SPEAKERS CONTENTS INSERTS
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A REVIEW OF THE DEPARTMENT OF THE TREASURY'S PROPOSED REGULATIONS FOR MONEY SERVICES BUSINESSES
WEDNESDAY, JULY 30, 1997
U.S. House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to notice, at 1:12 p.m., in room 2328, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.
Present: Chairman Bachus and Representative Foley.
Chairman BACHUS. The subcommittee hearing for General Oversight and Investigations will come to order. Good afternoon.
In 1994, Congress passed the Money Laundering Suppression Act which mandated that Non-Bank Financial InstitutionsNBFIsbe registered with the Treasury Department within 180 days of the passage of the legislation, or by March 23, 1995.
In May of this year, the Department of the Treasury's Financial Crimes Enforcement Network, known as FinCEN, issued proposed registration rules for NBFIs or, as they now refer to them, Money Services BusinessesMSBs. FinCEN also issued rules that would require certain MSBs to report suspicious activities by customers involved in transactions greater than $500. Another rule mandates that money transmitters file reports with the Government on fund transfers in excess of $750, if the transfer is made to a recipient in a foreign country.
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The subcommittee today has convened to review these proposed regulations. Our first panel will be the director of FinCEN, Mr. Stanley Morris. With him are Peter Djinis, the Associate Director, and Steve Kroll, Chief Counsel. And they will also be welcome to offer testimony. Mr. Morris, you are going to review the proposed rules and briefly describe how the Treasury Department intends to implement them, as I understand it.
Our second panel of witnesses is comprised of industry representatives. Mr. Ezra Levine will speak on behalf of the Non-Bank Funds Transmitters Group, an association comprised of several of the largest money transmitters. Mr. Jerome Gagerman will speak on behalf of the National Check Cashers Association. And, finally, Mr. Mark Plotkin, Counsel to Mondex USA, will discuss the effect the proposed rules will have on the stored-value industry and other forms of electronic commerce.
Personally, I think there is substantial reason to believe that the MSB industry requires regulatory scrutiny. This view is certainly what led Congress in 1994 to pass the Money Laundering Suppression Act mandating the registration of the MSBs. Furthermore, information developed during Treasury's recent use of the Geographical Targeting Orderor GTOin New York City, indicated that Colombian cocaine cartels were exploiting certain types of MSBs to launder hundreds of millions of dollars of drug money.
Although there have been complaints about the delay of FinCEN in issuing registration rules, there is no doubt that this is a significant undertaking. According to a recently published report, in 1996 there were approximately 158 MSBs operating in the United States that processed roughly $200 billion worth of transactions.
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Furthermore, this is a dynamic industry. The rapidly growing MSB industry generated about $3.7 billion in revenues last year. And it is predicted that the money transmitting and check cashing businesses alone will expand by at least 10 percent in the next year. Any rules placed on this growing and dynamic industry must balance the concern of consumers, law enforcement, and industry.
I think these proposed rules raise a number of questions that need to be answered. One, what law enforcement benefit will be created by these rules and what will it cost to enforce them?
And at this time, I have been handed a note. I'm in another subcommittee that's having a roll call. And, Mr. Foley, if you want to take over the opening statement so that we'll move ahead? We're right here [indicating].
If you don't like the opening statement, blame Mark. If you like it, it's mine.
Mr. FOLEY [presiding]. We need to ask whether these rules will produce a significant benefit for law enforcement and result in a significant decrease in money laundering. The Bank Secrecy Act has been somewhat successful in keeping widespread money laundering out of our traditional financial institutions.
However, we have to ask the question whether law enforcement can process and use all the information that is being churned out by these regulations. There must be better ways to deter money laundering than by simply creating mounds of paperwork that are impossible for law enforcement to scrutinize closely.
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I've been a strong supporter of the use of the Geographic Targeting Order. I think its use in New York City demonstrates that it can be very effective and a flexible tool in hitting money laundering centers. One must ask whether creating blanket nationwide rules will undercut the usefulness of the GTO mechanism? Do we need such broad rules if law enforcement would aggressively use the GTO?
We also must ask what the cost will be to the taxpayers for its Government to enforce these rules, if they can even be enforced in a comprehensive fashion? This will be a large regulatory undertaking involving thousands of institutions. If implementing these rules is going to require a tremendous amount of work and at a cost I understand to be estimated in the tens of millions of dollars, it is imperative that Congress keep the taxpayer in mind and make sure that we are getting a law enforcement bang for our buck. We should understand these issues before we proceed.
What is the impact on the consumer? The impact on the consumer cannot be ignored. The MSB industry often serves a population that is not serviced by traditional banks, hardworking people who are affected by even the smallest increase in transaction fees.
It is unclear at this point what compliance with the proposed rules will cost the MSB industry. Treasury contends that the proposed rules will cost MSBs approximately $50 million. The industry, however, claims the figure to be much higher. We have a responsibility to ensure that the benefits the proposed rules provide law enforcement outweigh the cost that will be imposed on the consumer.
Page 5 PREV PAGE TOP OF DOC Are we harming developing industries? We have to be cognizant that rules often have unintended consequences. The MSB industry is changing and, particularly, the stored-value industry is only just beginning to develop. Issuers and redeemers of stored-value are required to register with the Treasury Department under the proposed rules.
Although the mere act of registration does not seem unreasonable or burdensome, the unanticipated impact of rules upon this infant industry cannot be fully predicted. FinCEN, the Treasury Department, and the Government as a whole, must be careful not to hinder the growth of digital banking. Stored-value systems and related technologies truly are the wave of the future.
And will the privacy of our citizens be protected? These rules require a substantial increase in the amount of information on financial transactions by private citizens that will be provided to Federal law enforcement. We need to know whether this creates a potential for abuse, either by those in the industries that do the reporting or by those in the Government who receive the information. I do not think that the parallel rules that traditional financial institutions operate under have been abused, but those industries are closely regulated and have personnel who are highly trained.
We have to be concerned that requiring MSBs, an industry that is not closely regulated and whose employees are not highly trained, to file suspicious activity reports on all transactions over $500 could lead to abuses and suspicions being cast on honest, law-abiding citizens. This is not an insignificant concern. I think these are important questions. At the same time, Treasury is to be commended for attempting to tackle these issues. I certainly hope the Department is receptive to input from concerned parties in defining these rules.
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At this time I will turn to Ms. Waters, our Ranking Member, who is not here today, for any opening statement. Thank you, Ms. Waters, for your comments. And I enjoyed my opening statement very much and I welcome Mr. Morris to give testimony. That's my audition.
Chairman BACHUS. As you can see, Mr. Morris, there is total agreement on the subcommittee as to what the important questions are and how we ought to approach this thing. Another bill just moved through committee as we were having this opening statement.
At this time, Mr. Morris, we'll welcome you and ask that you make an opening statement. And if the Associate Director and Chief Counsel want to join you at the table, they are welcome.
STATEMENT OF MR. STANLEY E. MORRIS, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK
Mr. MORRIS. I would like to thank both Chairmen. I am pleased to be here again before this subcommittee to discuss the proposed rules on Money Services Businesses. I know that there is no subject in which the Banking Committee and, specifically, this subcommittee has been more interested over the past months.
And, as Chairman Bachus points out in his opening statement, these rules are important in our fight against money laundering and helping to counter the abuse that we have seen in money transmitters and related firms by narcotics traffickers and their criminal associates. While I have provided a full explanation in testimony, I would like to summarize it, but ask that my full statement be made a part of the record.
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The testimony that I would like to present has three parts. First, I'd like to briefly describe the backgrounds and, very briefly, the terms of the three proposed rules and the current state of our administrative process. Then I'd like to address the specific questions raised in your invitation to testify and summarized in your opening statement. And, finally, I'd like to explain briefly how the proposals fit into the overall context of our emphasis on Government-industry partnership.
First, I think perhaps a little history would be helpful. The focus for the last 20 years under the Bank Secrecy Act, BSA, which is the foundation from which the Treasury Department establishes its anti-money laundering programs, has been on banks. The BSA requires banks to keep records to preserve a financial trail for investigators to follow as they track criminals and their assets.
The Act also requires banks to report suspicious activity which could trigger investigations. And throughout the 1970's and, indeed, into the 1980's there was widespread noncompliance within the banking industry and, I think, to some degree, an adversarial relationship as well. There were cases in which individuals would bring satchels of cash into a bank and the transactions would go unreported.
Today the story is quite different. Banks do a very effective public and private sector cooperative effort. Banks are a key and strong component of this Nation's anti-money laundering programs. However, as you may have seen, this week's cover story of The Economist Magazine points out that we must move beyond banks, and beyond borders, and beyond cash, if we are to have an effective preventative and detective effort to deal with the issue of money laundering in today's international, fast-paced global economy.
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Criminals note that banks are no longer an easy route for laundering profits, so they have turned to other businesses, not just in this country but, indeed, around the world. We know that there are industries which are vulnerable just by the nature of their services and we have been working with them to build anti-money laundering safeguards. This effort includes businesses as diverse as casinos and brokerage firms.
Our focus has also expanded to Money Services Businesses, a name, as the Chairman pointed out, that we've coined for the five distinct types of financial services providers: issuers of traveler's checks or money orders, the sellers of those traveler's checks or money orders, check cashers, and retail currency exchangers. I'll speak of the stored-value industry as a component of that in a moment.
These types of financial services are complementary and are often provided together at a common location. They traditionally serve a segment of the unbanked population, often in culturally diverse, occasionally lower income neighborhoods. The vast majority of agents are small businesses.
We estimate, as the Chairman pointed out in his remarks, that there are about 160,000 outlets providing about $200 billion a year. These Money Services BusinessesMSBslike banks, can be large or small. Eight businesses account for the vast majority of the providers of these services, and these include such well-known corporations as Western Union, American Express, Thomas Cook Travelers Express, and Ace Check Cashers.
However, a far larger group, in terms of numbers, is composed of smaller companies that compete with these eight largest firms in a highly bifurcated market. Moreover, members of the second group may provide both financial services and unrelated products to the same sets of customers. For example, a liquor store may also provide check cashing services or currency exchange and money transmission services.
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In light of the complexity and the lack of knowledge, quite honestly, Mr. Chairman, regarding this part of the financial industry, we asked Coopers & Lybrand about a year ago to undertake the first comprehensive examination of these businesses ever, to assist us in defining their scope and character. I ask that a copy of this report be made a part of the hearing record.
Chairman BACHUS. Without objection.
Mr. MORRIS. Three proposals were published on the 21st of May. These proposals would require MSBs to register with FinCEN, to report suspicious activity, and finally, for money transmitters to report transfers purchased in cash of over $750 which are designated for foreign nations.
While written comments are due on the 30th of September, and therefore this hearing comes in the middle of this process, we too, like this subcommittee, are holding hearings in July and August, a series of four, open, on-the-record meetings to discuss the proposals at sites around the Nation.
Last week we met with over 50 interested parties at FinCEN headquarters to discuss the registration rules. On Monday we held a meeting in New York, attended by Under Secretary Kelly, to specifically discuss the rules relating to money transmitters. This Friday we will be meeting in San José, California, the heart of the Silicon Valley, to discuss the treatment of stored-value under the proposed rules. Our final meeting, at least planned final meeting, will be in Chicago on the 15th of August, where we will address the application of the rules to money orders and traveler's checks businesses.
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We are seeking this informal dialogue in the middle of the rulemaking process because we are aware, as the subcommittee has pointed out to us, that in crafting these rules, we should balance enforcement needs against the commercial efficiencies of the industry. This is a delicate process. Further, there is still more, despite the efforts that we have made over the last couple of years, that we can properly learn about the businesses involved and that they can learn about what our broad intent is.
The early meetings have been quite instructive. And, indeed, I think that they have been cordial. We are seeing ways in which we can make sure that the burdens that are imposed are the minimum necessary to carry out the anti-money laundering goals that the Congress and the President have set for us.
This leads me to your specific questions. First, the delay in implementing these regulations. There are several reasons for the delay and I hope you'll agree that this was ultimately a prudent delay. Missing Congressional deadlines is not something that I want to put on my resumé. In this case I'm not sure we were wise enough to meet the Congressional mandates that were established in the law when it was enacted, because first, we had to understand the way non-bank purveyors of money services operate.
The Annunzio-Wylie Amendments to the Bank Secrecy Act in 1992 would have required the banks to identify their non-bank financial institution customers, thereby essentially making them the registrant for this industry. That provision was superseded in 1994 as a registration requirement when it became clear to the Congress and the Treasury Department that it would be both difficult and very costly to make banks serve as our registration monitors.
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We began meeting with the industry representatives about the registration requirements in mid-1995, 2 years ago. I think we've come a long way since then in our knowledge and our understanding. And I would hope the representatives of the industry who come on the next panel will recognize the time that we have spent discussing these issues with them. So, in sum, we felt it wiser not to rush to regulate until we had a good sense of how to proceed efficiently.
The Coopers & Lybrand study, and a year-and-a-half preparation, implementation, and analysis surrounding the New York Geographic Targeting Order were crucial parts of our knowledge acquisition. We used our time wisely and I hope you will agree that our activities were in line with the way Congress wishes the executive regulatory agencies to proceed in this era of regulatory reform and regulatory sensitivity.
The second question the subcommittee has indicated that it is interested in, are the reasons that we propose to require the reporting of cash-purchased outbound transmissions of $750 or more. This is, in part, an outgrowth of the experience with the New York GTO combined with similar experiences elsewhere in the country.
We recognize that the proposed action is significant and it is costly. But we believe it is clearly warranted at this time based on the abuse of certain sectors of the money transmission industry. I do want to emphasize that other parts of the industry have worked hard to prevent the infection of their businesses by money launderers and that we have no intention here, or throughout this process, to tar an entire industry with a single, clumsy, brushstroke. All private and public organizations include a few bad apples.
Page 12 PREV PAGE TOP OF DOC And, indeed, a number of major national money remitters have already taken steps independent of the regulatory actions that are proposed and under discussion today. They've taken steps to devise anti-money laundering compliance programs. I would bring to the subcommittee's attention recent changes made by Western Union to its compliance programs. I think we all should applaud their effort.
Again, according to our research, $750 cash is twice the size of the average transaction in this industry. This reporting requirement will create a source of information that should help stop the relatively uncontrolled outflow of narcotics and other illicit proceeds through the transmitters that we have seen in this country.
Furthermore, we are hopeful that such a rule will allow more long term measures to take effect, the most important of which will be heightened industry procedures on suspicious activity reporting. Our goal here is to move, over time, away from specific currency reporting and focus more on suspicious activity reporting. That's the direction we are taking with banks and that's the direction we would like to go toward in the area of Money Services Businesses.
Chairman BACHUS. Mr. Morris, we are going to recess at this time for the two floor votes, and we'll return, probably in another 10 minutes, and reconvene the hearing. And I think Mr. Foley will actually start it when we reconvene. Thank you. We'll recess.
Chairman BACHUS. We'll reconvene the hearing at this time. And, Mr. Morris, I apologize for the interruption, but if you'll just proceed with your statement?
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Mr. MORRIS. Thank you, Mr. Chairman. As I was discussing when the call for the vote came, I'm in the process of trying to respond to some of the questions in your letter and in your opening statement. One of those issues you asked about was why the rules proposed the registration of stored-value and electronic payment providers.
We believe our proposal is in line with the best legal thinking on the subject, which is that stored-value, whether on a card or on a hard drive, represents the electronic equivalent of a traveler's check or a money order. In other words, it is a promise to redeem, in this case in a digital instrument or sequence, for currency or funds.
Therefore, it made little sense to us in our proposal, either as a matter of enforcement policy or simple regulatory equity, to treat old and new technology separately as a matter of definition in any event. And that's the point I'd like to emphasize. All we have done is to make clear our view, which I don't think is seriously debated from the numerous discussions we've had with industry representatives, that a purveyor of stored-value, like a purveyor of traveler's checks or money orders, is, in fact, a money services business.
But, having said that, we expressly have not made the new Money Services Businesses rules, other than registration, applicable to the new stored-value products because we agree with your opening comments that this industry is indeed in its infancy. Therefore, we have been working quite closely with the industry as it continues to evolve. I even had the opportunity a couple of years ago during the first tests of the Mondex system in Swindon, England, to walk the streets with Tim Jones and see how that system works. I have also been out to visit our colleagues, CyberPayments and FirstVirtual.
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Indeed, for over 2 years we have been studying these developments very closely. We sponsored the first Government-industry colloquia on money laundering cyber payments in September of 1995. I also had the honor to chair the Financial Action Task Force, the 26 nation anti-money laundering organization in Paris, and encourage its study and analysis of the implications of emerging payment system technologies for counter-money laundering efforts.
We recently contracted with the RAND Corporation for a simulation exercise whose results will soon be published within the next 45-60 days or so. I would be happy to make any of these materials available to the subcommittee. I know that your staff has been very closely involved in many of these, and indeed even participated in the simulation exercise along with the industry.
We are not concerned at this juncture that there are elements of this industry that are looking to design new mechanisms which could be avenues for money laundering. Indeed, what we've been trying to do is bridge very closely the direction that they are taking and gain an understanding of where their vulnerabilities might exist. Again, our goal here is, as a matter of equity, to identify them as Money Services Businesses. We would like to see them registered accordingly, while putting in abeyance all of the other requirements until the industry evolves.
Fourth, the subcommittee asked about the timetable and cost of implementing the rules. That is the crucial question and it's one about which I don't want to mince any words because it would be better to have no program than to write a set of rules that cannot be implemented fairly and efficiently.
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The present proposals call for the registration requirements to be satisfied within 6 months of the effective date, the date that the rules become final. Under Secretary Kelly has asked us to do everything we can to put these rules in place by the end of the year or early next year. Adherence to that schedule could mean registration of existing firms as soon as July 1, 1998.
The bulk of the costs associated with implementing the three proposed rules would be what I would term ''customer service.'' This would include printing and distribution of forms in multiple languages and business outreach and education. We are trying to design a voluntary program that is sensitive to the cultural differences of the various businesses that need to apply. And then, finally, we will be building the data systems to process and house the registration and reporting forms.
Our preliminary estimates are that it will take about $10 million to do the necessary job in fiscal year 1998. And probably about $7 million thereafter. Of course, these estimates are just that, and we're working with the Department on the details of the implementation process.
One thing I would like to point out is the important role that the Internal Revenue Service plays in this regard. IRS, by delegation, has oversight authority from the Secretary for non-bank institutions. And it has provided such support as well as information processing for years in carrying out the Treasury's anti-money laundering efforts with respect to banks, without any specific direct appropriation for that.
Page 16 PREV PAGE TOP OF DOC Indeed, as I have said in this subcommittee before, the United States would not have an anti-money laundering program if it were not for the support and assistance of the Internal Revenue Service in many different areas, not just in the area of criminal investigation.
But, I wonder whether we can continue to depend on those free services ad infinitum? I cannot emphasize strongly enough our concerns in this regard. We must have a mechanism to carry MSB implementation out and we are in planning discussions at this time.
A final question concerns the safeguards to protect the information obtained under the three proposed rules against misuse by employees of Federal law enforcement entities. We have worked at FinCEN very diligently since our founding to protect all of the information in our care, especially the BSA information.
The data would be held in databases to which employee access is continuously monitored on a keystroke basis and strict penalties will be applied for any misuse of that information. The databases include firewalls and other up-to-date security measures to limit access and to guard against unauthorized intrusions.
Let me close, Mr. Chairman, by briefly speaking about these rules in the context of our general regulatory and enforcement philosophy.
We have emphasized during the past 3 years that no effective Government anti-money laundering program can be built without the cooperation and confidence of the financial sector. Most financial services providers are as concerned as we are about walling off their industry and protecting the good names of their companies from corruption and crime.
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In this spirit we have approached the task of responding to everyone's concerns about the abuse of Money Services Businesses by trying to figure out what works, what truly assists law enforcement and what doesn't. The question is not whether these businesses can be abused by money launderers. We, and they, know they can be and they have been. The question is what to do about that abuse without harming the legitimate industry and its law abiding customers.
I hope, Mr. Chairman, I've given you a sense today that we are working hard with the industry itself and with this subcommittee, and look forward to trying to answer the questions that we're dealing with in as informed and sensitive a way as possible. I would be happy to answer any questions.
However, I have appeared before this subcommittee on a number of previous occasions and I am not a lawyer, and you are. And so I think, in fairness, I would like to call Mr. Djinis, my Associate Director for Policy Development, and Mr. Kroll, my Chief Counsel, and we'll share the microphone and try to respond as effectively as we can. Thank you.
Chairman BACHUS. Thank you, Mr. Morris. When I ran for office I was an attorney, as you know, but I ran as a small businessman. Much more popular.
Mr. MORRIS. I understand. Mr. Chairman, I have a whole range of lawyer jokes that I would be happy to share with you if you need them at any time.
Chairman BACHUS. Some people said that I was one of the lawyer jokes in my district. But the first question I want to ask you, and I'm going to get to our testimony today, but I want to applaud you on taking this show on the road, going to New York, going to Chicago, going out to California to Silicon Valley. I think that's tremendous, other than the hearing that you had here.
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I noted in the hearing Monday in New York, you talked about the large amount of money laundering that is going on under the $10,000 level. And you called this, ''We're being 'Smurfed' to death.'' Would you kindly comment on what you meant by that? I think I know, but I'm not sure.
Mr. MORRIS. Yes, Mr. Chairman. The challenge that we are facing is in fact a function of our success. Banks and other businesses are very wary of customer transactions, particularly cash transactions that are close to the threshold of the reporting or recordkeeping requirement. It used to be that a money launderer would be successful in depositing $9,800 or $9,700, three or four times a week, because the bank wouldn't pay attention to that.
They now know that the banks do pay attention to that and they also know that recordkeeping requirements are maintained. Because of that vigilance we find the money launderers are moving to much lower levels of transaction activity with banks at levels between $1,500 and $2,000. And, indeed, after the GTO in New York was issued, which we set at $750, we even saw efforts at laundering money below that reporting ceiling.
Now, clearly from the money launderers' standpoint, that is very expensive and it is very risky. Further, the fact that we know it suggests that it isn't as successful as it might be. But it does suggest the major problem that money launderers have, and you see this both with banks and Money Services Businesses. It illustrates that the alert attention by the private sector is having a very significant impact.
Chairman BACHUS. OK, thank you. You mentioned these in your opening statement that you thought these rulesor maybe it was your written statementthat you felt that they would be in place by July of next year. You have mentioned that there is $10 million appropriated the first year, is that to implement the rules?
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Mr. MORRIS. There has been no money appropriated. We have identified, outlining the timeframes that we have been given, what the costs would be in fiscal 1998. And we are discussing with the Internal Revenue Service and the Department of the Treasury whether or not those costs can be carried out within existing resources, whether they would need to be reprogrammed, or whether supplemental requests would need to be made.
Because the final dimension of the rules is not clear, we're not prepared, of course, to come to Congress, nor am I even prepared at this juncture to go to OMB. But we do know that if this program is going to be effective, in the timeframes set for it in the rules, that the Government has an obligation to help educate MSBs about the new rules through an aggressive outreach program.
Chairman BACHUS. I'm just trying to think of what needs to be done up to that date. You are going to have three different MSB data forms, so you've got to have a computer system. Have you looked at the cost of the computer system to handle those required documents?
Mr. MORRIS. Yes, we have. As I think the Chairman is aware, the Detroit Computing Center, which is an element of the IRS, conducts about half of its business with FinCEN. They do the processing of the Currency Transaction Reports, the Suspicious Activity Reports, and some of the processing for other reporting requirements that we maintain.
So, what we're having is a discussion with them as to what the additional costs might be, what software adjustments would need to be made. We also have to make some estimates as to whether any of these kinds of forms can be filed electronically.
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We have tried in the registration area not to find ourselves in the situation of registering all of the 100,000 or 200,000 businesses, but to focus on the registration, in most cases, of the principal parent company. We are also having discussions with the industry about the size of the reporting that would occur for the international remittance reporting. Clearly, we will be driven by that. But, in any event, they do have computer capacity and will have to make available the necessary systems with us, just as we did in the number of other programs in the past with casinos and the like. So, we are thinking about it, we are concerned about it, we clearly need to begin to think very carefully about the time framework in which we are operating.
Once the comment period ends, one of the first orders of business will be making an initial determination of the implementation elements even before a final rule goes out, if we're to be ready within the timeframes that exist. We have allowed, as you pointed out, Mr. Chairman, 6 months between the final regulation and the beginning of the registration process. And so, we do have a planning period built in, but it's still under very tight timeframes.
Chairman BACHUS. On the number of businesses to be registered, I've seen two or three figures. Is it 25,000 different companies, but 158 different locations, or what? Can you give me some read on how many MSBs there are and now many locations? Are you saying we're only going to register by companies?
Mr. MORRIS. Yes. There is some confusion in this and, indeed, I think there is some ignorance on our part and to some extent on the industry's part. One of the issues that we discussed in New York was whether or not we would tolerate different kinds of registration programs for different types of businesses.
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While my lawyers like to have everything fit neatly, I think that we should try to be as flexible as possible. For example, Western Union, I think, has 40,000 agents. We would accept Western Union registering and then maintaining a list of their other 40,000 agents, rather than our trying to register the 40,000. In the case of a smaller firm with a few agents, we may prefer to register those separately. In addition, our current proposal is to register certain large agents independently, even if they are maintained as well on the record books of their primary purveyor.
This is all very complex because quite honestly, we are still learning the dimensions of the industry and what the relationships and responsibilities are between the principal and the agencies.
Chairman BACHUS. You know, law enforcement has voiced some concern that the principals in the business are not paying enough attention to the agents and to their actions. Could you explain the relationship between the principals and the agents and how the proposed rules would increase the oversight that the principals have over their agents, or will there be any increase in that oversight?
In short, I guess maybe I'll just say, will the principal be responsible for the actions of their agents? You know, we have agency laws which make them responsible, but other than agency laws that focus on these regulations, what duties and responsibilities will arise?
Mr. MORRIS. The short answer, Mr. Chairman, isno, I don't think I can explain it.
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Chairman BACHUS. Maybe this would be one for legal counsel.
Mr. MORRIS. I was going to pass it to my legal counsel, although Mr. Cohen, of your staff, was with us up in New York and remembers an exchange on this which was animated but did not shed a great deal of light on the matter. Mr. Kroll, would you like to describe briefly how we think that might work?
Mr. KROLL. Mr. Chairman, good afternoon. I think the point we've tried to make in the Suspicious Activity rule and in the $750 rule, is that while there is a law of agency, it doesn't mandate the same relationship in all cases. We think that we need to learn more, frankly, about the different ways different purveyors of these Money Services Businesses structure their relationships with what I would call their outlets.
What we said in New York, except for the fireworks to which the director is referring, is that the fact that you create a financial product and someone else is licensed to act as your sales outlet does not mean you, and I'll use the words ''as principal,'' are absolutely responsible for everything that goes on there. On the other hand, it also doesn't mean that because those people are not your common law employees that you therefore have no duty of oversight and are responsible for nothing that goes on there.
So, the question is how to fill in the grey middle. We suggested in the preamble to the rules a concept like due diligence and that's going to have to be fleshed in over time. We are not suggesting insurer liability or anything of that kind.
Page 23 PREV PAGE TOP OF DOC Chairman BACHUS. And as you say, you know, you are going to have every shade from someone who is in an employee-employer relationship to someone who is an independent contractor.
Mr. KROLL. Yes, sir.
Chairman BACHUS. So, that is just another complexity of this whole situation.
Mr. MORRIS. Yes, Mr. Chairman.
Chairman BACHUS. Have you looked at agency law in this field? Do you have a summary of what the law isand I'm not talking about giving it to me now, but I wondered if one's been
Mr. KROLL. I know you are a man of very good humor, Mr. Chairman, so I'll say this reminds me a little bit of law school. I think generally the Restatement of Agency says that a principal is liable for the tortsand that's the closest analogyor crimes of his or her agent, or its agent, that are committed within the scope of the agent's employment by the principal, but not outside the scope of employment. So, then you get to the old debate about where that boundary is. And that we think is where the due diligence concept comes into play.
Chairman BACHUS. And whether they are on notice?
Page 24 PREV PAGE TOP OF DOC Mr. KROLL. And whether they are on notice, yes, sir. I think that we all agree that this is the nub of the issue and it's one that we are trying to craft some broad outlines and fill in.
Chairman BACHUS. But I'm very encouraged that you have obviously been giving this a lot of thought, so it's not something that is going to blind-side you. The last question is on getting prepared for this July 1 date. Have you made any preliminary staffing estimates? And I guess you are going to have to consider not only what registration you have, but also what regulation you have once you have the registration to make those decisions.
Mr. MORRIS. Mr. Chairman, we have been giving some preliminary, and I would underline ''preliminary'' thought about people as well as dollars here. Clearly, the amount of data coming into the Detroit Computer Center will require an increase in data entry activity. That, however, has traditionally been done on a contract basis and would continue to probably be done in that way.
The other parts of it, as it relates to the oversight elements, which are very, very important, really will come primarily as the responsibility of the Internal Revenue Service through their examination process. And as you know, IRS at present is being looked at top, bottom, left, right, and all kinds of ways. I have discussed with both the Acting Assistant Commissioner, Mike Dolan and others.
Chairman BACHUS. Are you saying they have a few problems of their own?
Page 25 PREV PAGE TOP OF DOC Mr. MORRIS. I think it would be inappropriate for me to use the word ''problems,'' but there certainly are lots of issues being discussed regarding the Internal Revenue Service and, of course, they are very important to us. While it's not the biggest thing that they do, it's nevertheless, for a small agency like mine, critical.
And they will have to play a major role in the outreach effort to the industry, and then a major role in disciplining business for failure to register or failure to comply with the rules. We don't have a good estimate in that regard. And then, within FinCEN itself, there probably would be some modest increases, but we are a very modest-sized agency, so I wouldn't expect anything of much significance in that regard.
Chairman BACHUS. You've reminded me, and sometimes you don't focus on the fact that they do have responsibility for implementing the regulationsthe IRS. Knowing that, knowing the present atmosphere, budgetary restraints, funding restraints, have Treasury and FinCEN had discussions with IRS on, what would I say, regarding the implementation of the rules?
Mr. MORRIS. Yes. Actually just a few weeks ago during one of Secretary Rubin's strategic meetings, an off-site that he held, this issue came up. I made sure it came up because I'm in a situation in which I'm a supplicant before the IRS court. I've raised the issue with both the Secretary, and the Deputy Secretary, and the Acting Commissioner, and I've discussed it with Under Secretary Kelly.
We are putting a team together with IRS and the several elements within IRS. And we'll advise them what we think the program needs are, and they'll tell us whether they can do it and how they are going to do it. So we've had discussions, though we're certainly not anywhere near a conclusion.
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But the timeframes are very tight here and it's very, very important that we not neglect this aspect of our duties while the Congress and the Executive are debating other aspects of IRS' duties.
Chairman BACHUS. And you know, we are going to need to know at some point whether, in their opinion, they have the resources to implement the rules and to enforce the rules.
Mr. MORRIS. Yes, Mr. Chairman.
Chairman BACHUS. As soon as you can get feedback on that, we'd appreciate hearing from you on that.
Mr. MORRIS. We will, for both this subcommittee as well as for the Appropriations Committees who are also quite interested in what the implications of this will be.
Chairman BACHUS. Particularly in light of the broader debate concerning this agency, and that could really be a sticking point at some future date.
Mr. MORRIS. It could, indeed.
Chairman BACHUS. I want to just conclude with maybe two more questions. I've got 25 that were submitted to me but two of them really, I think, are intriguing. And I'm just going to read what it says, so I won't stray.
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In the proposed MSB rule regarding the filing of Suspicious Activity Reports, you've got what I call a ''laundry list'' of potential suspicious activities that are provided. Is there a concern that by providing such a list as that, that Money Services Businesses will simply file reports to match what FinCEN profiles, even if they are not warranted, that they just basically send these things in?
And, I'll get down to a more specific example of where I could see that happening. Well, let me just tell you now. One example, I think it's Example B, the purchase of multiple instruments or remittances, in the same or similar amounts, by the same person is identified as being ''suspicious.'' What if I go in and purchase $1,000 worth of cashier's checks in $100 increments? Are the MSBs just going to immediately automatically submit that as a suspicious activity?
Mr. MORRIS. Mr. Chairman, we certainly hope not. One of the key elements of this process has to be education. MSBs really need to develop criteria in a different fashion than a bank has to, in order to increase their knowledge of typical customer activity and make judgments about unusual and suspicious activity. These items in the proposed regulation and the guidance that we have are intended to be illustrative.
But, finally, you cannot extract the important elements of judgment here. This becomes an important obligation on the part of the Government. We need to develop our relationship with, as I said in my closing remarks, the Money Services Businesses. We are moving toward this, but it does not yet have the same maturity as our relationship with the banking community, with whom we, in fact, share very specific kinds of information.
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Clearly, this is a different business. MSBs have a different kind of customer relationship. But our hope is that they will study these regulations and provide feedback indicating that some of these activities may not be suspicious at all. Some activities may be the typical way that a particular community conducts transactions.
Chairman BACHUS. What about traveler's checks? You know, it's more ordinary than not, for somebody to go in and purchase five $200 checks.
Mr. MORRIS. I think the point is well taken.
Chairman BACHUS. That might not fit a money order to Colombia, where you go in and you buy 300 money orders to the same person in Colombia. I think you mentioned education.
And, I guess, when I was talking about was staffing and what you are doing with the computer programs. Have you looked at how you are going to educate these Money Services Businesses? And I use ''educate'' maybe not in the Washington sense, but they are going to have to be given direction and some guidance. Have you talked about those staffing requirements or what that's going to require from a funding situation?
Mr. MORRIS. Yes, we have. It becomes very tricky in some regards, because we must take into account language and cultural differences in the communities being served by the MSB industry, plus the vast geography of the United States, and the differing nature of the services being provided. In the meeting we had last Tuesday in Vienna, Virginia, where FinCEN's headquarters are, I tried to draw the industry representatives out. It was the first meeting and I asked just that question. I said, ''We can't do this alone.'' That is, ''we'' the Government. ''And we really need to think what needs to be done.''
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And I think we're just working through that process. I think right now the industry, and I'm sure the panel that follows this one, will have thoughts on this. They are going to have an obligation and we have an obligation. The best way for us to carry those out is through some clear partnership and we need to begin that effort now.
Clearly, the focus now of the industry toward Government is going to be; ''Tell us what you are going do.'' But, as soon as that issue gets resolved, I believe the hard part really happens. Then we must try to establish ways to assist these very small businesses, in many cases two or three people whose first language is Korean, or Spanish, or Chinese, or Polish, and who are providing a very real service in that community in a range of ways to meet their new obligation.
It's our goal to try to have them assume that obligation in a way that is not viewed as another Government burden, but is understood as being good for their industry and for their legitimate customers. That is the kind of education that has to occur. The Government can't do that alone. We really need the help of the Associations and the industry, some of whom will be represented in the following panel.
Chairman BACHUS. Do you say these examples that you've provided, I mean Example B. Do you consider that as mandatory or optional?
Mr. MORRIS. No. They are simply illustrative.
Chairman BACHUS. OK. All right. Have you consideredyou mentioned American Express as having 40,000
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Mr. MORRIS. Western Union.
Chairman BACHUS. Western Union40,000 agents or 40,000, is that transmission points?
Mr. MORRIS. I think they call them agents, Western Union agents.
Chairman BACHUS. Have you given any consideration, or does the law or the regulations allow you to go to Western Union and say, ''As opposed to what we've developed here, you could develop your own form and we could approve it''? In other words, as an either/or. And in some cases they might actually develop a form that's simpler and gives you more information.
Mr. MORRIS. Mr. Chairman, we had a discussion about the forms and some of the requirements in New York. It was clear to me that the point that you made is absolutely correct. Government does not have an long distinguished career designing clear and coherent forms.
We hope to come up with a mechanism that engages MSBs in the development of the forms. For example, it was suggested by a number of representatives at the New York meeting that maybe we shouldn't have three forms, maybe we should devise one form that includes a registration element, a currency reporting element, and a suspicious reporting element. What is suggested is that perhaps we need a fifth meeting. We have four scheduled now with the industry and I hope we can arrange an additional meeting to see if together we can't craft something that meets our respective needs and concerns.
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Chairman BACHUS. What about an option? I guess I'm just saying what if they could bring a form to you and say, ''This is what we would propose''? And if it is substantially in compliance, and that decision has to be made sooner, as opposed to later, as you start getting your computer, you might get to the point where you say, ''It would have been a good idea, but we're so far along.''
And I almost think that if you did that, that you would at least have the entire industry respond. I think they are profit-motivated, which is good in that they would look for simplification, which is what you wanteffective, simple, cost efficient. And you might actually have one or two of their forms become your model.
Mr. MORRIS. The short answer is that we certainly would consider that in our discussions. The tensions that exist here in this system are the ones you point out, computers and lawyers, both like consistency. And of course, law enforcement's needs are a priority.
But having said that, our goal here is a system that is easily applicable to people in small businesses who do not have regular interaction with the Government. And so, we might very well get better data in a form in which there is more ownership by those who have to fill it out.
I think we would look at it, recognizing the tensions that FinCEN usually finds itself in, between the need for standardization because of the computer input and the ability to track that, and the enforcement aspects, which are both legal obligations as well as law enforcement's needs. Having said that footnote, we will certainly consider industry suggestions in the process.
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Chairman BACHUS. My final question. You said that the $750 requirement on reporting transactions to a foreign country is final, but it might not be permanent? What do we mean by that? I mean, you touched on that in your opening statement.
Mr. MORRIS. Yes. I mentioned briefly that we would like to move away from rote currency reporting requirements, as this subcommittee and the Congress have asked that we do in the area of banking regulation and the currency reporting system. However, we're building on a base here of very little regulatory oversight as it relates to money laundering from the Federal level and even less from the State level.
Our thinking at present is, let's see if we can't take the 25 years of history we have had with the banks and, starting with the currency reporting requirement, apply that experience to solving specific aspects of the problem. I would also be willing to entertain the inclusion of a sunset provision. We might take the approach of, ''Let's do this for 2 years, let's take a look at it,'' much like we are doing with the wire rules, and together with the industry determine whether or not that maintains some validity.
Chairman BACHUS. What do you think would have to transpire, in your mind, for this rule, once it goes final, to be repealed?
Mr. MORRIS. How do you mean ''repealed''?
Chairman BACHUS. The requirement, the reporting requirement, if it's final, but not permanent. Just the requirement being removed.
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Mr. MORRIS. I guess anything that we do is obviously susceptible to change. But I believe, and we have done this in other areas, that the Government should impose upon itself an examination of its practices.
In fact, one of the reasons that that language is in there, Mr. Kroll and I and Mr. Djinis crafted it together, was the thought that if we put some reporting requirement in place, it should be examined to determine whether or not it has a negative commercial impact.
Let us examine whether or not the Government actually uses it. Let's determine whether suspicious reports don't, in fact, provide the necessary deterrence and protection devices to deal with money laundering. At the end of some given period of time we can say, ''We are better informed, we will now change it,'' as the problem moves and as the industry provides us better information.
And I think that kind of an obligation is good for a Government to undergo, even though it is more costly and it creates some uncertainty for the industry and some more work for the Government, I think in the long run it is better Government.
Chairman BACHUS. In my opening statement I touched on the fact that the GTO was so successful just going into a geographical area where law enforcement says, ''This is a problem,'' and addressing it in that way. Has there been any consideration to these rules being made final, but holding off their application and using the GTOs and seeing if it's been successful, at least in the short run?
Page 34 PREV PAGE TOP OF DOC Mr. MORRIS. It has been successful in New York. I will say this and I shouldn't say too much because law enforcement has a number of investigations ongoing, what we have seen occurring is that we've driven the problem out of New York. There are highways, and train tracks, and bus routes, that quite easily take you to other places where you are not subjected to the same rule.
Chairman BACHUS. Couldn't a Geographical Targeting Order hit that too, and maybe by surprise? What I'm saying is, we're building a system which we're talking about applying nationwide, but, I mean if, it's only active in certain areas and we move it aroundhas there been any discussion of that as an alternative?
Mr. MORRIS. Very briefly. I guess the argument against that approach is that what you do then in the process of making a case for the application of a Geographical Targeting Order, is you've simply identified a problem. What we're trying to do is prevent a problem here as much as attack a problem. So, let's take an example.
Chairman BACHUS. Well, see, I might disagree. We're addressing a problem that we see as opposed to just anticipating. We've got so many problems without anticipating problems. I think we do have a problem with the money laundering through these businesses, but, could we address it in this limited fashion?
Mr. MORRIS. I think the answer is that that would mean we were constantly chasing and moving the problem and not, in fact, addressing the problem. And the way to address the problem is to take the experience we have and basically set up a system that does not allow anonymous transactions purchased with large amounts of cash to move off-shore.
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What we saw in New York was the problem moving elsewhere in the United States or moving outside of transactions to Colombia. And so we could constantly spend our time and resources chasing it, but we can head it off at the pass by establishing a system of registration and suspicious reporting and narrow currency reporting for cash purchased
Chairman BACHUS. But what about going into an area and having the Geographical Targeting at a certain level, but having in another area of the countrylet's just say in Iowa or upstate New York, where you think this problem is being chasedanother form that you require only if someone suddenly goes into an area and starts utilizing a transaction that hadn't been common there?
In other words, if you have a drug dealer in New York and he's chased out of New York, and you've got a Geographical Targeting Order, and suddenly he goes to Saratoga Springs, outside Binghamton, and he starts working this Money Services Business, there all you have is you have that report come in from that area.
Mr. MORRIS. My view is that we would just simply create a train stop for money laundering activity, and they would just move in, and as soon as they knew that currency purchases at certain levels are supposed to be reported, they'd just move to the next stop. This doesn't seem to me to be, in the long run, a successful way to deter this which is what we are trying to do.
Chairman BACHUS. I appreciate that. And you've got a monumental task here. And this is an ongoing process. I appreciate your attendance, I appreciate your candid responses. At this time I'll dismiss this panel and we'll call our second panel forward.
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Mr. MORRIS. Thank you, Mr. Chairman.
Chairman BACHUS. At this time we'll hear from our second panel of witnesses which is comprised of industry representatives. Mr. Ezra Levine will speak on behalf of the Non-Bank Funds Transmitters Group, which is an Association comprised of several of the largest money transmitters.
Mr. Jerome Gagerman, you are here to speak on behalf of the National Check Cashers Association. And, Mr. Mark Plotkin, counsel for Mondex USA, you might tell us what Mondex does as you offer your testimony. You are going to discuss the effect the proposed rules will have on the service industry and other forms of electronic commerce. And I know you might be offering the most complex testimony of all.
Gentlemen, we welcome you. I know you have prepared remarks, but feel free to take as little time as you need or as much. Welcome to the subcommittee. You've had the benefit of hearing from the potential regulatorsFinCENand now we'll hear your testimony. You can also depart from your prepared remarks, if you'd like, to address some of what you heard from the first panel.
STATEMENT OF MR. EZRA C. LEVINE, ESQ., HOWREY & SIMON
Page 37 PREV PAGE TOP OF DOC Mr. LEVINE. Thank you, Mr. Chairman. Mr. Chairman, on behalf of the Non-Bank Funds Transmitters Group, which is composed of Western Union, MoneyGram, Travelers Express, Comdata Network, Thomas Cook, Citicorp Services and American Express, I am pleased to testify before the subcommittee on the important issues surrounding FinCEN's recently issued proposed rules relating to Money Services Businesses. I have submitted for the record, prepared comments, but what follows is an overview and, hopefully, it will be brief.
The members of the Group are the leading purveyors of the traditional non-bank funds transfer services including sales of money orders, traveler's checks, foreign currency, denominated checks, and domestic and foreign funds transfers by wire. I should add parenthetically that MoneyGram and Western Union, for example, together account for about 90 percent of wire transmissions, even according to FinCEN's data.
They are vitally interested in insuring that their systems and the services that they provide are not utilized for illicit means. To that end, these companies have actively worked with Federal and State law enforcement officials in the fight against money laundering. Now, these companies are not, as you often hear, unregulated.
They are not only licensed by 44 States, including Alabama, and I checked that just before I walked in the door, Mr. Chairman, but they are subject to the full range of Title 31 Bank Secrecy Act reporting and recordkeeping requirements. They are examined by the IRS for BSA compliance. They've implemented in-house programs that review both their operating procedures, as well as day-to-day transactions, to safeguard their systems from abuse.
For example, Travelers Express was presented with a monetary award by the IRS for analyzing a complex transaction involving money orders which led to a successful prosecution of a major criminal enterprise. MoneyGram, Western Union, Thomas Cook, American Express have developed sophisticated compliance programs and have encouraged the active participation of FinCEN officials to review and comment on their ongoing compliance efforts.
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Moreover, Group members voluntarily file Suspicious Activity Reports, even though right now today there is no regulatory requirement for filing of those reports as there is for banks. Representatives of these companies participate in FinCEN panels, Bank Secrecy Act Advisory Group, and at such functions as the Financial Action Task Force mutual evaluation sessions.
This represents, in the Group's view, a fairly high level of commitment by an industry that believes that public confidence in its operations is essential to the continued growth of the industry.
Therefore, the industry is very concerned when a narrowly focused issue like the New York GTO, involving only a relative handful of suspect actors in transactions to one country, Colombia, becomes the driving force for national regulatory action with attendant and unnecessary negative publicity.
To set the stage here, it is important to remember that non-bank financial institutions, in the aggregate, account for a relatively insignificant portion of the funds transfer activity generated domestically across the spectrum of all financial institutions in the U.S.
This is a particularly important observation in the context of the money laundering debate, because too often unfortunate generalizations have been made which tend to suggest that, somehow or other, non-banks are particularly vulnerable as conduits for the proceeds from illegal drug sales.
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In fact, while every financial services industry sector can be utilized to some extent by money launderers, there is no credible evidence today that non-banks as a whole are disproportionately so utilized.
Now again, at the outset, with the exception of the proposed special rule of the package of FinCEN-proposed rules for currency transaction reports, the rules proposed by FinCEN do not relate to the New York GTO, neither the Registration and Suspicious Activity Report, which are two of the key reports in the package which relate specifically to mandates under preexisting statutes.
Therefore, it is unfair to create the impression that some have that the package of rulemaking initiatives was somehow necessitated by disclosures of widespread illicit activity by non-bank financial institutions, or that somehow non-banks are uniquely susceptible to systematic abuse. Nothing could be further from the truth in our view.
And now, I'll turn to the specific proposals. A key aspect of the first proposal is FinCEN's attempt to implement the statutory registration provisions of the 1994 Money Laundering Suppression Act. That provision requires FinCEN, as you know, to register all money transmitting businesses, but not all of their sales outlets, which number about 150,000 nationwide.
The FinCEN proposal, we believe, is generally workable. It appears to be an attempt to effectuate the Congressional intent that not all small business outlets be required to independently register, but can be included on lists maintained by the money transmitters, which are available for review by law enforcement.
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However, FinCEN has proposed a complex regulation, an independent duty to register, which may require many small sales outlets to register. Now unfortunately, I think, it's inevitable that any threshold for independent registration of only certain sales outlets, may snare those small businesses which will not become aware of their registration responsibilities and as a result will risk felony prosecution for not filing.
There is a way to avoid this problem, since there is no statutory requirement that all sales outlets of money transmitters independently register. In light of the discretion in the statute and the Congressional mandate to avoid unnecessary paperworkwhich is clearly articulated in the conference report on the MLSAit would be far better to allow money transmitters to maintain the lists of all sales outlets, which they ordinarily do in the normal course of business, and avoid registration of any sales outlets.
The second proposed rule deals with Suspicious Activity Reports, SARs. While filing SARs is a worthwhile endeavor from the law enforcement standpoint, the rule as proposed, because of an unrealistically low filing threshold, would result in the countless filing of the useless SARs at significant expense to the industry with questionable benefit to law enforcement.
In fact, coupled with the examples which were included in the proposed regulations as typical of suspicious activity, the vast majority of ordinary money orders and traveler's check transactions, as well as wire transmissions, could almost be, per se, suspicious and require reporting. In short, while FinCEN is to be applauded for attempting to provide guidance on examples of suspicious activity, that guidance should be constructed and reflect the reality of the marketplace.
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Let me add for a second, Mr. Chairman, a response to a question you asked of the prior panel with regard to the examples. One of the fears we have of having specific examples, rather than just general guidelines in the regulation itself, is that those field personnel who ultimately have the duty, in good faith, of enforcing the regulations will, in fact, use those, quote, ''examples'' as a checklist, rather than just the subjective guide that they are designed to be.
Now, the last rulemaking deals with the special CTR report. The special CTR rule, as you know, would require all non-banks which transmit $750 or more by wire to any country, not just Colombia, to obtain certain I.D. information from the sender, report the information on a form to the Government.
The problem, in part, with this proposal is, we believe, that it is premature, is regulatory overreaction, and because of the unrealistic threshold, will be a costly regulatory burden both for the industry and the Government.
First, the New York GTO is the first effective use of the Geographical Targeting Order pursuant to an authority conferred by Congress some years ago, and it should be used again if it works, rather than imposing a nationwide rule.
Second, if the rules promulgated at the threshold are proposed, over one million new CTRs will be filed at a conservative cost of about $11 million per year to the industry. These additional one million CTRs will represent a 10 percent increase in the aggregate number of CTOs filed nationally, few of which are utilized by law enforcement.
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The Group will propose to FinCEN more rational reporting thresholds, in the context of the formal rulemaking proceeding, which can help to eliminate the number of filings, while serving the needs of law enforcement, even though the Group believes this rule is unnecessary on a national level.
Finally, the Group believes that it has always been able to work in a very constructive manner with FinCEN to develop regulations which are both cost effective and serve the legitimate needs of law enforcement. We appreciate FinCEN's series of open forums on the rulemaking proposals which, as you noted, Mr. Chairman, have been held in a number of cities and will be held in other cities in the United States.
But in attempting, in the words of the Government, to make, quote, ''life difficult for the money launderers,'' the Government should not lose sight of the fact that the main burden of the proposals falls on the responsible companies which transact by far the vast majority of the business.
In short, regulatory overreaction has the unfortunate result of penalizing responsible companies, and is especially inequitable when Congress has already provided very effective, but little-used, enforcement tools like the GTO process and the largely-ignored tool provided by 18 U.S. Code, Section 1960, which makes it a Federal felony to operate a money transmitting business without a State license.
On behalf of the Group, thank you again, Mr. Chairman, for this opportunity to appear and provide views on these important issues.
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Chairman BACHUS. Thank you, Mr. Levine. And I would say that your remarks have already been useful to me. I think they are very practical remarks and also it's reassuring to hear that your past experiences with FinCEN have been positive.
Mr. LEVINE. Yes, Mr. Chairman, they have been. I mean, certainly through the Bank Secrecy Act Advisory Group and generally speaking, I think FinCEN has been very responsive to the industry and has tried very hard in an outreach program to attempt to get industry views. I think, as Director Morris has pointed out, it is a complex group of industries under the rubric of MSB.
And, while it is often not as, how shall I put it, well understood at the Federal level, because traditionally it's been regulated by the States not the Feds, I think FinCEN, in good faith, has been attempting to make that effort and try to determine what the nuances are with regard to the various elements of the broad category of MSBs and non-banks generally.
Chairman BACHUS. And when I say you've had a good relationship, I'm not presupposing that there won't be areas of disagreement. You know, it's basically unavoidable at some point not to have differences of opinion, and we'll view those as reasonable, just because you've had a past experience that has been good.
Mr. LEVINE. Thank you, Mr. Chairman. If I could add one final note. Again, I don't want to be so presumptuous as to comment on funding needs for various arms of the Federal Government, but I think I would second what Director Morris indicated with regard to the essential nature of the Internal Revenue Service.
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The rules are increasingly complex and when the Internal Revenue Service performs the examinations of non-banks, whether they are called MSBs or not, their agents, the agents of the Internal Revenue Service, have to have adequate training. And unless the Internal Revenue Service has adequate funds to perform the training of these complex rules, it won't work. Thank you, sir.
Chairman BACHUS. Thank you. Good point.
Let me just go from my left to right. And, Mr. Plotkin, we appreciate your testimony and tell us what Mondex is.
STATEMENT OF MR. MARK E. PLOTKIN, ESQ., COVINGTON & BURLING
Mr. PLOTKIN. Mondex, Mr. Chairman, can be summarized briefly by this card that I have in my hand, which looks very much like a credit card, but has a little computer chip off on one side. And, in fact, if a staff member would like to grab a card, so that the Chairman can take a look at one. I have a number of them in my pocket that I can hand out.
Chairman BACHUS. I'm interested in looking at the one that has the most stored-value.
Mr. PLOTKIN. That would be the one my associate has with him here. I'd like to take a few minutes and tell you a little bit about Mondex, and also about our comments on the rules, Mr. Chairman.
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As I've said in my written testimony, I'm here as Regulatory Counsel for Mondex USA, which is a pioneer in the development of stored-value cards, of which this card is one. And I'd like to thank the Chairman and the subcommittee for inviting us to participate in this hearing today.
I'm going to address myself to the proposed registration requirement of Money Services Businesses with the Treasury, because that's really the only proposal that directly affects the organization that I represent. And I'm going to depart significantly from my written remarks, because my wife criticized them as ''long and boring.'' And she is a former insurance coverage lawyer, so if she thinks that
Chairman BACHUS. Is she here today?
Mr. PLOTKIN. She is not.
Chairman BACHUS. She is not?
Mr. PLOTKIN. Oh, no. She wouldn't let me say that if she was. But, if she thinks it's boring, then it really must be boring. So, if I could leave you with just three points to consider today, they would be the following:
First, there is no fully operational stored-value industry in the United States, nor is there a network for the redemption of stored-value. Without a network like that, stored-value products can't be used to launder money.
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Second, the proposed registration requirement may distort stored-value products as they emerge, and may deter other companies from joining us to build a stored-value industry. Without a consumer oriented product and in the absence of cooperation from other companies, there will never be a stored-value industry.
Third and finally, Mondex, for its part, is implementing stringent measures to sharply reduce the possibility that its product could ever be used for money laundering. These measures include low dollar limits, restrictions on transfers of funds among certain types of cards, and various monitoring activities at the financial institution level.
I'd like to elaborate very briefly on each of those points, but first let me tell you about Mondex. Seven companies own Mondex USA. They are Wells Fargo, Chase Manhattan, MasterCard, AT&T, First Chicago NBD, Dean Witter Discover, and Michigan National Bank.
Mondex actually consists of two affiliated companies. One is a services company that is engaged exclusively in marketing activities and administration, and the companion sister company is an originator that functions very much like a central bank although it is not a bank. It issues, sells and redeems electronic Mondex value, which perhaps may be best thought of as a private script that we essentially create and we exchange for U.S. currency. Because a majority of its owners are national banks, Mondex USA is supervised by the Comptroller of the Currency.
Mondex will not, when it's up and running, deal directly with consumers, but rather will engage licensees and resellers to distribute its stored-value. We expect these licensees and resellers to include financial institutions, but they will also include a wide variety of cash-intensive merchants, such as fast food outlets, movie theaters, small retailers, parking garages, and the like.
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Our licensees and resellers will offer to consumers special cards like the one that you've seen that have computer chips on them in which electronic value can be encoded and stored. That value, which we call ''Mondex dollars,'' which correspond on a one-to-one basis with U.S. dollars, is designed primarily for use in small transactions, perhaps a few cents up to $20, not for the larger transactions that we usually use credit cards or checks for.
We also expect, and we're testing a pilot now through AT&T, that Mondex will be the first truly secure and inexpensive means of exchange for small transactions over the Internet.
There are, of course, numerous other stored-value products being developed. Some of the best-known of them include CyberCash, a software-based product that is really contained on diskettes, which bears no relationship at allor resemblance at allto Mondex in the way it operates. VisaCash looks like our product, since it consists of a computer chip on a card, but the similarities end there. Whereas Mondex value resides on the chip and can be transmitted from one consumer to another, just as cash can be, in an off-line transaction, VisaCash, by contrast, is an on-line system that requires telephone authorization, sort of like a debit or credit card, and that cannot be used directly between consumers.
And most of the other stored-value products under development differ from these examples and from each other. The analogy that comes to my mind is something like the competition that occurred in VHS and Betamax, where everybody has their own standard.
In terms of our current status, while Mondex and several of our competitors have commenced pilots of stored-value systems, no one is close to a wide scale retail implementation of such a system. It's really probably some years away.
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Now, in its proposed rule, FinCEN would define the term ''money services businesses'' to include businesses that issue, sell, or redeem stored-value. Mondex believes that this definition encompasses our originator and very well may capture many or even possibly all of our licensees and resellers.
FinCEN has further proposed that all Money Services Businesses register with the Treasury Department and that each maintain a current list of its agents for examination by authorities. There are a number of practical issues raised by the proposal as to the meaning of the word ''agent,'' which is left undefined, and certain other terms, some of which we believe are over-broad or ambiguous.
Thus, for example, we believe it is possible to construe the registration requirement as it has been proposed to encompass, under certain circumstances, every retail outlet, fast food location, and corner grocer where stored-value is distributed to, or accepted from, a consumer. At the same time and for that reason, we are encouraged by Director Morris' suggestion earlier that FinCEN may find it efficient to register a principal of the Money Services Business without extending the reach of its rule to all of its locations.
Problems also exist with the proposed exemption from registration for sellers and redeemers of stored-value products in amounts less than $500 to any person on any day. To qualify for this exemption, each of our licensees and resellers would have to institute systems to track the amount of value loaded onto any particular card on a given day, and possibly to aggregate sales occurring at different outlets that are commonly owned.
Page 49 PREV PAGE TOP OF DOC Having said that, we know that FinCEN does not especially want to cover such a broad range of businesses. And I believe that Director Morris indicated earlier that FinCEN is really looking simply to establish its jurisdiction over stored-value products at this time. We, therefore, are quite comfortable that there is going to be some narrowing of the requirements and an increase in the exemption threshold, I would hope, could be accomplished in the course of the rulemaking.
The difficulty, however, is that it will be impossible to draw a sensible definition as to who should be required to register at a time when the stored-value industry is really nonexistent and the nature of its products is undetermined.
It's not surprising that, since it's not able to know what products are going to develop, FinCEN has had to write very broad definitions and limited exceptions which attract criticism from industry lawyers like myself, and that offer little comfort to those considering whether to participate in the development of these products.
It's our position that neither we, nor our competitors, should be required to shape our products around the definitions and parameters contained in this early regulation, rather than design them to meet the needs of consumers as the market suggests. This kind of distortion is neither efficient nor desirable, especially when it comes to a product that someday may be indispensable to everybody in this room.
We recognize FinCEN's concern regarding the potential for abuse of stored-value systems. Yet the fact remains that stored-value products presently cannot be misused to launder funds. One needs a mature network to channel the funds and sufficient sites to redeem stored-value for cash safely and anonymously.
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There is no network today, nor will one develop until the marketplace is better defined and, importantly, other businesses are sufficiently intrigued and not frightened off by our product that they may make the necessary investment to accept and process stored-value. In these circumstances, the potential for criminal abuse of those systems is merely speculative and is not imminent.
We believe that the proposed registration requirement is premature. It's been argued that the act of registration is not unduly burdensome, but as a practical matter, however, it should surprise no one that a company that is deciding whether it should be a licensee or reseller of this new technology called ''stored-value'' will now have a reason to consider not doing so.
Moreover, by treating those who deal in stored-value as financial institutions for purposes of the Bank Secrecy Act, the proposal subjects them to the other requirements imposed by that Act. The possibility that fast food chains, department and grocery stores, and others that sell and accept stored-value, may become subject to a number of requirements under the Bank Secrecy Act that have nothing to do with stored-value, may deter them from joining us.
We know that FinCEN and other agencies do not want to be behind the times when it comes to new technology, yet we suggest that thus far FinCEN has dealt with stored-value products in a very sophisticated way. It pursued a dialogue with our industry, it scrutinized developments in our technology and security, it has hypothesized criminal scenarios and ways to combat them, it has closely questioned our management in working meetings. I note that FinCEN's next public hearing on the rules on stored-value this Friday is going to be out in Silicon Valley and near our headquarters in San Francisco.
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We urge the subcommittee to commend FinCEN for its careful work, as it has, and to suggest that it remain, vigilant, but defer imposing regulations on products that are only now seeking to find their place in the consumer market.
Mondex strongly supports FinCEN's goal of preventing stored-value systems from becoming a vehicle for money laundering. We, too, are working on combating any potential abuse. For example, we plan to impose relatively low limits on the dollar amount of value that may be stored on consumer cards. We plan generally to render merchant cards incapable of transmitting the value they accumulate to anyone other than as a refund to a consumer or to the merchant's financial institution. And we plan to force cards that are overused in consumer-to-consumer transactions to lock up automatically and be returned to a financial institution before they can be used again.
In sum, we believe it is clear that stored-value systems are not yet ripe for regulation of the sort proposed. And we, therefore, would recommend suspension of the current rulemaking, insofar as it affects stored-value products. Thank you very much.
Chairman BACHUS. Thank you. And normally we'd pass on to Mr. Gagerman, but I almost wish we'd done this in this order and separated the panels, because there are more differences than likenesses. I do want to ask you a question or two right now.
Mr. PLOTKIN. Yes, Mr. Chairman.
Chairman BACHUS. Right at the end, you started giving, in my mind, the safeguards that you can build into the system to prevent money laundering, was that a correct analysis?
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Mr. PLOTKIN. That's correct, and that was really the tip of the iceberg. FinCEN is privy to a number of the things that we're doing and there are even more on the way.
Chairman BACHUS. And I noticed, Mr. Kroll, you stayed. And some of what he said, I won't say you've agreed to, but you've indicated there may be areas of consensus. I didn't mean to put you on the spot.
Mr. KROLL. Mr. Chairman, we're certainly pleased to reach consensus with Mr. Plotkin on the sophistication with which FinCEN has approached these issues. I think to say more than that would be outside my
Chairman BACHUS. Sure. And I didn't mean to put you on the spot.
Mr. KROLL. You didn't, Mr. Chairman.
Chairman BACHUS. OK, thank you. And I think after this meeting Friday, maybe we'll know lots more next week about this particular industry and how it's regulated.
Let me throw this out as a hypothetical. I know hypotheticals are tough to answer, but could it be that the regulation in this industry consistsand I'll just ask the panelists here and not put you on the spot as legal counselthat the regulation be that, if they give a good proposal for safeguarding against money laundering, building in those safeguards, that that might be a good part of what they are required to do, particularly when you are talking about businesses that you are operating, you've got those cards?
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Mr. PLOTKIN. You are referring to a form of self-regulation within the stored-value industry?
Chairman BACHUS. Well, you would say, ''These are the safeguards that we've built into the system,'' and that they would simply have regulatory authority, or oversight into, first, judging those safeguards, and then seeing if they think that they are sufficient.
Mr. PLOTKIN. Mr. Chairman, I personally think that that ultimately is the only way to regulate the stored-value industry at all at this stage in time, because every product that is striving to get out into the marketplace is so very different. When I talk to our competitors we have difficulty agreeing on how much we like or dislike proposed regulations, because they affect each of us in such different ways, that ultimately we would probably all be much better off if we could do as we've been doing all along, which is approach FinCEN and explain what it is exactly that we're doing to provide the necessary safeguards.
This won't always be the case. Eventually, I would think a more rational kind of regulation could be imposed when the industry shakes out and there is a standard perhaps too, but that is going to be some years away. We're nowhere near that yet.
Chairman BACHUS. You did mention that we are years away, and I guess that's about the only thing we can say right now, is that right?
Mr. PLOTKIN. That's right.
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Chairman BACHUS. You are under the regulation of OCC?
Mr. PLOTKIN. That's correct.
Chairman BACHUS. Do the rules of the Bank Secrecy Act apply to your industry?
Mr. PLOTKIN. That's a good question, Mr. Chairman, and I'm not quite sure of the answer, because we ourselves have been discussing that with the OCC. And as far as the industry goes, I guess I'll back up a second. It is solely Mondex USA that is subject to the supervision of the OCC, and that is a result of its ownership, being owned by national banks.
In that sense my belief is, although I hope we won't communicate this to the legal counsel of the OCC, that as an operating subsidiary of those national banks, that the OCC does have the right to enforce certain provisions of the Bank Secrecy Act against Mondex. I'm not sure with respect to our competitors to what extent that's true.
Chairman BACHUS. OK. I appreciate that.
Mr. Gagerman, I was looking to see whether you had a wedding ring, trying to judge the length of your comments, but we welcome you before the panel.
This is obviously the National Check Cashers Association, and we're talking about an awful lot of transactions. It's a very important business and we welcome you before the subcommittee.
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STATEMENT OF MR. JEROME GAGERMAN, PRESIDENT, FINANCIAL CLEARINGS, INC.
Mr. GAGERMAN. Thank you, Mr. Chairman. My name is Jerome Gagerman. I am the Chairman and Chief Executive Officer of Financial Clearings, located in Chicago, Illinois. It's a privately held company which manages numerous check cashing agencies and provides consulting services to the check cashing industry.
I'm testifying today on behalf of the National Check Cashers Association, the professional organization that represents check cashers in 35 States. I am the founding Chairman of that association and served in that capacity for 6 years. Currently, I serve on NaCCAs Executive Committee, its Board of Directors, and the Compliance Committee, which is the committee that develops the programs to ensure that our members are in compliance with the Bank Secrecy Act.
We have devoted substantial resources to the fight against money laundering. NaCCA has developed a comprehensive compliance manual which includes training and testing materials for employees. Our General Counsel is an active member of the Bank Secrecy Act Advisory Group, and we educate our members about money laundering prevention at annual conferences, including presentations by both IRS and Treasury personnel.
The check cashing industry has long supported registering all Money Services Businesses. It should be noted, however, that as check cashers, we do specifically the opposite of money laundering. We take money out of the banking system and actually put cash into circulation.
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However, we believe that if we are to register as check cashers we should be joined by all other businesses which provide similar financial services to the public, regardless of the volume of those individual services. It makes no sense to register only a fraction of the businesses which cash checks.
The fact that a business provides other products or services does not reduce the opportunity to launder money. If anything, it facilitates the ability to mask the origin of funds. While we, as full-time Money Services Businesses, are more likely to be aware of, and comply with, the Bank Secrecy Act, it is the small part-time MSB which has the greatest probability of being in violation.
Some individuals have proposed that only those businesses which are primarily engaged in the provision of financial services should be required to register. We strongly oppose that suggestion. Pharmacies are not exempt from complying with the recordkeeping requirements of the Controlled Substances Act merely because they are located in grocery stores. Neither does the IRS impose taxes only on one's primary business. Why should laws that prevent money laundering be held to a weaker standard?
There is also a very real competitive question. Numerous businesses cash checks in direct competition with us, including liquor stores, groceries, and convenience stores. We are concerned because all professional check cashers have to register and remain subject to the Bank Secrecy Act. While we already train our employees and develop compliance plans, our major competitors are exempt from such activities, thus giving them a competitive edge in the marketplace.
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We suggest that the Department exclude from the definition of ''check cashing,'' those checks which are presented for encashment by the maker. For example, an individual cashing a small personal check. This would exempt a large number of establishments from the requirement to register. This reduced number of registrants would also allow the check cashing threshold to be lowered from $500, as proposed, to $200.
Retailers who simply permit shoppers to write personal checks for goods and receive funds back above the cost of those goods would then be exempt from registration. Since there is a clear paper trail in such transactions, we feel that little enforcement value is gained from such information. Conversely, if a grocer or merchant cashes payroll checks or other third party checks, the potential for abuse exists. As you know, money orders sales can be used to launder money.
The only appropriate threshold for deciding which entity should register is zero. Experience has shown that any deviation from zero tolerance will allow criminals the opportunity to launder money. The Coopers & Lybrand Study states that money orders are sold at approximately 146,000 locations in the United States, of which only 5,600 are check cashers. By only registering check cashers, less than 4 percent of the money order sellers would be included.
The Treasury Department has proposed that registration be triggered if a business sells money orders in amounts above $500 per item. Treasury is proposing that only those businesses doing more than $50,000 of gross transactions per month should have to register as Money Services Businesses.
Page 58 PREV PAGE TOP OF DOC We feel that money order sellers should register regardless of volume. Maintaining a monthly threshold of $50,000 would result in the exclusion of high volume establishments. If a threshold must be established, we believe it should be no higher than $20,000 per month.
There are some specific issues regarding registration which we are hopeful can be addressed. We are concerned about the possible release of certain confidential business information. The proposed registration form requires that each registrant list an estimate of business volume for the coming year.
Not only don't we understand the enforcement value of this information, but we can't comprehend which statistics would comprise this measure. Further, we're concerned that such information could be released pursuant to a Freedom of Information Act request. Will we be subject to penalties if our estimates prove incorrect?
The proposed requirements for registration renewal may create unnecessary burdens for our industry. The requirement for renewal should be changed from every 2 to every 5 years. In addition, the requirement for registration in the event of a change in ownership of more than 10 percent could be troublesome, particularly for the publicly-held companies. In the case of public companies, existing SCC rules fully cover the public disclosure and ownership information. We also urge the Department to permit annual, rather than quarterly, reporting of depository institutions used by the Money Services Businesses.
Thank you for the opportunity to present our views on this matter, and I'd be pleased to respond to any questions.
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Chairman BACHUS. Mr. Gagerman, I think some of what you said does make sense and I'm sure that there is still dialogue going on. I can certainly see that a lot of your services would actually have the opposite effect of what a money launderer is trying to accomplish.
Mr. GAGERMAN. That's correct.
Chairman BACHUS. And you mentioned a ''maker,'' someone cashing their own check. I'm trying to think of a case where that would assist them in a criminal enterprise and I'm not sure that it would. It may be, obviously, something for further discussion. We will take a look at these things that you said, and be following with FinCEN. And I'm sure you all are going to be in discussions.
Let me ask the two gentlemen on the end. Mr. Levine, your industryyou said 44 States regulate money transmitters?
Mr. LEVINE. Yes, Mr. Chairman, in one fashion or another. The State regulations are safety and soundness regulations, they are licensing laws, they've been around, in most instances, from about the turn of the century. Most of the laws encompass at least sale and issuance of instruments, about half of the 44 also encompass wire transmissions.
And the growing trend among the States now is to expand the laws to include wire transmissions and the full range of non-bank activities. Maybe I'm telling you more than you want to know, Mr. Chairman.
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Chairman BACHUS. No, no.
Mr. LEVINE. But, typically, in most States, it's the State Banking Department which performs the regulation and licensing and, in an increasing number of States, performs on-site examinations with bank examiners who come in and look at the books and records, interview the key employees, the president, the CFO, folks like that.
They look at many of the procedures for dealing with the business, and in an increasing number of instances, also look at anti-money laundering compliance programs. That's aside from the IRS, of course.
Chairman BACHUS. Let me ask you this. Do you consider that these present regulations address money laundering?
Mr. LEVINE. The State laws?
Chairman BACHUS. Yes.
Mr. LEVINE. No.
Chairman BACHUS. OK.
Mr. LEVINE. I think the Bank Secrecy Act regulations, which encompass money transmitters today, whether they are sale-of-check operators or whether they are money transmitters, do, in fact, regulate them. For example, the wire transfer rules, the CTR requirements, they are subject to those. And, as you know, the SAR requirement hasn't been imposed yet.
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Chairman BACHUS. Our subcommittee staff had a conversation with the comptroller of the Colombian banking system recently. And she commented that many of the money remitters receiving transfers in her country from the U.S. are doing so illegally.
Supposing that to be factual, what safeguards do money transmitters in the United States have in place to make sure that they are transferring money to a licensed legal transmitter in a foreign country?
Mr. LEVINE. I can only tell you that, speaking for the members of the Group, the members of the Group check on the affiliation of those entities that they deal with in foreign countries, to the extent they have such affiliations, in the case of Western Union or MoneyGram, for example. The issuers of instruments often have no entities in foreign countries if they are domestic money order sellers.
If they are traveler's check sellers, they may well issue them through banks or other financial institutions in other countries, or through travel agents, just like they do in the United States. So they make a good faith effort to attempt to find out who they are dealing with, both in foreign countries and in the United States.
I should add, Mr. Chairman, that it's a problem even in the United States in dealing with independent sales vendors. You make the best possible effort you can, but you do not have access to, for example, the criminal databases that are available, for example, to law enforcement. Companies like Western Union, or MoneyGram, or Travelers Express don't have access, for example.
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One of the things I know is the American Bankers Association reported to the Judiciary Committee on the House side about these concerns. And the similar kind of issue arises for non-banks, so that they can tell each other about corrupt sales outlets, whether they are international or national, without fear of, for example, anti-trust prosecution or otherwise. That is an issue we'll be taking up with the Congress in the future.
Chairman BACHUS. You mentioned that you thought the $500 Suspicious Activity Report is a low threshold, that a higher amount might be more appropriate, is that right?
Mr. LEVINE. Yes, sir. I just think that many, many of the common transactions that occur today are below that level. For example, money orders are often used to pay rent. And unfortunately, there is an increasing element of the unbanked in the United States, people who don't have bank accounts. And when they get their paycheck they go and buy money orders and they use the money orders, for example, to pay their rent.
At the Money Transmitter Regulators Association meeting a couple of months ago, in Williamsburg, I heard a small money order issuer from Atlanta, Georgia, get up and say, ''Wait a minute. Typical rent in Atlanta averages $750 to $800 a month.'' And he said, ''What many of my customers do is to buy two or three money orders. Money order sales, or individual money orders, are often capped at about $300 face value, so they buy two or three of them. The same person will buy it and it will be the same payee. They are making it out to the landlord and they buy that on the rent day.'' And that's very often the case.
Page 63 PREV PAGE TOP OF DOC It's often the case for those of you, and I'm sure probably everybody in this room, at one time or another, bought traveler's checks, and when you buy traveler's checks to go on a trip, often you buy more than a $500 aggregate amount. They are already serially numbered, consecutive numbers, the same person buying them. And $500 seems very, very low from the sales standpoint.
Think about it too, Mr. Chairman, when you are the issuer. When you are the issuer, you are not at the point-of-sale, so you are looking at a transaction that arguably could be suspicious. Well, how do you know it's suspicious? You look at the checks as they come back from the clearing bank, and you look at a lot of them, and you try to match them up and see, well, Gee, did they all go to, as you suggest, Colombia? Did they go to one person in Colombia?
Maybe you have a screening system and you try to take the transactions, and then if you think they are suspicious you file the SAR, you call up IRS and you say, ''We've got something.'' The problem with $500 is, it is so low that you've got virtually every transaction.
Chairman BACHUS. Would you like to make a suggestion of what you think is a more appropriate level? You are not going to be held to this.
Mr. LEVINE. My clients, I'm not sure
Chairman BACHUS. Or maybe you will.
Mr. LEVINE. I'm not trying to be coy, Mr. Chairman. The problem is, what we're working with now is trying to see whether there oughtn't to be, for the SAR requirement, and I agree there should be an SAR rule, but different thresholds at the retail sales level for, say, an instrument seller than the threshold for SARs for the issuer. And, perhaps, there should be a third number for SARs, for money transmitters because, again, remember the systems are all very, very different.
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Chairman BACHUS. Right.
Mr. LEVINE. That's why I'm hesitant to give you a number. And that's what we're struggling with even within our group, to try to figure out what to recommend that makes sense, that's really workable.
Chairman BACHUS. Right. I see that. I can see that we could be talking about that. FinCEN, do you seem to see any appreciation of that on their part? Have you had discussions with them?
Mr. LEVINE. We have generally talked with them and people have raised the issue at some open meetings. We will be submitting formal comments, and I suspect, and I truly hope, that FinCEN will be responsivereceptive, that's the word.
Chairman BACHUS. Thank you. Mr. Gagerman, are you regulated by the State and to what extent?
Mr. GAGERMAN. All the industry is regulated, to one extent or another, depending upon the State of jurisdiction, Mr. Chairman. In some States, the regulation is nothing more than what any normal retail business would be subject to. In some Statesfor example, my own State of Illinoiswe are actually considered as State-chartered financial institutions subject to yearly auditing by State examiners.
The regulation nationally is going to vary depending upon the State in which we do business. And the money instruments we sell are also regulated depending upon, number one, the State in which we do business and, also, the owner or the company that provides us with those instruments, for example, American Express or Travelers Express money orders.
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Chairman BACHUS. OK. Will any of the proposed rules that FinCEN is talking about, will they duplicate measures that the States have already employed in regulating?
Mr. GAGERMAN. In some instances, yes, they will. I think Illinois, for example, with which I am most familiar, has already passed some money laundering statutes on the State level.
Chairman BACHUS. OK. I'd be interested in looking at those and seeing what type experience we have with that, and I'm sure FinCEN would too. You mentioned checks redeemed by the originator?
Mr. GAGERMAN. By the maker.
Chairman BACHUS. By the maker.
Mr. GAGERMAN. Right.
Chairman BACHUS. What percentage of your checks would fall into that category?
Mr. GAGERMAN. Of our checks as check cashers, probably very few. To the extent that someone will come in on their lunch hour and cash a small personal for cash, is the extent to which that normally happens. We were making that suggestion more in the line of exempting retailers who cash personal checks for their customers.
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Chairman BACHUS. I understand. And when you talk about extending it to everyone who provides this type of service, of course you are talking about the corner grocery store and
Mr. GAGERMAN. I was talking about money order sales and wire transfers. That is a way to move money out of the cash economy into the banking system. And once that kind of potential exists, there is the potential for money laundering.
Chairman BACHUS. What about a grocery store that cashes a check and someone goes in and buys $20 worth of groceries, are you saying that they ought to be
Mr. GAGERMAN. Sure. In cashing the $50 check, I would have to ask if that's a check that the person wrote to the grocer, or is he cashing a paycheck? If he is cashing a paycheck, I would say that's a different program than just cashing his own personal.
Chairman BACHUS. All right. Again, these questions and comments show the complexities of this whole experience. And I think we need to ask them to anticipate what approach is taken. Has your association conducted any type of risk assessment to measure the vulnerability of check cashing to money laundering?
Mr. GAGERMAN. No. What we can tell you is that we've been audited on a regular basis by the Internal Revenue Service under Title 31 examinations, and to the best of my knowledge, no serious problems have been uncovered.
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Chairman BACHUS. Do you think that maybe in all this, and I'm sure it would be helpful to FinCEN and I'm not sure how open you would be to this, you would conduct some risk assessment to try to measure the vulnerability of your membership to money laundering? Has the association developed any type of safeguards, put any safeguards in place, to try to prevent money launderers from abusing the check cashing?
Mr. GAGERMAN. Yes. As I stated in my testimony, one of the things that we have already done is our Compliance Committee, along with Mr. Morley, has written an extensively comprehensive manual to detect money laundering. Number one; to report it, number two; and number three, to train our cashiers so that our industry can recognize it and not be victimized.
Chairman BACHUS. Is that manual in place?
Mr. GAGERMAN. Yes. It has been for several years.
Chairman BACHUS. Has FinCEN asked you for a copy of that? Do they have a copy?
Mr. GAGERMAN. I believe so. We have a very good working relationship with Mr. Morris and Mr. Djinis. We've worked with them for a number of years, yes.
Chairman BACHUS. Good. And they are listening to your concerns, do you believe?
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Mr. GAGERMAN. Yes. We've been very happy with our relationship.
Chairman BACHUS. That's great news. I think at this time we'll conclude the hearing. I very much appreciate your testimony. It was very much needed to appreciate this issue, and we appreciate your attendance today. We know it's been interrupted on occasion, and we apologize for that. But, it is good to hear that FinCEN, and that Director Morris, is working with your industries.
And, I think, from your testimony, it is an extremely complex charge that he has. But, he is getting input from you and will, I hope, continue to do so. Thank you, very much.
This hearing is adjourned.
[Whereupon, at 3:38 p.m., the hearing was adjourned.]