credit to the account regardless, would want to make sure that they are accounting for their money. So, we would be able, as investigators, to trace that something happened to the money that originally had been placed into the New York bank. The bank in New York would be required in an investigation, through subpoena, and so forth, to tell us what happened to the money next.
In your example, they would tell us that instructions were received to wire X number of dollars via Mexico to the Caymans.
Ms. WATERS. So we could trace that?
Mr. FEDERICO. I believe we could.
Ms. WATERS. OK. Thank you very much.
Chairman LEACH. Before recessing, let me ask Ms. Waters if she has a follow-on question when we come back?
Page 55 PREV PAGE TOP OF DOC Ms. WATERS. No.
Chairman LEACH. Before adjourning, I would like to clarify one point that I think I am correct on. An illegal money launderer putting money in a United States bank, in the United States would have to report, or a foreign bank in the United States would have to report, or a United States bank in a foreign country; is that correct?
Ms. WATERS. A United States bank in a foreign country?
Chairman LEACH. Yes.
Mr. FEDERICO. I was with you all the way until the last example.
Chairman LEACH. The last example is a major United States bank with a branch in Mexico City or any other country. They come under United States law, don't they?
Mr. FEDERICO. Yes, but
Mr. MORRIS. They are treated, for purposes of bank examination
Chairman LEACH. Under United States law?
Mr. MORRIS.Under U.S. law, as well as under Mexican law.
Chairman LEACH. But does that include the money laundering provisions?
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Mr. FEDERICO. In Ms. Waters' example, there was no currency transaction other than the initial placement of cash.
Chairman LEACH. Forgetting her example, I am just asking a United States bank located in a foreign domicile with a branch would presumably come under all United States reporting laws in this area; is that false or true?
Mr. MORRIS. I believe that is not correct.
Chairman LEACH. OK. I would like to request a clarification from your general counsel on this subject, and whether you want a recommendation of change in law on this subject.
[The following reply to Chairman Leach was provided at a later date by Mr. Morris:
[The definition of ''financial institution'' in the Bank Secrecy Act (''BSA'') regulations is limited to agents, branches and offices within the United States, whether of a U.S or a foreign chartered bank. See 31 CFR 103.11(n). Accordingly, the reporting and recordkeeping obligations set forth in those regulations do not directly apply to offices of U.S. banks located outside the U.S. The BSA contains no explicit extraterritoriality provision, and in fact, Congress explicitly provided in the BSA that currency transaction reporting could only apply to ''domestic financial institutions,'' that is to ''actions in the United States of a financial agency or institution.'' See 31 U.S.C. 5312(b) and 31 U.S.C. 5313(a), (''When a domestic financial institution is involved in a transaction for the payment, receipt, or transfer of United States coins or currency . . . '').
Page 57 PREV PAGE TOP OF DOC [The money laundering statutes at 18 U.S.C. 195657 do have extraterritorial effect. In addition, it is possible that in appropriate situations, the actions of a foreign branch office of a U.S. bank could, when combined with actions taken, or not taken, in the U.S., provide a basis for a finding that the bank had violated the BSA or its implementing regulations. For example, officials of a foreign branch office of a U.S. bank might agree with officials of a U.S. office of that bank, or might otherwise act to cause a U.S. office to violate the BSA reporting or recordkeeping rules, (by, say, routing a transaction that would require reporting if completed inside the U.S., to a branch outside the U.S.). Given an adequate factual basis of this sort, the fact that particular acts occurred outside the U.S. would not exclude those acts from considereation in determining whether the BSA had been violated, either in a civil penalty or criminal prosecution context, by a U.S. institution, Particular BSA provisions that might be circumvented in this way would include the funds transfer recordkeeping rules (31 CFR 103.33(e)(g), the suspicious transaction reporting rules (31 CFR 103.21), and the currency transaction reporting (''CTR'') rules (31 CFR 103.22).].
Ms. WATERS. Mr. Chairman, if I could for a moment, I thank you very much for that, because that further plays into what I was trying to describe in that situation, where if the banking laws are not operative in the foreign country for the subsidiary, or the branch, and you wire transfer from that branch, then it may not show up
Chairman LEACH. Correct.
Ms. WATERS.In the American bank. Thank you very much.
Chairman LEACH. This hearing is in recess. This vote is several votes, and so there will be a little time. Because it is the lunch hour, so we can give everybody the same circumstance, why don't we assume we will begin about 10 minutes of the hour, and there is a cafeteria just below this in the basement level. The hearing is in recess.
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[Whereupon, the hearing recessed at 12:20 p.m., to be reconvened at 12:50 p.m. this same day.]
Chairman LEACH. The hearing will reconvene. And I recognize Mr. Vento.
Mr. VENTO. Thank you, Mr. Chairman.
The information that I have heard is that with regard to individuals and currency transactions, we have a $10,000 threshold, or a $5,000 threshold if there is suspicion. But, with regard to trucks, there are armored trucks that are delivering money across the border that we don't have any record of?
Mr. FEDERICO. The armored cars coming to Mexico transferring the bulk cash from the Mexican banks to their correspondent banks in the United Stateswhen those funds come to the domestic banks, the Currency Transaction Report is filed by our banks.
Mr. VENTO. What is the nature of that particular report?
Mr. FEDERICO. It describes who brought the money in, how it came in, hopefully the denominations, the owners of the money. The owners at that point would be the Mexican bank.
Mr. VENTO. In other words, it only counts the money that goes directly into the bank at that point, it doesn't count any other money; is that correct?
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Mr. FEDERICO. The amount of money that is in the armored car is what is accounted for through the CTR, yes, sir.
Mr. VENTO. It may come from a bank anywhereis that correct? In Texas, to differentiate between money coming across the border versus money that comes from other banks in Texas, as an example, if we are talking about Texas or Arizona or California.
Mr. MORRIS. CTRs are not required for interbank transfers of currency within the United States; they are required for currency brought from outside the United States by armored car. We don't require Citibank to report an interbank transfer of currency with Chemical Chase in a simple exchange between two banks.
The effort, I understand, is to try and look for increased anti-money laundering efforts in Mexico. There are some proposals to, in fact, require more reporting within Mexico. There is proposed regulation scheduled to go into effect January 1, 1998 that would require the reporting of large cash transactions to identify the source of currency.
Mr. JOHNSON. The regs that are in place now cover a number of things, banking institutions as well as non-bank financial institutions. I believe that when we are talking about bank-to-bank transfers, those are not currently covered by the new Mexican regs.
Mr. VENTO. So, a bank in Mexico transferring cash in an armored car to the United States, you would have the CTR report, but you would not look at where they, for instance, had received large sums of money from that bank in Mexico, where they had acquired large sums of cash? In other words, you assume this all came in as $20 bills, or what?
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Mr. JOHNSON. Well, with respect to the Mexican banks, there are a couple of different transfers to keep in mind. One transfer we have been talking about has been a transfer from a Mexican bank to the U.S. bank, and I think we have discussed the reporting that is attached to that. Then there are the transfers between and among Mexican financial institutions, and the reports, as I understand the regs, the Mexican regs, the reports are not generated on those bank-to-bank transfers.
Mr. VENTO. Let me back up a minute. Does Customs gather information on incoming armored cars?
Mr. JOHNSON. No, it does not.
Mr. VENTO. Those answers seem like they are different than the first answer. It seems to me I was asking that question. They are lumped together in a ''trucks'' category, which number 3 million per year; is that accurate?
Mr. MORRIS. Well
Mr. VENTO. You don't know the answer?
Mr. MORRIS. Let me see if I can explain. It is correct that there is no CMIR, which is a Currency and Monetary Instrument Report, required of armored cars transporting currency from Mexican banks to U.S. banks when they cross the border. The reporting requirement for that armored car transaction in the United States is that the receiving U.S. bank file a Currency Transaction Report. That is the way that information is collected.
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Mr. VENTO. Well, is it true that money may be commingled with money that didn't come in the armored cars then?
Mr. MORRIS. I don't know. I don't think so.
Mr. VENTO. You don't know? Does anyone at the table know?
Mr. MORRIS. Let me see if I can understand your question.
Mr. VENTO. The question is, at that particular point, that money could be commingled; some came from armored cars, some came from other sources.
Mr. MORRIS. In the bank in Mexico that basically assembled the cash shipment?
Mr. VENTO. In the U.S. report, in the report in the domestic U.S. bank in which the armored car delivered some money and other funds were delivered.
Mr. MORRIS. No. I think the arrangement is that that armored car has an assignment that it is to deliver X amount of cash as counted and identified in the Mexican bank, and that is delivered and then counted and identified and reported at the U.S. correspondent bank which files a CTR.
Mr. VENTO. It sounds to meMr. Chairman, I know I am over my time, but it sounds to me as if we need to have more definitive information about the number of vehicles transporting cash across the border if we are going to keep track of this. I understand the dilemma that may be, but this is information that we can control, you know, within our borders, in terms of how the money is delivered. Now, where the sources of it came from, I don't know.
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I had one other question, Mr. Chairman, if there is time.
Chairman LEACH. Absolutely.
Mr. VENTO. I note that there was a purchase in the background material that I was given, issues surrounding the Laredo National Bank. I am sorry to have to use the common surname of my colleague, Ranking Member, Mr. Gonzalez.
But what happens, for instance, if we have an interest purchase within the fact of buying a U.S. financial institution, what type of investigation or what type of review is there, Mr. Johnson, of the suitability of that individual, for purchase, in terms of their background and relationships and financial dealings of a foreign national that is actually establishing a purchase of the bank or a novel establishment of an institution within the United States?
I mean, for instance, I know we do FBI background checks for under secretaries, I guess.
Mr. JOHNSON. And assistant secretaries.
Mr. VENTO. Mr. Winer, maybe you are most appropriate to direct that question to, but I would be happy to have information from others to address it as well.
Mr. WINER. I would like to address that question in part because of my previous service in this branch of government when we were considering follow-ups to the BCCI for the Foreign Bank Supervision Enhancement Act, and at that time a new set of rules were put into place for Edge Act banks, where the Fed basically does background checks of various kinds with both of the law enforcement and intelligence agencies in reviewing basically all source information for the United States Government in trying to determine whether a bank should enter the United States or not.
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Among the issues they look at is whether there is comprehensive regulation by a foreign bank regulator of that institution, but they also look at the individuals and the entities, and that is done pretty systematically. The Fed would be the best entity to testify about that, however.
Mr. VENTO. To your knowledge, Mr. Winer, has any individual been refused on the basis of these investigations and reviews?
Mr. WINER. To the best of my understanding, a number of banks that have applied for Edge Act status have been unable to proceed with moving to the United States while applications have been considered. It is difficult to tell in such circumstances whether an application is being rejected or deferred.
Mr. VENTO. Mr. Johnson, are there any proposals in terms of making a more rigorous test with regardnot just to location, but with merger and other activitiesthat might be threshold questions?
Mr. JOHNSON. None that I am aware of. But perhaps Mr. Morris is aware of some.
Mr. MORRIS. Just that these determinations are made by the agencies that have responsibility for supervising these. You mentioned the Laredo National Bank, which is subject to the oversight and determination of the Office of the Comptroller of the Currency, and, as Mr. Winer says, there is a series of actions they take regarding purchases or transfer of ownership, directorship determinations; there is a lot of exchange of information between and among the five Federal bank regulatory agencies and FinCEN.
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Mr. VENTO. Has the Customs asked their opinion, or are there other agenciesDepartment of Justiceasked for their opinions with regard to comments on these particular issues?
Mr. MORRIS. The answer is, I believe, that it is not the responsibility of anybody at this table. It is the responsibility of the bank examining agencies.
Mr. VENTO. I realize they have the authority, but I am wondering if they are asking questions, or if others are permitted to participate and offer the information they have with regard to individuals like Mr. Gonzalez?
Mr. MORRIS. There are exchanges of information on that throughout the Federal Government, yes.
Mr. VENTO. Well, my time has long expired, Mr. Chair, and my colleagues have been waiting.
Chairman LEACH. Thank you, Mr. Vento.
Mr. BARR. Thank you, Mr. Chairman.
Mr. Johnson, one of the laws of the universe under which I find it realistic to operate is that, whatever we see publicly, no matter how much we see publicly, is only the tip of the iceberg.
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The iceberg I am a little curious about is an article that appeared in the May 1st, 1997, Wall Street Journal, with which I know you are familiar, entitled, ''U.S. Drops Protest in Drug Money Probe.'' And in that story, you are referenced as having had to travel to Mexico, quote, ''To straighten out what turns out to have been a bad misunderstanding,'' closed quote, between U.S. and Mexican officials, regarding a prominent money laundering case involving the powerful Mexican-based Juarez drug cartel.
Just from looking at the details that are contained in the Wall Street Journal article, it would appear to me as somebody in passing familiarity with money laundering statutes and procedures, including substitute asset forfeiture and so forth, that there probably was a lot there and there was very good reason for us to be expecting $183 million to be frozen, but, again, I presume there is a lot more here.
Why was it that we backed off this so quickly, or what appears to have been so quickly, in the face of the Mexicans saying, ''Oh, gee, sorry, only $16 million can be traceable,'' and that is why we only froze $16 million, as opposed to $183 million?
Mr. JOHNSON. We didn't back off in the face of a blanket assertion from the Mexicans. When the Customs Service commenced an investigation, I believe IRS was also involved, in approximately April of 1996, that enabled the Service to identify certain accounts, certain money laundering activity, activity we believed to be associated with money laundering. That information was passed on to the Mexicans in September of 1996.
We did not have the account information as to what was in the Mexican accounts, and we had to rely on our Mexican counterparts for that.
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The information and the case came to fruition in early January of 1997. I believe it was on January 10th that Hacienda, Mexico's Treasury Department, passed on information to the PGR, its Justice Department, about this investigation. It wasn't just a passing on of information, but it was a request for assets to be seized.
The assets that we believed were there were believed by our investigators, based on documents that had been provided by Mexican authorities, which suggested that the accountsI believe the number of accounts was 15contained $183 million. This information was transmitted to our investigators. They, in turn, transmitted it up the chain, and we believe that there was $183 million in the accounts at the time the seizures were to have gone into effect.
Later on, I would say it was sometime aroundI can't say sometime around, I will say on March 8, it came to my attention that the dollar amount that had been represented to us as being $183 million, was $167 million short of that, and it was our goal, given that there had been some representations about cooperation in that particular case, that we be in a position to get back to Congress, get back to the public, about what was right. So, what we did within, I would say, 3 days, we sent down Customs agents.
Mr. BARR. What do you mean, what was right? Was this just a PR ploy that you all were engaged in?
Mr. JOHNSON. No, sir. We had communicated to the Congress, both to the House Foreign Relations and Senate Foreign Relations, that we had participated in a joint activity that had resulted in a seizure of $183 million. This was one ofthis would have been one of the largest joint operations ever, and it was something that we were pointing to as an instance of cooperation.
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Our information, the information that came to us, suggested that we had given incorrect information to Congress, and we had a duty, in my view, to investigate, not simply to take anyone's assertion as to what happened, but investigate and determine what the amount of thewas actually there.
We undertook that investigation, and after we completed that investigation and reviewed the documents, we were confident that the amount in question was not $183 million.
Mr. BARR. Can I ask unanimous consent for an additional 2 minutes to go a little further in this?
Chairman LEACH. Absolutely. We are being very lenient.
Mr. BARR. According to the Wall Street Journal, and I know that it is just the Wall Street Journal, but, I mean, it indicates, I think, fairly clearly that the money was there, at least according to the Mexicans. And the article also indicates that there really was very little basis, if any, on which to presume that even a portion of this was the proceeds of legitimate business transactions involving Rigberto Gaxiola Medina and others.
I mean, is the Wall Street Journal wrong? Was somebody lying to us? Did the money all of a sudden disappear?
In other words, what I am saying, it appears that the money was there, and it appears that there was very good reason and good evidence to believe that it was the proceeds of drug transactions, that there were 18 accounts, that there was $183 million in there, and then all of a sudden to find 16, to me, it just doesn't match up. Something is wrong there.
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Mr. JOHNSON. And I can see where we are havingit is the same communication issue we actually had with the Mexicans. It is a difference between a stock and a flow. The $183 million on the documents, some of which I personally looked at, was, as I understand it now, on each of the accounts that was listed on the documents. The amounts were amounts that had actually gone through on the summary sheet, actually had gone through the accounts, not the amounts that were in the accounts on the day in question.
And our investigators have looked at the actual supporting account documents, not the summary document, which I saw, but the supporting documents, and what they show is that at the time that the order went from Hacienda to the PGR, there was a dollar amount on the order of $1 million or lessand I will get the precise figures for youat the time that the order went into place.
Subsequent to that, and it may have been substantially less, but subsequent to that, more money was placed in. By the time the order was actually perfected and the accounts were frozen and seized, the dollar amounts transferred in had gone up to $16 million.
But the problem in communication and the problem on the ground was one in talking about whether or not we are talking about a stock or a flow, money passing through an account, which was a total of $183 million, or money that was actually in the accounts on the day that the seizure order went into place.
We did not have that clarification made to us when we communicated to Congress, which is why we undertook our investigation.
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Mr. BARR. Was there any evidence that the monies had been there and deliberately removed because somebody had been tipped off? That doesn't appear to be the case?
Mr. JOHNSON. Based on our investigation so far, what the account records appear to show is that after the order was actually transmitted from Hacienda to PGR, the amounts in the accounts actually went up, which would have meant if someone had actually been tipped off they were putting money into law enforcement hands
Mr. BARR. Unless they were really clever. But, anyway, OK. Is this the subject of an ongoing investigation, this particular case?
Mr. JOHNSON. There is additional follow-up. Obviously, there was a flow of $183 million. Obviously, we only have 16, and we want to follow up, and that is what we are doing.
Mr. BARR. One very quick question. Have any Mexican banks, or subsidiaries in Mexico of banks headquartered outside of Mexico, been indicted in any U.S. jurisdiction for money laundering?
Mr. JOHNSON. I don't know whether or not the corporate entities have been indicted, and Director Morris may have more familiarity whether there is a corporate entity that has been indicted, or mid-ranking or high-ranking officials have been indicted.
Mr. BARR. Have there been, Mr. Morris?
Page 70 PREV PAGE TOP OF DOC Mr. MORRIS. Would you allow me to provide something for the record on that? I think the answer is, there have been officials indicted, but rather than give youI would like to give you an answer we can check.
Mr. BARR. No banks or subsidiaries come to mind that have been indicted, but you will check and make sure?
Mr. MORRIS. Yes.
Mr. BARR. If you can get that back to me, I would appreciate it.
Thank you, Mr. Chairman.
[The following reply to Hon. Bob Barr was provided at a later time by Mr. Morris:
[At this time, neither FinCEN nor the Criminal Division of the Department of Justice is aware that any Mexican banks or subsidiaries in Mexico of banks located outside of Mexicoor any officials of such institutionshave been defendents in any Federal or State money laundering prosecution.
[My staff has conferred with the staff of the Asset Forfeiture and Money Laundering Section of the Department of Justice on this issue. The U.S. Attorneys' manual provides that U.S. Attorneys' Offices obtain approval from the Criminal Division in Washington before any indictment is filed in a criminal money laundering case in which a financial institution (other than an independent money transmitter, check casher, retail currency exchanger, or issuer and seller of money orders and traveler's checks), would be named as a defendant or in which such a financial institution would be named as an unindicted co-conspirator.
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[Although there are no comparable systematic procedures in place to collect information about State or local prosecutions, any cases involving Mexican banks or bank officials would be relatively high-profile matters, and I believe they would have come to our attention as well. To date, we know of no such indictments having been issued.]
Chairman LEACH. Thank you, Mr. Barr.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman.
Mr. Morris, in light of the fact that New York City does not have a surplus in its Federal Reserve Bank, are there other indicators that you could point to that draw stronger connections to money laundering?
Mr. MORRIS. In New York?
Ms. VELÁZQUEZ. In New York.
Mr. MORRIS. As you know, Congresswoman, the activities that were taken by Customs and the IRS and the New York Police Department, with some support of FinCEN, demonstrated quite a lot of money laundering activity through money remitters, at least $300 million and perhaps significantly more.
Page 72 PREV PAGE TOP OF DOC We continue to believe, as was clear when I was Deputy Director in the Office of National Drug Control Policy, that one of our primary determinants for designating the five major HIDTA areas, High Intensity Drug Trafficking Areas, is money laundering activity. We went through a series of steps to come to the conclusion to pick the five locations, and they were New York, Miami, Houston, Southwest border, and Los Angeles. That was 6 or 7 years ago. That continues to be the case today.
The financial activity in the geographical location of those areas makes it subject to that, and, as I said in my prepared statement, our view is that that is the situation, that the cash surpluses, one way or the other, are not a determinant.
Ms. VELÁZQUEZ. You answered a question about currency flows between Mexican and U.S. banks and about countermeasures that you have to detect and prevent money laundering. Can you tell this committee what your plans are with respect to a non-bank institution like money remitters?
Mr. MORRIS. Yes. As we have become more successful in the United States in dealing with cash and more effective in our relationship with banks, it is not surprising that we find ourselves dealing with non-cash and non-banks, and that has been an increasing focus of our attention. The non-bank financial institutions cover a large gamut of activity from broker-dealers, to money remitters, to casinos.
We had a fairly active amount of regulatory activity with casinos in this country and just completed a lengthy negotiation with the State of Nevada and the Nevada Gaming Control Board to establish a very new effective system there that we hope to expand nationwide.
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As it relates to broker-dealers, we have had a series of discussions, both with the SEC as well as with the self-regulatory organizations and the broker-dealers themselves. We are moving to propose regulations that would establish a suspicious reporting regime for broker-dealers, which will be essentially the same, but obviously will not be cash-based, because most broker-dealers aren't dealing in cash.
The third area is what we term, in order to make them more finite, ''money services businesses.'' These are the money remitters, the issuers and redeemers of travelers' checks and money orders, currency exchange houses, and check cashers. It is a large industry, about $200 billion a year. It is heavily a small business with agents providing multiple services, and we have seen in a number of places, like in New York, that you mentioned in your opening remarks, abuses.
So, we have established a new set of regulations, which Assistant Secretary Johnson assures me will be out shortly. They are a very complex set of rules that would have essentially three elements, and we expect these to be out within the next week or two, if not sooner.
The first order is to come up with some registration system, as was authored by the Money Laundering Suppression Act, so we know what the businesses are at the Federal level. They are indifferently regulated by the various States, and that becomes very important.
So, the definitions here are very complex. For example, you can cash your check at a Safeway, but we don't view that as a money service business. You can exchange currency at a hotel, but we don't consider that a currency exchange. We have worked very hard on the definitions, and have had very close consultations with the industry, which I think are quite anxious to get these issues resolved.
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The second aspect of the regulations will focus on suspicious reporting requirements, particularly for the issuers of travelers' checks, money orders, and money remittances. The third aspect will look at a reporting requirement for cash purchased remittances going offshore, essentially a follow-on to the experience that the Treasury Department developed as a part of the Geographical Targeting Order, as you mentioned in your remarks, in the Roosevelt Roads and Jackson Heights areas. So, we hope those will be in place.
We will probably seek about a 90-day period of comment. We will have to work closely with the industry and with the States, as well as law enforcement. But, we fully expect by the end of the year to have this industry clearly within the similar or consistent regulatory confines as we have done with our Nation's banks.
Ms. VELÁZQUEZ. Thank you.
Mr. Johnson, you mentioned in your testimony that Treasury led an interagency mission to Mexico City to help the Mexican Government to develop its anti-money laundering laws. In your judgment, or your opinion, is Treasury the agency best suited to take the lead against money laundering? And also, I would like to ask that some of the foreign countries, they say that sometimes they do not know to which agency to turn when they are fighting money laundering in their own countries, in terms of the United States Government.
Mr. JOHNSON. I think in the past 2 years Secretary Rubin has exercised tremendous leadership in this area, and I think it is appropriate for him to continue to exercise that leadership, whether or not we look to the Summit of the Americas process or whether or not we look at some of the innovations that are coming through FinCEN.
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One of the hallmarks, I think, of Secretary Rubin's leadership is that we have an interagency process and we do things, we attempt to do thingswe may not always be perfectin consultation, clearly, with the State Department. Mr. Winer is one of our significant partners in any money laundering efforts, as well as with the Justice Department.
Ms. VELÁZQUEZ. There has to be some coordinated, comprehensive strategy.
Mr. JOHNSON. More coordination is always better, and that is what we are working to achieve.
Ms. VELÁZQUEZ. So, someone has to put it together. Who is that agencywho should be that agency, in your judgment?
Mr. JOHNSON. I think we have the capabilities to put together that effort. We will be, in all of these efforts, working with the State Department and with the Justice Department. There may be others at this table, at least one, who may have a different view of that, but that is the Treasury perspective.
Ms. VELÁZQUEZ. Any comments from the other witnesses?
Mr. WINER. Ms. Velázquez, ordinarily we rely on the White House and the National Security Council to make determinations about who acts as lead agency in particular areas.
In the area of money laundering, there are very important equities for the Departments of State, Justice, and Treasury, and as long as we respect one another's equities and work closely with one another, we are usually able to stay out of trouble and to advance everyone's equities simultaneously.
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The level of communication has intensified dramatically over the last several years between these three departments on these issues.
We consult as well with the Federal Reserve, with some other affected agencies outside our departments, and I think communication in Washington is not the problem it once was, or coordinated strategies. There are still sometimes difficulties carrying on these strategies as effectively in the field. Having Washington and the field talking to one another effectively is a recurring problem of the Federal Government. It is not one this Administration is likely to solve completely. We are working on it.
Ms. VELÁZQUEZ. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Ms. Velázquez.
Ms. KILPATRICK. Thank you, Mr. Chairman.
This entire discussion today reminds me of some of my many classes at the University of Michigan, very academic and quiet and humane, and everybody congratulating and smiling. But the fact of the matter is, we have a major problem in the world, in America, and it is drugstrafficking, use, selling, and on and on.
I don't feel the urgency at the table. But that might be because you guys deal with it all the time and you are here academically explaining to us what you do. I think each of you started talking about how well you are doing, and no, you can't tell how much is laundered because of all the money coming in and all. So, I am disturbed, to say the least.
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If I haven't said it, I do appreciate your jobs and what you are doing and all the good things, and congratulations, and let's do better. And I respect you for the work that you do.
Mr. Johnson, there are still a lot of unknowns, as I have listened here this morning. You speculate that some of the currency, without specifying how much, coming from Mexico, is illegal narcotics profit. It also appears the Government is not sure how much money comes in from Mexico in armored car shipments. We are also not sure how much currency is being smuggled out of the country from the proceeds from upward of a $30 billion drug trade. How do we address it?
Why don't you come to the table and give us answers on what you want? Can you answer any of that?
Mr. JOHNSON. In terms of what our focus has beenand I think what our focus needs to be with the narcotics problem is obviously a multifaceted problem that has to be addressed in a wide variety of areasthe money laundering simply is an aspect of that problem.
We have agentsand to the extent our comments have been on perhaps a rather abstract level, we have agents, just within the last couple of weeks, in terms of trying to keep narcotics from coming into this country, who were gravely injured as a result of their efforts, just in the last couple of weeks.
Ms. KILPATRICK. In terms of what, entered how?
Mr. JOHNSON. They attempted to smuggle the narcotics into the country, and one agent was shot in the face, the other was shot in the chest, before they were ultimately able tothese were Customs inspectorsultimately able to kill the person who was trying to kill them.
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So, it is an issue, from a law enforcement perspective, in terms of the risks we are willing to take, that we take gravely and very seriously and we are committed, because we are all, I think, at this table, not only law enforcement officers, but we are citizens here and parents, and we are committed to dealing with these issues.
Now in terms of information that we need, one of the issues that we have been talking about, the whole focus has been on the Federal Reserve surpluses. The thing that we most are focused on has been less the Federal Reserves, but the value, the money, the credits, that the narcotraffickers continue to control.
When a narcotrafficker goes to a bank, perhaps a Mexican bank, and deposits a large sum of money in an account, there is no report that is generated
Ms. KILPATRICK. Should there be?
Mr. JOHNSON. There should be, and now there will be if the amount is over $10,000; those reports will be generated.
But prior to that happening, the Mexicansneither the Mexicans nor the U.S., if we asked for it, would be able to get the source of information about those transfers. So, we need to work with the Mexicans on that, and I think we are going to be in a position to get better information.
But as to the physical dollars that are being brought into the United States, whether or not it is in armored cars or in other forms of conveyance, when those physical dollars are deposited into the account of the drug dealer, the drug dealer no longer cares about those physical dollars, what the drug dealer cares about is the value that is in that account that may be transferred to a friend's account, a family member's account, and transferred from account to account to account. So, the dollars may end up in the U.S. system.
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But what we want to seize, what we are working on, for instance, in the Glass-Steagall LaMaduma case, is being able to track what happens in a subsequent transfer, and that is what we are trying to get, and I think what we do get with a lot of our information is information about the subsequent transfers of value that the narcotrafficker still controls.
Ms. KILPATRICK. Have you begun to make a dent in that yet, in that information that will help you to rid or stop the flow of laundered money?
Mr. JOHNSON. I think that with the changes in the Mexican system we have started to make a dent, but this is something where time will tell, because we haven't yet started to get that information.
Ms. KILPATRICK. Does Treasury, Justice, or State, or all the working collaborations feel yet an International Economic Emergency Powers Act needs to be instituted? Are you way off from that, or do you think you can keep doing what you are doing?
And I was going to get to you.
Mr. JOHNSON. I will defer to Mr. Winer on the IEEPA question.
Ms. KILPATRICK. I know you mentioned earlier, and I was going to come back to Mr. Winer on that. Are you saying the Secretary of State would make the recommendation to the President and he would then invoke that? Is that the process? And tell me if you think we are there yet, because I don't feel like you think we are there.
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Mr. WINER. I think I would like to quote from the written testimony on this point, because I think it answers this question pretty explicitly.
Ms. KILPATRICK. You don't have to find it. I will read it.
Mr. WINER. I found it. ''Money laundering in Mexico poses a real threat to the national security of the United States and is a comparable threat to Mexico and its financial system.'' So, is it a national security threat? My interagency-cleared testimony from the Government of the United States says that it is. It is not just me speaking. It is all the agencies who looked at this and reviewed this.
The question of whether a particular tool, like the International Emergency Economic Powers Act, is the correct tool to use against a national security threat is a determination that has to be made by the President, in consultation with his National Security Council senior staff, National Security Adviser, and the principals from all the departments with the most equities, the most wisdom, the Secretary of State, the Attorney General, Secretary of Treasury.
Ms. KILPATRICK. I respect that, sir.
Mr. WINER. The decision to use it against the Colombian traffickers was the first time any President had used this power against mere criminals, against mere drug traffickers. It had already been used against Iran, it had been used against Iraq, it had been used against other foreign enemies of the United States in states of war or near war. It was the first time any President had chosen to use this power against drug traffickers.
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President Clinton chose to do that because, in his view, these traffickers did pose a serious national security threat to the United States requiring urgent action. Now when he did that, there was a lot of debate within the Administration the weeks and months ahead of it. The debate was not about, do we dare do this? It was, can we do it and do it right?
Ms. KILPATRICK. I am going to cut you off, because that is the bell and we have to go and I have to finish this, and I appreciate everything you just said, and I understand you are saying the President has used it and may use it again in a future date.
Mr. WINER. He said in October of 1995 with the United Nations that he was considering using it again.
Ms. KILPATRICK. Mr. Morris, you mentioned HIDTA. I follow it very closely, and in my area of the world, we had $1 million come in not long ago and this is the end result of what laundering and trafficking does. HIDTA again deals with enforcement, sweeps the streets of people where the high drug traffic areas are, and really makes no impact, other than resources beingI mean, we have got to do it to some extent, but, again, unless the interdiction things are increased and resources are put there, HIDTA will never be what we want it to be, which is to rid the communities of drugs. It is a nice, good, fancy way to say, ''Hey, we are here; you guys get off the corner''; you know; but overalland someone said at the table earlier, it is a comprehensive approach that we have got to address, using the emergency powers when necessary, doing much more interdiction, stopping the flow in the first place, the money laundering, whatever it takes.
Page 82 PREV PAGE TOP OF DOC You know, I have many people on that Drug Caucus Task Forceand that is a bipartisan task forcethat are ready to ask this Congress for whatever it takes. I want those of you who put your lives on the line to come and ask the Congress for it. It is too quiet. You don't make enough noise. The squeaky wheel very much does get the oil and attention, and I think it is time for us to make the issue America has to face as we move to the new millennium.
Mr. MORRIS. Let me give you a quick answer. I am sorry you don't see the anger and passion here that perhaps you would like to see. Maybe we have been in these jobs long enough so that we mask our deep concern. I don't think there is anybody here who doesn't have adequate anger and passion about these problems. That is why we devote our careers to this field.
And the other thing is that the President has a strategy, and the strategy is to apply pressure at every point possible. There is no silver bullet in dealing with the drug problem in this country. It has to be dealt with from the parenting, all the way to prosecution and conviction and every step in between, including prevention, which is our mission. What you have here is a small piece of a much broader solution.
Again, I am sure that if we have seemed sort of academic and noncaring here, it is because of the nature of discussing cash surpluses at Federal Reserve Banks and not the tragic problems of our cities. I know everybody here personally, and I know that they care every bit as much as you do.
Ms. KILPATRICK. And I appreciate that and respect you for it, and I know your lives are on the line, and I hope you hear my passion as well in terms of saving this country and our children, because if we don't, in a bipartisan kind of way, America is in trouble.
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Thank you very much.
Chairman LEACH. Thank you, Ms. Kilpatrick.
Mrs. Maloney, do you wish to be recognized?
Mrs. MALONEY. Yes. I first would like to compliment the Ranking Member, Mr. Gonzalez, for calling this hearing and for the Chairman responding to it.
I am really just concerned about the armored cars that are coming across. As you know, NAFTA had many effects. One is that we don't have to stop all the trucks coming into our borders so that inspection is not there. I am told we had over three million trucks, including armored cars, that came into the United States last year, and that these trucks from Mexico can travel within 20 miles of the border before they unload their contents. Therefore, there is never any need for planes anymore to fly illegal narcotics into our country.
And my question to you is, what tracking do you have of armored trucks coming into the country and the currency that they are carrying? If we are not stopping these trucks, how are we monitoring what they are bringing into our country?
Mr. MORRIS. Well, the licensed armored currency carriers bring cash from Mexican banks to U.S. banks. We don't believe that it would make very much sense for Customs to stop those trucks and count the currency in them, because the focus should be at the bank. When the carrier arrives at the bank, the currency is counted then, and reported on a CTR to the Government. And we know, indeed, the foundation upon which much of the analysis done by the IRS focuses, specifically, on the CTRs filed by U.S. banks, on currency they had received from armored car carriers.
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So, we do have that information. We just don't collect it at the border, we collect it at the bank, which is the designated recipient of the currency.
Mrs. MALONEY. But that is, in a sense, an indirect method of gathering this information through CTRs. Would it not make sense to possibly track as the trucks come in? I am told there are not that many armored trucks, and one of you testified earlier that we have a $3.2 billion surplus in net cash receipts received by the San Antonio branch of the Federal Reserve Bank of Dallas. Obviously, some of this has got to be laundered money. It seems to me that would be one step that we could take.
Could I just ask one simple question, and I would like to ask every single witness this same question. I would like you to suggest remedies, including any legislative approaches, that will reduce this criminal cycle of narcotics and currency transfer from across our border that are severely harming our country. And I would like you to start with the first witness and just go down.
We know the problem. What are your remedies and any legislative suggestions that you could propose to handle this problem?
Mr. JOHNSON. While I wouldn't want to engage in the sort of legislative drafting, just from the witness chair, what we are trying to do, and what we have done in terms of addressing this problem has been, I think, a comprehensive approach. We need to do certain things better.
At Treasury, we have Customs, the IRS, FinCEN, the ATF, and even, to a certain extent, the Secret Service, that have been involved in aspects of this problem. What we are trying to do, in consultation with our partners at Justice, in consultation with our partners at State, is to work together in a more coordinated fashion to enhance the use of the assets that we have in place now.
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Mrs. MALONEY. That said absolutely nothing to me. I would like you to go back in writing to give the specific remedies that you are doing to handle the problem.
I would like to go down the panel if I could. Mr. Chairman, if you have specific remedies, legislative solutions, any solution that you could recommend on the problem, besides, in a general sense, we are allocating our resources better.
Mr. FEDERICO. I apologize, but I do not have any specific remedies at this time. I think our laws are in effect. We are utilizing the laws based on the resources we have, and I think we are doing a very good job at what we are doing.
Mrs. MALONEY. You think we are doing a good job at stopping narcotics and money laundering? I think the testimony all of you gave earlier shows we are not doing a good job.
Anyway, the next person.
Mr. FEDERICO. Well, since 1986 we have had this money laundering law. The IRS initiated somewhere in the neighborhood of 16,000 investigations. We have convicted approximately 7,500 individuals of money laundering. We are doing that in conjunction with our other mission of enforcing the tax laws, and we are doing it in conjunction, in a coordinated fashion, with the other agencies. And I think, taking that into consideration, and balancing the resources, I think that we are doing quite a bit.
Chairman LEACH. If I could interrupt, we have a vote with about 5 minutes left, and so what I would recommend
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Mrs. MALONEY. Oh, wow.
Chairman LEACH. What I would recommend is that the other panelists be required to respond when we return from the vote.
Mrs. MALONEY. OK. Mr. Chairman, I am particularly interested in any specific remedy. And also, if I could, just very quickly, we had a program in New York called the Geographic Targeting Area. Actually, it is Mrs. Velázquez' district, and it has been very successful
Chairman LEACH. Excuse me. I think we are obligated to recess for the moment for the vote, and then I would be delighted to return to you as the first questioner, Mrs. Maloney.
Mrs. MALONEY. OK. Thank you, Mr. Chairman.
Actually, I didn't think I was going to come back because there is a floor debate on. But in any event.
Chairman LEACH. If you do not come back, could we leave it that you will have the questions in writing for the witnesses?
Mrs. MALONEY. What I would like from the witnesses is to come to the Chairman, to the committee, with specific remedies, any legislative proposals, any specific ideas of what we can be doing to do a better job, and specifically the Geographic Targeting Area approach that has worked successfully in Queens and Mrs. Velázquez' district. I am sure you have looked at that. What kind of resources would that require? Should we move that type of idea over there?
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And we have a vote. Thank you, Mr. Chairman.
Chairman LEACH. We will recess pending the vote, and partly because I am not sure if Mr. Gonzalez has any further questions, I would like you to remain, if that is all right.
The hearing is recessed pending the vote.
Chairman LEACH. The hearing will reconvene. And let me explain procedurally what has occurred on the floor. We had what is called a ''notice quorum,'' which is somewhat arcane in our Congressional proceedings. It is the first one this year. And what it means is that as soon as 100 votes are registered, they go on with the floor business. And so that is the circumstance, and that is why the voting is completed.
I am hopeful that Mrs. Maloney will return and Mr. Gonzalez, in time, but I would like to just make a kind of summary observation and question.
And I want to be clear. It is my sense that this panel has suggested that cash surpluses are not an indicator of money laundering. However, are you going so far as to suggest that it is not one of several factors that may raise a red flag? Are you suggesting that law enforcement should ignore cash surpluses in identifying potential problem areas, and are you saying cash surpluses are totally irrelevant? And I hope I have phrased this correctly, do you continue to say that excess cash that goes through, say, a McDonald's owned by drug interests, involving perhaps false invoicing to a bank, which then represents part of the surplus reported by the Fed, is unrelated to money laundering?
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And maybe I ought to go back to each question. Number one, are you going so far as to suggest that Fed cash surpluses are not one of several factors that may raise a red flag? Is that a yes, or a no?
Mr. MORRIS. Yes.
Chairman LEACH. Are you suggesting law enforcement should ignore cash surplus in identifying potential problem areas?
Mr. MORRIS. Yes.
Chairman LEACH. Are you saying cash surpluses are totally irrelevant?
Mr. MORRIS. Yes.
Chairman LEACH. And do you continue to say that excess cash, with perhaps false invoicing that goes through a McDonald's owned by a drug interest, to a bank, which then represents part of the surplus reported by the Fed, is unrelated to money laundering?
Mr. MORRIS. That question is more complicated. Let me say, Mr. Chairman, I will at least explain the point that I made earlier, because I was frustrated that I had not made it very clear.
We say ''follow the money'' as a major tool to deal with money laundering, and we mean that. But we don't mean ''follow the cash.'' What we mean by following the money is following the transactions that occur that result in the criminal gaining and legitimizing the proceeds of crime. The first order of that business is usuallynot always, but usuallycash.
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Cash is used because there is no paper trail for the purchase of drugs. That cash then gets put into the banking financial system, either by structuring at low levels, so that the bank doesn't notice it, commingling it with other activities, legitimate and illegitimate, like a grocery store, for example, whose normal cash business is $10,000 a week, and it puts $20,000 a week in. That cash then ends up as a credit in the account of the drug dealer.
The physical cash at this juncture is of no further investigative interest; it is the value in that account and what happens at the next stages of the process. That is the point that we are trying to make, so that the key linchpin for addressing, we believeand I think this is what the IRS findingis to look at the transaction activities, the business activities, the suspicious reporting from the financial institutions, and the currency reporting that they are providing, the records that they are collecting, not the surplus or deficit that ends up at the end of the year in the Federal Reserve, because there is too much other legitimate activity wound within that to have that be a meaningful number.
As I mentioned in answer to one of the questions, $13 billion showed as a deficit in the City of New York. So, if we are to sayif we are to overassess the value of a cash surplus, we would move all of our resources from New York to Los Angeles, because they had a large cash surplus. We don't think that that, one way or the other, is very meaningful.
But as the cash activity leading into the financial institutions, that is a very, very important part of the placement process; and so thatif I understand your question, I think the answer to your last question is, no.
Page 90 PREV PAGE TOP OF DOC Chairman LEACH. Well, that is very convoluted. And I will tell you, I don't think your answers to all of these questions are compelling. They are possible.
I am looking back to my original statement on the last question when the Chief of Domestic Operations of DEA testified that service-oriented businesses with high cash flow are often used for money laundering. And then for you to say in a convoluted way. A; that there is no evidence of money laundering and, B; that you recognize this possibility, evidence related to surplus, is totally inconsistent. It is a logical impossibility that both statements can be right.
Mr. MORRIS. But the cash activity of the drug dealer and the bank is a very real interest. The question is, what happens with all of the activity in that area, all of the other indicators at the Federal Reserve branch bank? That is where we don't think the measure works very well.
The currency flow activity into the bank and out of the bank, looking at the individual banks, we think, is very, very important; and that is where we should be focusing our attention.
Chairman LEACH. There are two separate issues here. I don't disagree that it is difficult to measure. I do disagree with the philosophical concept that if you accept that it is occurring, which the United States DEA has suggested that it is, and all of you have said that DEA is probably right, and that it enters a bank and that it becomes a cash surplus at the Fed
Mr. MORRIS. At the bank.
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Chairman LEACH. At the Fed.
Mr. MORRIS. At the bank.
Chairman LEACH. At the bank, but then it can transfer to the Fed that, therefore, there is no relationship. And I don't see how you concurI mean, how you can say that?
Mr. MORRIS. I am obviously not doing a very good job. Perhaps Mr. Federico can explain.
Mr. FEDERICO. We agree with DEA.
Many times money coming in to the drug lords is put into cash businesses; and they doctor their books, come up with false invoices, whatever is necessary to try to justify the cash flow that is going through that business.
From that business, monies are then put into the banking system. At that point, Currency Transaction Reports are filed. At that point, a credit is made to the business account. At that point, that bank may or may not have a cash surplus in and of itself.
Our interests are looking at the CTRs, looking at our own intelligence, looking at information from other law enforcement agencies and working an investigation on the owners of those businesses and, hopefully, to the drug lord.
Page 92 PREV PAGE TOP OF DOC Now, the bank itself takes its money, its excess cash, if it is excess cash, and it takes it to the Fed. At that point, the Fed brings all the cash in or out of the banking system for the location, the geographical location, that it has. It loses its identity at that point.
That has nothing whatsoever to do, in our minds, with the illegal activity that got us that far. We acknowledge that there is money laundering going on. We acknowledge that some of the money that flowed into the Fed via that domestic bank was probably dirty money.
Chairman LEACH. Well, if you acknowledge that, how in Heaven's name can you respond to this question? Are you going so far as to suggest it is not one of several factors that may raise a red flag, that is cash surpluses, with the answer yes? Are you suggesting law enforcement should ignore cash surpluses in identifying potential problem areas? The answer is yes. Are you saying the cash surpluses are totally irrelevant? The answer is yes. Your answer to this question belies the three ''yes'' answers to the previous questions, and that is just on one score.
Mr. FEDERICO. I think what happens
Chairman LEACH. Now I have been following Mr. Gonzalez' thinking for a long time on this issue, and he has raised a very interesting perspective, and I don't think that you have persuasively countered Mr. Gonzalez.
Now, you might say these things are extremely difficult to measure, that is fair. But to take the affirmative answers to these questions is very difficult.
Mr. FEDERICO. What I am hearing from the committee and from members of the staff of the committee is that, because we have, in 1995, a $2.9 billion surplus in San Antonio, we must have tremendous amounts of money laundering occurring in the Federal Reserve area that is serviced by San Antonio.
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Prior to 1993 or 1994, all that money that was coming out of Mexico was going to New York or going to South Florida; and you had a relatively modest, relatively speaking, modest amount of surplus in the San Antonio Fed.
Does that mean that there was money laundering not going on in 1993 or 1994? That is the question that we asked ourselves as we started the analysis.
Does that mean that when we have a negative cashwe have a deficit cash flow, or whatever the term of art is, for the New York area, that that is indicative of not having money laundering in the New York City area? Now, our answer to that was, no, not at all.
So, to look at and to become subjected to the theory that it immediately is a red flag, we think, is an erroneous way to look at money laundering in a particular geographic area.
Mr. MORRIS. Mr. Chairman, let me just add one point that I didn't make before.
Perhaps part of the problem here is this is a huge economy in the United States. While the drug problem is a large problem, the amount of laundered money is very small, given the whole size of the economy, so that you end up in a situation in which in the same time period, 1995, which is the data that was examined, New York showed a $28 billion deficit and San Antonio a $3 billion surplus.
There is no question that the amount of money laundering activity in New York is greater than the amount of money laundering activity of San Antonio, by virtue of just the size of New York's economy, but the numbers are not significantly lower in order to affect the surplus.
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Chairman LEACH. Would you look at this question that may be of some interest? How much cash is transferred out of San Antonio into the Cayman Islands? How much is transferred out of New York? And if you see a huge differential, that can account for New York's problems. You see virtually none in San Antonio, it might say it is a better indicator in San Antonio and a less good indicator in New York. I just raise that as a theoretical possibility.
Mr. WINER. Mr. Chairman.
Chairman LEACH. Yes.
Mr. WINER. On the point of currency flows, I think all the facts relating to a particular geographical area have to be brought to bear in conducting an analysis. There are a lot of particular facts which make the Mexican/U.S. border particularly difficult to analyzethe changes in trade, the relative valuation of the peso, movements of currency this way and that. Many different factors can obtain.
Chairman LEACH. Also, since 1993 or 1994, a major reduction in military presence in San Antonio, which would be a cash depleter.
Mr. WINER. In some cases, we have seen major differentials in cash coming to the United States and cash leaving the United States to particular countries.
I recollect a year or 2 ago, I asked the Treasury, Customs, to pull records for the Department of State relating to Aruba, for example. We found that about a billion dollars came to the United States in U.S. currency from Aruba over a 3-year period, despite the fact that only $10 million had gone to Aruba from the United States, opening the question of where did the other $990 million, a rather large amount, come from in the first place? The ratio was $100-to-$1.
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By contrast, when we looked at the Dutch Antilles, Curacao, right next door, the ratio was about $5-to-$1 as opposed to $100-to-$1. So, there was a tremendous differential, despite the relative geographic similarity of the two locations.
What that would suggest in this case was that the currency flows, while not a red flag, were certainly an interesting indicator that there might well be something in that case having gone on with Aruba.
Separate law enforcement information, as represented in indictments in Puerto Rico and Miami, show that, in fact, there was some substantial money laundering going on in Aruba. So, there may be cases where these kinds of currency flows are indicators, but you have to look at them in light of all other factors, and sometimes it is simpler than others.
There is less other activity between the U.S. and Aruba, though there is some, tourism, for example, that one has to factor into those kinds of statistics.
Thank you, Mr. Chairman.
Chairman LEACH. Let me ask this question, and I will make this my last one, I promise. Do you automatically require suspicious money flow information on money that is transferred to certain of these island groupings, where there appears to be lots of incentive to do business and to disguise money? Is that an automatic circumstance at the Department of the Treasury?
Mr. JOHNSON. I am not sure I completely followed the question.
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Chairman LEACH. Well, you have two reporting requirements. One is on cash transfers. One is with regard to the use of the word ''suspicious transfer.'' Is it kind of an automatic circumstance that a large money flow to certain of these island republics is a suspicious transfer?
Mr. JOHNSON. Well, there is a question of whether or not you are talking about a particular transaction or a largea series of transactions. I think that it clearly would be something that we would want to be able to take a closer look at. Whether or not there is automatically a report generated, for instance, with a wire transfer, I am not certain.
Mr. FEDERICO. If it is a cash transactionI mean, several years ago we always had our antenna up when cash would leave the country and go to a Caribbean tax haven country. And so, if that is answering your question, we would start finding that extremely suspicious.
Chairman LEACH. Would it be suspicious if a State government transferred funds to the Cayman Islands?
Mr. FEDERICO. I would suspect that it would be if we could identify that, yes.
Mr. MORRIS. However, they are not subject to the Bank Secrecy Act.
May I make just one point? The point you made about New York, you are absolutely right that there may be clear explanations for surpluses and deficits and that one needs to examine it; and that is really the conclusion that we have drawn from this, that those have to be examined by the individual banks and their activity. And while you can explain the surpluses and deficits, the surpluses and deficits really on their surface don't mean anything with respect to the level of money laundering. That is the point we were trying to make.
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Chairman LEACH. Let me ask Mr. Gonzalez if he has any concluding questions.
Mr. GONZALEZ. I am going to defer and submit mine in writing so we won't hold up the thing here.
Chairman LEACH. Thank you. I want the distinguished Ranking Member to know I have been supporting his thesis in his absence.
Mr. GONZALEZ. Thank you very much.
Chairman LEACH. Well, let me say, while not convinced of everything said here today, I think the committee wants to express its enormous appreciation for your work and the import of it. And on behalf of Mrs. Maloney, as well as myself, this committee is always welcome to requests for a legislative change if you at any time think something is warranted, and we would expect that to be your obligation. So, if there are refinements in law that you think would be helpful, we would certainly like to work with you.
Mr. JOHNSON. Thank you, Mr. Chairman.
Chairman LEACH. You are welcome. Thank you.
Mr. FEDERICO. Thank you very much.
Chairman LEACH. Thank you very much.
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We will go to our next panel. Our next two witnesses are Jack Blum, Esquire, and Charles Saphos, Esquire.
Mr. Blum is with the law firm of Lobel, Novins & Lamont. He is a former staffer to Senator Kerry, and did what is widely perceived to be an exceedingly professional staff analysis of the BCCI circumstance, something that the entire Congress is appreciative of, and has testified on several occasions before this committee.
Our second witness, Mr. Saphos, is a former General Counsel of Interpol, U.S. National Credit Bureau, Chief of the Narcotics and Dangerous Drug Section of the Criminal Division, U.S. Department of Justice, as well as a former Assistant U.S. Attorney for the Southern District of Florida and for the Northern District of Georgia.
We appreciate your coming.
Why don't we begin, unless you have a prearranged arrangement with Mr. Blum.
STATEMENT OF MR. JACK BLUM, ESQUIRE, LOBEL, NOVINS & LAMONT
Mr. BLUM. Thank you, Mr. Chairman. I appreciate the opportunity to testify.
Perhaps I should begin by talking about the difference between the cash business and the business of laundered money moving around in the wire transfer system, because I think that is at the root of much of the discussion that went on before.
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The United States Government is in the business of selling cash around the world. There is $100 billion in currency in circulation in the United States and $400 billion in circulation in currency in the world in general. We are in that business because it is very profitable.
United States paper money is the cheapest form of Treasury debt. We don't pay any interest on it at all. It costs us about 4 to 6 cents a bill to produce. We sell it for, if it is a one hundred dollar bill, $100. So, we are in the business of selling currency to whoever would want to buy it around the world.
The difficulty in the United States is that we do a huge number of transactions every year. Only a very small number are in currency. The estimates are that around $260 billion of the many trillions of dollars of transactions that go through our banks routinely every year are done in the form of currency, and most of those are in amounts of under $2.00.
So, the question of where the currency winds up in the United States becomes a very significant question, because people who have a lot of it are probably engaged in either a very high-volume small transaction business or the currency is a store of value for criminal behavior.
The difficulty is that the currency is handled through a variety of complicated channels once it gets outside the United States, and there is no indication at all that shipments back need come from the bank that received it outside the United States. And I would like to give you some examples of bank transfers that wound up in other places.
Page 100 PREV PAGE TOP OF DOC When we were investigating General Noriega's money laundering, we heard of bank shipmentsnot bank shipments but cash shipmentsby money launderers to Panama; and that generated a situation where the Government of Panama had a $2 billion cash surplus, despite a balance of payments deficit, a balance of trade deficit and, by all accounts, currency deficits as well.
The question was, where did this $2 billion come from?
And our government went to the Panamanians and said, ''Gentlemen, what about this $2 billion surplus?'' They were greatly embarrassed, and they went to the Panamanian Bankers Association and said, ''What are you going to do about it?'' And the Bankers Association did the obvious. They chartered an airplane and every week shipped the money from Panama to Switzerland. So, now the numbers showed up as being repatriated from Switzerland, not from Panama.
We have had similar kinds of things go on in the system in other places, and I want to suggest to the committee the most important thing you can do is to look at the business of the United States of America selling currency as a profit-making profit center. We earn $16 billion a year doing it. I think the damage to the country far exceeds the $16 billion, and I think we have to absolutely analyze the risk-reward ratio of this.
Now, as far as which bank gets the currency and what the money from Mexico means, I think that that money in San Antonio is the equivalent of a patient who goes to a doctor and he has a low grade fever and the doctor knows, because there is a low grade fever, he better go do a better physical examination of the patient to find out what is causing it, because it could be anything from a toothache to perhaps some form of cancer that causes that sort of low grade fever; and you don't know until you do the careful physical examination.
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So, for example, the numbers in New York that everyone talked about are negative because we are shipping on the order of half-a-billion dollars a week to the Russians, who have an insatiable demand for that wonderful Treasury product, which is paper.
Now I have talked about the money problem, but there are a couple of other things that I really would like to talk about which are very important. I am always delighted by the Government people who can portray everything as working smoothly, moving in concert, everything on track, when sometimes it isn't quite as smooth and the ballet isn't quite as easy as the slick ballet that you are confronted with.
I am astonished at the difference in the treatment the United States gives Colombia and the treatment it gives Mexico. We have as much evidence with respect to certain Mexican entities of involvement in drug trafficking and money laundering as we do with respect to Colombians, yet we have not used IEEPA against the Mexicans; and one wonders here whether that has anything to do with their political and economic connections in the United States and the size and importance of those connections as opposed to the somewhat more marginal connections to the people who were put on the bad list in Colombia?
I think that what is sauce for the goose is sauce for the gander.
I would remind the committee that in the question of the money laundering by Raul Salinas, the money that is being held, the $100 million in Switzerland pending a confiscation hearing, the man who recommended Raul Salinas for the account at Citibank, to the private banking department at Citibank, was Carlos Hank Rhon. Carlos Hank Rhon is an owner of a bank in Laredo, Texas, applying for ownership of a bank in Brownsville.
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And the questions here should be obvious to the committee, and they are questions that I can't answer, but certainly are questions that the committee should be asking with respect to the use of IEEPA.
Finally, because I realize my time is short, we have the problem of the various reports that are filed, who is responsible for the filing of the reports and what they do with them.
I believe that the Suspicious Activity Report shouldand you will notice in the very careful statements it was not said that it would beshould be extended to all cambios, casas de cambios, along the border on the American side; all the check cashing entities and all the currency remitters. They should file those reports and then the reports should be followed up on.
Further, the Department of Treasury should be asking the question of why the private banking departments don't appear to have filed any Suspicious Activity Reports and why there has been no enforcement against those private banking departments. There has been a very strange lag in the ability to enforce the rules that are in place.
Then the question is, when you get an STR, or you get a Suspicious Activity Report, what do you do with it? And, at the moment, all of those reports are purely historical, so that if an investigation begins, people can then go back burrowing in the paper and figure out what they mean.
Page 103 PREV PAGE TOP OF DOC My belief is those reports should be available to law enforcement in some on-line way that enables them to respond much more quickly and actually make them an immediate tool for aggressive efforts to seize money. By ''on-line'' I mean the reports should be filed electronically and be available in real time. Because if you are going back historically to look for money in today's world, with the complicated ability and the speed with which it can be switched and moved to other places, historical research using STRs won't give you a lot of opportunity to seize anything or even catch the criminal.
I will stop there and be happy to answer any questions you might have. I do have a prepared statement for the record. Thank you.
Chairman LEACH. Thank you very much, Mr. Blum.
STATEMENT OF MR. CHARLES S. SAPHOS, ESQ., PARTNER, FILA & SAPHOS
Mr. SAPHOS. Thank you, Mr. Chairman.
Mr. Chairman, I, too, have a prepared statement which I have tendered to the committee; and, for the sake of time, let me depart from that.
Chairman LEACH. Without objection, both full statements will be in the record.
Page 104 PREV PAGE TOP OF DOC Mr. SAPHOS. Thank you, sir.
I, like Mr. Blum, would base my reputation on asserting that the thesis of Mr. Gonzalez that the cash surplus money in the Federal Reservesurplus cash money rather in the Federal Reserve in San Antonio is, indeed, indicative somewhat of narcotics money laundering occurring there and in Mexico.
And, like Mr. Blum, I would say that it is such a serious symptom that it should not be ignored by any professional; and I am somewhat shocked by the supposition given by the earlier panel that it should, in fact, be ignored.
This is, I believe, my fourth time of testifying before this committee, and the last time I testified was some 7 years ago when I was called by Mr. Gonzalez to try to explain the growing surplus of currency in the Federal Reserve in San Antonio, Texas. I am pleased to testify in front of the committee. I am not pleased, however, at what we have done in the last 7 years with the legislative tools that this committee has given us.
It is my belief that this committee and Congress has given law enforcement the tools that are necessary in order to take symptomatic events, like the surplus of currency in the San Antonio Federal Reserve, and by regressive analysis using those tools to find out the absolute cause of it; and I am shocked that we are not doing it. In fact, we appear, by regulation, to be moving in the other direction, so we make it impossible to do it.
Back in 1985, the Department of Treasury was examining a system of automated intelligence which would, by regressive analysis, every time a currency transaction report was filed, answer certain questions: Is this report consistent or inconsistent with the source and origin of the money? Is it money coming into a bank which is in excess of the bank's position in the financial community? And does it mean that the bank is bringing in too much currency?
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Then, at about the same time, this Congress passed legislation which would allow the same type of reports and the same type of examinations from trades or businesses.
Apparently, by some sort of error from the editor of the United States Code, that section of law was placed in the Internal Revenue section and, thus, it is prohibited from disclosure; and law enforcement is not using those reports to answer Mr. Gonzalez' question.
So, what do we have now? What we have now are turf wars at home, we have lack of cooperation abroad, and we have lack of attention to the areas of vulnerability of the drug traffickers.
I say turf wars at home because, for instance, that problem with the reports of trades or businesses required by Congress has not been cured, although it is a 13-year-old problem.
We still have an inattention between the agencies and a lack of mission among the agencies as to who is responsible and who is in charge in the war against narcotics money laundering and how much resources they are going to be given and how we are going to measure their accountability for the use of those resources.
We have lack of cooperation abroad; and one can only presume that in a country like Mexico, where purportedly political corruption is gangbusters and the amount of money being obtained by politicians from corruption is monstrous, that their interests in passing laws which will identify the laundering from political corruption to the same extent it will identify the laundering from narcotics trafficking would be less than enthusiastic, and that their enforcement of those laws, once passed, will be as vigorous as we have seen their enforcement of their narcotics or their internal corruption laws.
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Is IEEPA called for to address that? Certainly. Is it important that the President of the United States continue to recognize the threat of narcotics trafficking and money laundering as a national threat to the United States? Of course, it is.
Money laundering from Mexico is a unique type of money laundering. Money laundering fromwe, the United States, is the preferable place of laundering Mexican narcotics traffickers' money. For historical reasons and traditional reasons, Mexican narcotics traffickers prefer to place their money in the United States rather than to keep it in the form of the inflationary peso and invest it in sensitive areas in the Mexican economy. Therefore, Mexican traffickers on the border are extremely vulnerable to apprehension, detection and having their goods forfeited.
To find that an allegation that law enforcement has inadequate intelligence and information to identify those assets is rather shocking, since the assets are here in the United States.
The Chairman's concern about using commercial entities here in the United States for money laundering is absolutely well placed. I think we discovered that many, many years ago in the investigation entitled La Mena, where we discovered that the traffickers using the enterprise they called the ''gold mine'' had, in 18 months, laundered through that single enterprise $1.2 billion, indicated that our trades and businesses are extremely vulnerable in the United States and our enforcement of the requirements that they report currency transactions is almost nonexistent.
Because the editors of the Code made those requirements part of the Internal Revenue Code, the failure to file is a misdemeanor, failure to file an information return. The failure to file a Currency Transaction Report by a bank is an extremely serious felony. I would suggest that perhaps the enforcement of that felony law by law enforcement against banks is one of the reasons why we have such vigorous enforcement and attention to the laws by the U.S. financial institutions; and I would suggest that unless we have the tools for vigorous enforcement against trades and businesses that have heavy cash flow, we won't have the same degree of compliance.
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But since we hide the reports away in the IRS vault and we don't use them for generating investigations for law enforcement purposes, perhaps there is no sense in the exercise at all in the first place.
I see that my time is up, but I would be pleased to answer any questions by the panel. Thank you.
Mr. BARR. [presiding]. Thank you, Mr. Saphos.
On behalf of the committee, I would like to thank both of our witnesses. We will now go into the questioning phase.
There are two things thatwell, a number of things that I found very interesting and enlightening in your written testimony, Mr. Saphos. One was that you had been before this committee 7 years ago to discuss this burgeoning problem; and here you are again, 7 years later, back here for the same reason. Because the problem hasn't only not gone away in those 7 years, it has gotten worse. That is a very telling perspective.
Second is, I was not aware of the fact that your 5-year-old son coined the term ''smurfing.'' It is a term, as you know, that we use in money laundering prosecutions and investigations; and he should have trademarked the name. He would be a wealthy young man by now.
I appreciate particularly your last comments which tie into something that you indicated early in your testimony as well, and that is the way the CTR language is set up in its position in the Internal Revenue Code, and that places some very severe restrictions on the availability of that information for other agencies' investigations.
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Would addressing that problem legislatively be among the highest priorities that you could give this committee in looking at this problem?
Mr. SAPHOS. Yes, sir. I would suggest that the legislative fix is relatively simple, and the legislative fix is remove Section 6050(I) from Title 26 of the United States Code and place that section in Title 31 of the United States Code and merely change the word from ''return'' to ''report.'' That would then require that the Secretary of the Treasury acquire those reports in exactly the same way as the Secretary of Treasury is acquiring the reports from banks and travelers and put themand I would further require the Secretary to put them in the same system as the reports from banks and travelers.
I would require that the Secretary, however, not hide that system away in a corner and make it only available to law enforcement agencies from the Department of Treasury, but to actually make all of those reports available in an automatic format to all law enforcement agencies in the United States. Because looking at the clear legislative intent of the statute, that is what you wanted him to do.
Mr. BARR. That was the clear intent.
In your experience, which is indeed vast in this area, would that sort of very reasonable, very logical, in effect, minimal but very important change to the U.S. Code meet with resistance in the Federal bureaucracy anywhere?
Mr. SAPHOS. In my prior life, I started negotiating with Treasury and the Internal Revenue Service about this issue 12 years ago. And even recognizing that it was fortuitous that this law was placed in the Internal Revenue Code, the IRS and the Secretary of the Treasury still were reluctant and, in fact, refused to endorse moving it from the Internal Revenue Code, where it is almost worthless, to Title 31 with the Bank Secrecy Act, which has been, to a certain extent, very, very valuable to law enforcement.
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Having said that, I would add that some of the value that Title 31, the reports that the committee has required of banks and financial institutions, have diminished in usefulness; and one of the reasons is that the regulations imposed by Treasury have not been well thought out.
For instance, they have exempted the movement of cash from abroad in the United States when they are done by professional transmitters of currency, when they are done by armored car companies. That is goofy.
Mr. BARR. I remember a particular case, and I think you referred to it, the Polar Cap case involving La Mena, in which use of the armored cars in these transactions figured very prominently.
Mr. SAPHOS. Yes, sir. Also, if you will remember Banco Ambrosiano. Banco Ambrosiano before it went belly up, received $35 million in a corresponding account in Miami, Florida, delivered by an armored car company, which had to be a very good armored car company to come from Italy. You have to admit, it was a great truck. The cash was actually being picked up from an office buildingor, rather, a seedy office buildingthree blocks away from the bank to which it had been delivered, after it was picked up from trunks of rental cars parked at the airport parking lot in Miami.
Allowing an exemption for armored cars, believing that that money really has somehow traveled across a border just because it gets delivered by an armored car, is not well thought out.
Page 110 PREV PAGE TOP OF DOC Mr. BARR. What is the basis, if there is one, for that interpretation?
Mr. SAPHOS. It was a decision made by Treasury to grant that exemption within their regulations, although there is no requirement from this committee and from Congress that they grant such an exemption.
Mr. BARR. What was the basis? Did they articulate a basis upon which to make that exemption?
Mr. SAPHOS. I believe, sir, that they thought the reporting was too burdensome upon the industry, but I dare say I am not in a position to talk for either the armored car industry or Treasury, sir.
Mr. BARR. OK.
Mr. SAPHOS. Another exemption which they permit is interbank transfers of funds. Well, if you don't have a report of interbank transfers of funds, how can Mr. Gonzalez determine which banks received currency in excess of their legitimate needs that they deposited in the Federal Reserve? You need to have an automated system of making that determination every time a Currency Transaction Report is filed.
My children, who are actually computer literate, unlike their very unintelligent old man, realized that putting together such an automated system is child's play; and it is inexcusable that we don't have it; and it is rather inexcusable that we can't answer Mr. Gonzalez' question.
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Mr. BARR. OK. Thank you. I may have some other questions; but, in fairness to the other Members, I would now turn to the distinguished Ranking Member from Texas, Mr. Gonzalez.
Mr. GONZALEZ. Thank you. I just have a question here for Mr. Blum.
What is your understanding of why the IRS, which is a tax agency, instead of the Financial Crimes Enforcement Network, conducted the Treasury study of cash surpluses?
Mr. BLUM. I wish I could answer that. I can tell you that the question of who enforces what with respect to the Bank Secrecy Act is a very important one for you to work on and understand. Because, I will give you just one example of an area I know a bit about, which is the FBAR report, the Foreign Bank Account Report, which is a requirement of the Treasury Department.
You check a form on the block on the IRS form, but if you check the block you have to file a report with Treasury. Those reports are simply not filed. FinCEN has done virtually nothing to enforce the failure to file those reports.
Mr. GONZALEZ. I see.
Mr. BLUM. And they turn that over, in part, to IRS for enforcement; but IRS has to refer it back to them; and the entire enforcement process gets broken down in a kind of closed loop of cross-referral because, by the time anybody gets it to adjudicate it, the statute of limitations has run out.
Page 112 PREV PAGE TOP OF DOC Now, part of the difficulty here is something that Mr. Saphos referred to, which is the secrecy that surrounds any kind of information gathered by the IRS and how it has to be kept within the IRS.
I believe that you really have to examine that level of secrecy, not only for STR and that kind of reporting, but simply when IRS participates as part of a money laundering task force investigation. Because at the moment information can only flow one way and that is to IRS, but not from IRS.
As a consequence, other law enforcement agencies hate to deal with them. They say, ''Hey, we are not going to get anything. We are not going to cooperate with you.'' And IRS winds up as a kind of one-way repository.
I think you should very seriously consider changing the restrictions on IRS' ability to communicate anything to other law enforcement agencies. I would do more than remove the one provision.
Mr. GONZALEZ. Thank you.
Mr. BARR. Thank you, Mr. Gonzalez.
Let me just ask one final question, and then we do have a vote.
Mr. Saphos, again, turning to you. One person that we haven't really talked about in all of this yet, at least on paper, who would appear to be in a position to play a very pivotal role in money laundering enforcement, and that is our Drug Czar, the head of the Office of National Drug Control Policy.
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In your viewand, again, we needn't go into all of your background, but it will be there in the recordand you have extensive background, both domestically and internationally in handling these mattersis the director of ONDCP doing an adequate job supervising narcotics money laundering enforcement efforts? And, if not, what could be done, if anything, to remedy that?
Mr. SAPHOS. Thank you.
Is there an adequate job being done? No. Where you have conflicting responsibilities, where you have unclear mission statements to the agencies, where you have overlapping responsibilities and where you have open turf wars between the agencies, is the supervision adequate? No.
Have we given the Drug Czar's office adequate tools to allow the Drug Czar to supervise and coordinate and direct our efforts at narcotics money laundering? I would suggest that you perhaps have, but since the Drug Czar has never seen fit to exercise the legislative tools that you have given him, it is hard to tell.
You have, indeed, given the Drug CzarCongress has given the Drug Czar the authority to supervise the resources of all law enforcement agencies engaged in narcotics investigation and prosecution. One would presume that that authority to supervise the budgetary process is analogous to the authority that Congress has and exercises quite well in supervising the budgetary process, which gives you quite a serious say in who is going to do what and how much resources they are going to devote to it and how you are going to measure their performance after having done that.
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The Drug Czar, it appears, is not exercising the type of supervision over the processnot appears, the drug czar flat isn't exercising the type of supervision over the process that you expected of the drug czar and, as a consequence, are things falling through the cracks? Well, I would strongly suggest that domestic and international money laundering investigation and enforcement has indeed fallen through the cracks as a consequence.
Mr. BLUM. Mr. Chairman, if I can add just one thing. You do know that the Justice Department abolished its money laundering section. Now, if that isn't an indicator, I don't know what is. Are they giving adequate priority to it? I would argue that says everything you need to know.
Mr. BARR. Thank you.
Just one final question. The last question that I asked the previous panel had to do with whether or not there had been any indictments in any U.S. District court, or district in this country, of any Mexican banks for money laundering or of any subsidiaries in Mexico of other foreign banks; and the answer was they didn't think there was, the two government officials, but they would check on that and make sure.
Are either of you aware of any indictments in this country along those lines?
Mr. SAPHOS. I am aware of several indictments regarding foreign banks. Those foreign banks have offices in Mexico; but I can't answer, Mr. Chairman, whether or not they were Mexican banks or banks of another country and had offices in the United States and in Mexico.
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I would, however, agree with the panel that the issue of the conduct of foreign banks doing business in the United States is a very serious issue; and it has had insufficient supervision.
One of the things which we have seen many times is that banks doing business in the United States open up a corresponding account, but they use that corresponding account only for the receipt of drug money here domestically, although they are reporting it and claiming it as having originated from offshore. That avoids the embarrassing difficulty of the drug magnate having to actually smuggle his drug moneyor actually runhis drug money through a seemingly legitimate industry.
He merely deposits the money into a U.S. institution for the benefit of the foreign bank and, therefore, is able to draw upon the assets of that institution, you know, by wire transferring or whatever from the foreign location. And the books occur in Mexico. There are no books in the United States that show it.
Mr. BARR. Thank you, Mr. Saphos.
On behalf of the Chairman, who had to leave just a little bit early, and in light of the vote on the floor, at this time I would like to, on behalf of the Chairman and all Members of the committee, thank you both for being with us today. Your written testimony will appear in the record, and we very much appreciate your time and your expertise here today.
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This hearing is adjourned.
[Whereupon, at 3:50 p.m., the hearing was adjourned.]
[Insert offset folios 61 to 126 here.]