SPEAKERS CONTENTS INSERTS
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THE OPERATION OF THE DEPARTMENT OF THE TREASURY'S FINANCIAL CRIMES ENFORCEMENT NETWORK
WEDNESDAY, APRIL 1, 1998
U.S. House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
The subcommittee met, pursuant to notice, at 1:06 p.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.
Present: Chairman Bachus and Representative Sanders.
Chairman BACHUS. I'd like to call to order the Subcommittee on General Oversight and Investigations of the Banking Committee.
Good afternoon. Today the subcommittee looks again at the operations of the Treasury Department's Financial Crimes Enforcement Network, FinCEN. This is a follow-up to the first ever oversight hearing conducted of FinCEN held by this subcommittee last March.
In 1990, FinCEN was established to provide a Governmentwide, multi-source intelligence and analytical network in support of the detection, investigation, and prosecution of domestic and international money laundering and other financial crimes by Federal, State, local and foreign law enforcement agencies.
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Over time, however, the agency's responsibilities have expanded. In testimony before the subcommittee last March, former FinCen Director Stan Morris described the current mission of the agency as consisting of three parts: law enforcement support; an anti-money laundering regulatory program; and international initiatives.
In the wake of that March 1997 hearing, concerns were raised as to the ability of FinCen to handle its diverse tasks and its heavy volume of work. Members of this subcommittee questioned why the agency was slow in promulgating statutorily mandated regulations, had de-emphasized its traditional tactical support role, and was expending a considerable amount of time and resources on international outreach programs. These concerns prompted Representative Waters and I to sponsor a four-part GAO study of the agency.
Pursuant to our request, GAO examined the manner in which FinCEN develops Bank Secrecy Act regulations, the products and services that FinCEN provides the law enforcement community, and FinCEN's handling of international projects. The GAO was also tasked to provide the subcommittee with an update on FinCEN's processing of BSA civil penalty cases.
The findings of the GAO inquiry have raised further questions and concerns. Thus, this hearing. To FinCEN's credit, GAO found that those familiar with the agency's anti-money laundering products and services gave it high marks. It is clear that in some areas the work being done by FinCEN is very good. However, the subcommittee is concerned with certain work that is not getting done.
For instance, the GAO found that of the nine Bank Secrecy Act related initiatives either authorized or required under the Money Laundering Suppression Act of 1994, FinCEN has completed only four, has started three, and has not yet begun two. Also, the agency has missed all three of the MLSA statutory deadlines for the promulgation of new regulations.
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Such delays may well have an impact on our ability to fight money laundering. For instance, one should consider the stalled implementation of the proposed Money Service Businesses regulations. The subcommittee has learned that while the final MSB regulations have yet to be refined and implemented, cartel money launderers forced out of New York City by the various geographic targeting orders are now using wire remitters in small towns up and down the East Coast to do their illegal business.
The GAO has determined that a number of Federal, State, and local law enforcement agencies are not aware of the products and services offered by FinCEN. Furthermore, the agency has yet to audit the computer safeguards that all agencies using FinCEN's ''Gateway'' system are required to have in place. These safeguards are designed to prevent improper access and dissemination of what could be sensitive personal information belonging to our citizens. I think we all must keep in mind the so-called ''Big Brother'' implications of the Government managing vast electronic repositories of financial information on private individuals.
According to the GAO, FinCEN receives positive reviews concerning its extensive international money laundering responsibilities, but at the cost of considerable time and money expended on international travel over the past three years.
Finally, the GAO has determined that FinCEN's record in processing BSA civil penalty cases is abysmal. Since assuming this responsibility in 1994, FinCEN has closed an average of only 14 percent of its pending BSA civil violation caseload annually.
In 1996 it closed only 8 percent of these cases. This is obviously unacceptable; failure to resolve these cases threatens to make a mockery of the regulatory process.
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In short, it appears that the GAO has identified a classic case of ''mission creep.'' There is no doubt that FinCEN can do good work. However, it may be that FinCEN, currently staffed with only 162 people, has been spread too thin. And because of this, important responsibilities are falling through the cracks. My intent, and I believe the intent of the entire subcommittee, is not to cast blame on FinCEN, the Treasury Department, or others, but rather to use the GAO findings to initiate a frank and focused discussion on FinCEN's problems and what needs to be done to fix them.
One issue that deserves exploration concerns the resolution of civil penalty cases. The Money Laundering Suppression Act authorized the Treasury Department to develop a system to delegate the responsibility for civil penalty enforcement to the relevant bank regulatory agencies. I understand that this delegation has yet to take place because of bureaucratic squabbling between Treasury's regulatory and enforcement communities.
If this is in fact the case, it is incumbent upon Main Treasury to break this log-jam as soon as possible. If FinCEN and Treasury are not able to enforce the reporting requirements mandated under the BSA, then perhaps it is time for Congress to reconsider the BSA altogether.
Second, FinCEN is faced with a number of competing statutory requirements for regulations. FinCEN develops Bank Secrecy Act regulations but cannot finalize them until Treasury Department management signs off. This often results in protracted delays. My question: Is the Department providing sufficient guidance to FinCEN concerning its regulatory priorities?
Page 5 PREV PAGE TOP OF DOC Another question involves FinCEN's role as a U.S. representative on international money laundering matters. According to a chart developed by subcommittee staff, which I will enter into the record, the former director was apparently out of the country approximately 200 days over a three-year period in order to perform these duties.
However, it is my understanding that on most important international money laundering initiatives, such as the bilateral talks with Mexico, Main Treasury has had the lead, not FinCEN. I think it may be time that this international work be handled directly by Main Treasury, thus leaving FinCEN to focus on its important domestic tasks.
Combating money laundering is crucial to our Nation's war on drugs, and FinCEN is at the forefront of that fight. However, the agency certainly has some serious managerial issues that need to be consideredissues that will not be resolved by simply throwing money at them.
The responsibility for the future of FinCEN rests, of course, squarely with the Treasury Department and it's time for senior officials there to make some decisions. It is time either to give FinCEN the guidance and support it needs to carry out its broad mission, or give serious consideration to redefining or limiting its mission.
Our hearing will begin this morning with testimony from GAO Director for Administrative Justice Issues, Mr. Norman Rabkin. Our second panel of witnesses will be composed of Treasury Assistant Secretary for Enforcement, Mr. James Johnson, and Acting FinCEN Director, Mr. William Baity.
Page 6 PREV PAGE TOP OF DOC Before we begin our hearing, I would like to express for the record the appreciation of this subcommittee for the work of former FinCEN Director Stan Morris. Director Morris retired this past February after a long and distinguished career in law enforcement. I want to thank him for his efforts at FinCEN and wish him good luck in his future endeavors.
All right. I am now going to turn to other Members of the subcommittee for remarks. At this time we do have a vote on the floor of the House. What I think we might do, Mr. Rabkin, if it's all right with you, is I will go vote. I understand that there is only one vote and then we'll have a 2-hour period with no votes. So I'm going to do that at this time and quickly recess for about a 10-minute period. Thank you.
Chairman BACHUS. We will reconvene the hearing at this time. And I would also like to welcome our subcommittee's new Ranking Member, the distinguished gentleman from Vermont, Mr. Bernie Sanders, or Bernard. Should I say Bernard?
Mr. SANDERS. Bernie is fine.
Chairman BACHUS. Mr. Sanders, I look forward to working with you in the coming months. And with that, Mr. Rabkin. Mr. Sanders doesn't wish to make an opening statement. So we look forward to hearing from you.
Mr. RABKIN. Thank you, Mr. Chairman, Mr. Sanders. I have a detailed statement that I'd be prepared to summarize at this time, if you would like, and the detailed statement has been made available.
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Chairman BACHUS. That would be fine.
STATEMENT OF NORMAN J. RABKIN, DIRECTOR, ADMINISTRATION OF JUSTICE ISSUES, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY DAN BURTON, ASSISTANT DIRECTOR, ADMINISTRATION OF JUSTICE ISSUES
Mr. RABKIN. We're pleased to be here this afternoon to discuss the results of our work performed at your request on the roles and operations of FinCEN. With me is Dan Burton, who has managed this body of work.
GAO has provided oversight of FinCEN since its inception in 1990. Our first report, done for the Senate Appropriations Committee in March 1991, described why FinCEN was formed and how it was organized. Now, seven years later, we are here to discuss aspects of FinCEN's law enforcement role, its regulatory role including its processing of civil penalties for Bank Secrecy Act violations, and its international role.
First, law enforcement. You asked us to identify trends in the products and services FinCEN has been providing to other Federal, State, local, and international law enforcement agencies. We have finished our audit work and are preparing our report, which we hope to issue to you later this spring.
Our work has shown that recently FinCEN has been providing less direct or tactical support to agencies and less analysis in reports on more broadly scoped topics related to money laundering. A primary reason FinCEN officials gave for these trends is that the agency has chosen to dedicate fewer staff to generate these products.
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On the other hand, we've noted that FinCEN has increased its efforts to encourage and train other Federal, State, and local law enforcement agencies to access and analyze source data directly, either through FinCEN resources or through their own resources.
As part of this work, we contacted many Federal and State officials and asked about their satisfaction with FinCEN's products and services. Most were quite complimentary. We also surveyed officials from law enforcement agencies which had not used FinCEN products and services. They told us that they relied on in-house capabilities or used intelligence or analytical support centers other than FinCEN.
The second topic I'd like to discuss this afternoon is FinCEN's responsibility to issue regulations implementing the Bank Secrecy Act. Our recent report, which you've released today, points out that FinCEN did not meet any of the three statutory deadlines imposed by the 1994 Money Laundering Suppression Act.
Final regulations for several provisions of the act are still pending. Obviously, the intended law enforcement benefits of the act cannot be fully achieved until all the regulations have been promulgated and implemented.
FinCEN officials told us that they emphasized quality over timeliness in their regulation writing program. They've developed a partnership process for involving the law enforcement, regulatory, and financial services communities in regulatory drafting efforts. But they have also limited the number of staff that they have devoted to writing regulations.
Page 9 PREV PAGE TOP OF DOC We concluded that FinCEN could do a better job of communicating the priority it was placing on the specific regulations that Congress has directed it to promulgate, which ones were at the top of its list, which ones were at the bottom, as well as an estimate of when all the regulations would be issued.
Next I'd like to talk about FinCEN timeliness in assessing penalties under the Bank Secrecy Act. FinCEN gets referrals from various sources, and is supposed to evaluate the circumstances and either close a case, issue a warning letter or assess a civil penalty.
In 1992 we reported that it took about 21 months on average to process civil penalty referrals for BSA violations. In calendar year 1997, the average had grown to about 50 months, according to FinCEN's own data.
We're working with FinCEN now to identify the reasons for the increase in this processing time. Although this work is still ongoing, we have noticed that since FinCEN received this responsibility in 1994, it has not improved the policies or processes that had resulted in lengthy cases. It has also not made this a priority in terms of staffing either.
Lastly, you asked us to look into FinCEN's international role. This is another responsibility that FinCEN assumed in 1994. Although we have only begun our work in this area, we are aware that FinCEN's principal international efforts include working with international organizations to promote the development of effective anti-money laundering controls and helping other nations establish financial intelligence units or FIUs, which serve as the central focal point for these countries' anti-money laundering efforts. FinCEN's office of international programs is the agency's second-largest organizational component.
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Mr. Chairman, recognizing that FinCEN's roles have grown significantly over the past four years, while its staffing levels have not, this hearing provides an excellent opportunity to focus on FinCEN's priorities and its future directions.
The subcommittee may want to pursue with Treasury and FinCEN officials issues such as whether FinCEN's staffing level is adequate to carry out its range of responsibilities, whether FinCEN has assigned appropriate priority to each of its roles, and whether FinCEN's performance goals and measures as reflected in its strategic plan and annual performance plan are adequately results-oriented and are commensurate with the level of resources and responsibility the Congress has provided to it.
Mr. Chairman, that completes my summary. Mr. Burton and I will be glad to answer any questions you or Mr. Sanders may have at this time.
Chairman BACHUS. Thank you. The first question I would ask you is did you note that FinCEN is assessing civil penalty cases for Bank Secrecy Act violations and it's taking them longer now than it did six years ago, and it was very slow then.
One of the regulations that FinCEN has not gotten around to issuing yet is one delegating authority for assessing civil penalties to the bank regulatory agencies. Is there anything FinCEN should be doing in the meantime to process these cases in a more timely fashion?
Mr. RABKIN. Yes, I think there is, and I'd like to suggest a couple of things that they can consider. First of all, they can consider assigning more resources to handling these cases. They have, as I understand it, about six people that work on these cases, and they put about half of their time in on processing these cases. If it's a matter of just having more people work on it, as you know, they have 162 people. They have authority for more than that, but they 160-some people on board and then they can decide whether they want to put more people on that task.
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More importantly, I think they can manage the whole process a little better. When a case comes in to FinCEN, they can make some estimate of what kind of case it is, how long it should take to do what they have to do, to refer it to IRS to see if there's any criminal aspect of the case that should be pursued, or to make some judgment. If it's a relatively simple case, maybe they can have this done in six months; if it's a relatively complex case, maybe it would take two to three years. Then they have much more sense as to how long these cases should take.
Once they establish some timeframe for how long the case could take, they ought to be managing against that timeframe. The managers ought to get data on where the cases are, some interim milestones perhaps that the case processors are supposed to achieve, and just pay a little more attention to those cases.
I think by doing that, even if they don't devote more resources, they should be able to manage these cases and close them in a more timely way.
Mr. SANDERS. OK. You found that many field offices and high-intensity drug trafficking areas have requested little or no tactical support in the last few years from FinCEN, in part because, as you said, they rely on in-house capabilities.
Furthermore, I understand that several Federal law enforcement agencies like the FBI, DEA, Secret Service have or are in the process of developing their own data mining capabilities.
Page 12 PREV PAGE TOP OF DOC Finally, you pointed out that FinCEN has been issuing fewer analytical products recently and is providing more self-help services to law enforcement agencies. Does this indicate that FinCEN tactical support efforts may be redundant, or what implications does this have for the agency?
Mr. RABKIN. I think there are a couple of implications for the agency. First, I think as it focuses its work on the more complex issues and the more analytical issues, it can free up some staff that have been doing the tactical work and leverage those staff to fulfill some of the other responsibilities. And I'll let Mr. Burton talk a little bit more about what the other agencies are doing and how FinCEN is working with them.
But there's one other issue that I'd like to point out, and that has to do with the increase in the amount of self-help, and the number of agencies that are doing this work directly. It does raise some concern about security over the data that they are accessing.
And as you mentioned in your opening statement, FinCEN has some plans for auditing the use of the databases by some of these agencies and to ensure that adequate security measures are in place and are being followed. They just haven't been implementing those plans. We think it's important that they do that to assure that agencies that have access to these kinds of data are managing them and using them in the proper ways.
Maybe now I can let Mr. Burton add a little bit.
Mr. SANDERS. Yes, Mr. Burton, we welcome you to the subcommittee hearing.
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Mr. BURTON. Thank you very much. I think, first of all, that FinCEN would never claim or want to be the only tactical support entity in town, so to speak. Part of FinCEN's long-range plan is to encourage agencies to the extent possible to conduct their own research, particularly the research that involves mainly database extracts. Database extracts are kind of the low end of the support. If agencies can have access to the databases directly, I think FinCEN would encourage that.
FinCEN would like to reserve a good part of its tactical support for the more in-depth analysis, where it has the expertise in those areas. So again, I think the implication is that FinCEN would encourage the self-help mode.
Mr. RABKIN. Another point, Mr. Chairman. You mentioned a number of the agencies are developing their own capabilities and it's certainly true. But our data show that it doesn't necessarily mean that they're not coming to FinCEN for support. The FBI, for example, that has some of its own centers for this kind of research, is still increasing its use of FinCEN, as I understand it.
Chairman BACHUS. All right, thank you.
Mr. SANDERS. Thank you very much, Mr. Chairman.
Mr. Rabkin, in your written testimony regarding FinCEN's products and services, you mention that some survey respondents cited a reliance on the availability of intelligence or other analytic support centers through other sources for information. Could you be so kind as to tell us what specific centers were these agents relying on. Where were they going?
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Mr. BURTON. Yes, let me answer that. One of the sources cited was, for example, the South Florida HIDTA. The High Intensity Drug Trafficking Area in South Florida has its own intelligence center. Some of the other well-known centers are the El Paso Intelligence Center and even the National Drug Intelligence Center.
Mr. SANDERS. So those are some of the areas where the agents are going to get their information, as well.
Mr. BURTON. Right. Much of the law enforcement work these days is, as you know, task force oriented. And many of the task force members, particularly if they are Treasury members, such as the Customs Service and Secret Service, can directly access BSA data through their own agencies.
Mr. SANDERS. You also, Mr. Rabkin, mentioned in your written testimony that various field agents were not aware of FinCEN's products and services. Could you tell us how you think that situation could be improved?
Mr. RABKIN. As I understand it, FinCEN has an outreach effort to make law enforcement agencies more aware of the services and the products that it can provide and how the agencies can use these services in their cases. It's just a matter of FinCEN perhaps marketing their products and services a little better.
Mr. SANDERS. How serious a problem is this? Are there a lot of agencies who should know about FinCEN's services that are not aware of them?
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Mr. BURTON. I think probably about 20 percent, about one-fourth of the respondents to our survey indicated lack of awareness.
Mr. SANDERS. Lack of awareness. That's a pretty serious indictment, isn't it?
Mr. BURTON. Well, 25 percent is a pretty good number.
Mr. RABKIN. I would suspect that over time that number will decrease as law enforcement agencies work together and learn of the successes that their colleagues are having using the kind of data, the kind of analysis that FinCEN can provide or that they can get on their own, having been trained by FinCEN or using FinCEN resources; that it will become more of a normal operational tool for them to use.
Mr. SANDERS. But if we have established an agency which has a particular function who's supposed to share their information with relevant agencies, 25 percent of them are not aware of that existence.
Mr. BURTON. Part of the responsibility for that, I think, is also on the using agency headquarters itself.
Mr. SANDERS. They have not been proactive in seeking
Page 16 PREV PAGE TOP OF DOC Mr. BURTON. Right, making sure their field offices are aware of FinCEN's resources.
Mr. SANDERS. OK. Anything else specifically you'd like to say how FinCEN can improve the situation?
Mr. RABKIN. Not at this time.
Mr. SANDERS. Thank you. Thank you, Mr. Chairman.
Chairman BACHUS. Thank you. Let me ask you one or two more questions. You mentioned that the top priority of FinCEN is developing a methodology for measuring the magnitude of money laundering. What do you think the cost of this undertaking has been?
Mr. RABKIN. I know in the Fiscal Year 1999 budget request, FinCEN has asked for $500,000 to pursue this. I'm not sure if that's the total cost and how long, over what period of time this is going to take. I would assume that once a methodology can be developed and has been validated and is producing this kind of information, then it would have to be replicated, or it probably ought to be replicated year after year, so that FinCEN and the rest of the Federal Government and perhaps even the international community can have some measure as to whether it is accomplishing anything, and can use that as a mechanism to set goals for itself as to what it can achieve with the resources that are available to it.
Chairman BACHUS. I will ask this question of both of you, but is it realistic to think that the agency is going to be able to determine the extent of global money laundering using this methodology?
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Mr. RABKIN. Well, if you use a very broad definition of determine, they might be able to. I'm not aware of how they are approaching it. I would like to reserve judgment until I see the kind of methodology that's been developed. But basically, what you're talking about is getting a handle on the proceeds from illegal activities; that to the extent the illegal activities are known, then the proceeds ought to be known and then the extent to which those proceeds are being laundered, domestically, internationally.
I've seen estimates ranging from $100 billion to $400 billion; it's quite a broad range and I'm not sure of the methodology for any of those estimates. But hopefully, with a little bit of thought, and if there are some good data sources and some good analytical techniques, they ought to be able to come up with some methodology for estimating that.
Mr. SANDERS. The Results Act was passed so that agencies would be accountable for taxpayers' dollars and that they would basically produce results with the money they are given. I noticed you said that their current performance measures were, I think it said activity-based, rather than performance-based. Could you comment on that?
Mr. RABKIN. The Results Act is one of the mechanisms that the Congress has passed to hold agencies accountable for producing the results that their basic missions are directed toward. Agencies this year for the first time under the Results Act have prepared strategic plans, and then for Fiscal Year 1999 have prepared performance plans basically outlining what results they will achieve with the resources that are going to be provided to them in the fiscal year.
Page 18 PREV PAGE TOP OF DOC The intent of the Act is that the agencies at the highest level focus on the results, the outcomes of their work. For example, in money laundering, an outcome-based result might be something like less money is being laundered as a percentage of the total proceeds of criminal activities than was before because of the deterrent activities or the investigative activities of the Federal, international, State, and local law enforcement agencies.
Another outcome measure might be the cost of money laundering, the discount rate, so to speak, that criminals have to pay to launder their money. And the better job that the Government is doing in fighting money laundering, the higher that rate is going to be. So that might be another indicator of the outcomes of all these efforts.
As you translate that down into an agency, it's appropriate to have more activity-based or output-based measures. How much are you going to do, what do you want to achieve with it? How many seminars are you going to hold? How many reports are you going to issue?
That, however, doesn't tell you what effect you are having on the money laundering problem generally. The measures that FinCEN has proposed for Fiscal Year 1999 for the most part are activity-based measures, and we haven't seen any that really focus on the overall question of have they produced the results they and the other law enforcement agencies in general combined, produced the results that Congress would like them to.
In the drug control area, for example, we have the Office of National Drug Control Policy that puts out a national strategy and is proposing national measures. That's from the Administration side.
Page 19 PREV PAGE TOP OF DOC The House has passed a bill that is imposing congressional measures, what they would like to see this effort produce. I haven't seen anything comparable to that that relates to money laundering. It's obvious there are more agencies involved than just FinCEN, and FinCEN shouldn't individually be held accountable for reducing the amount of money that's laundered. But it does have a role to play that is the ultimate mission of FinCEN and of some of the other agencies that are involved, some of their missions.
So I think it's appropriate to hold someone accountable and that's why I think there is a need for those kinds of measures.
Chairman BACHUS. All right.
OK, no further questions. This panel is dismissed.
Mr. SANDERS. Thank you very much.
Mr. RABKIN. Thank you.
Chairman BACHUS. Our second panel consists of Mr. James Johnson, Assistant Secretary for Enforcement, U.S. Department of the Treasury, and Acting FinCEN Director, Mr. William Baity. We welcome you to the subcommittee.
Mr. JOHNSON. Thank you, Mr. Chairman.
Chairman BACHUS. Would you all wish to make any opening statement?
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Mr. JOHNSON. Yes, Mr. Chairman. I will make one on behalf of the Treasury Department and Mr. Baity will make one on behalf of FinCEN.
STATEMENT OF JAMES E. JOHNSON, ASSISTANT SECRETARY FOR ENFORCEMENT, U.S. DEPARTMENT OF THE TREASURY
Mr. JOHNSON. Mr. Chairman, Congressman Sanders, thank you for providing me with the opportunity to appear before you today. I look forward to presenting the Treasury Department's views on the mission, activities, and future of the Financial Crimes Enforcement Network, commonly known as FinCEN.
Mr. Chairman, I have a prepared statement that I respectfully request be included in full in the record. I am prepared to summarize that statement this afternoon.
As you know, Mr. Chairman, money laundering allows drug traffickers and other criminals to fund and profit from their illegal activities. By eliminating the taint from illegally obtained funds, these individuals disguise the origins of their resources and carry forward their criminal enterprises.
Indeed, because of the harm that flows from money laundering, Secretary Rubin and Under Secretary for Enforcement, Ray Kelly, have worked to ensure that the Treasury Department focused both attention and resources on combating money laundering across its bureaus and on other financial crimes.
Page 21 PREV PAGE TOP OF DOC Over the past few years, money laundering has gained increasing attention as an enforcement problem. Mr. Chairman, your efforts and those of this subcommittee have aided us as we've worked to develop a comprehensive strategy against money laundering and other financial crimes.
We particularly appreciate your support of Treasury's recent Geographic Targeting Order, focused on preventing illicit fund transfers to Colombia and the Dominican Republic.
Rather than use my time to describe Treasury and FinCEN's activities in detail, I would like to take this opportunity to provide you with a more general assessment of those activities and with our views on where we believe this important organization is headed.
Treasury has a three-pronged strategy to battle money laundering. This strategy involves prevention, enforcement and international cooperation. It uses its regulatory authority to keep dirty money out of the financial system. When the money launderers exploit the system, Treasury's investigative resources, used together with those in the Justice Department, help make cases against the money launderers.
Because money laundering knows no borders, we must help our global partners increase their abilities to battle against it. Mr. Baity, former Director Morris, and the men and women of FinCEN are central players, and were central players, in this strategy.
Since FinCEN was founded in 1990, it has been a key player in a broad-based effort against money laundering and related financial crimes. FinCEN's mission is to provide law enforcement case support to assist in the investigation of money laundering and related financial crimes; to develop and administer regulations aimed at protecting and detecting money laundering, and to pursue civil enforcement against violators of these rules; and finally, to strengthen our overall domestic and international efforts against money laundering.
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As has been noted, the scope of FinCEN's responsibilities has expanded substantially since it was first created. And FinCEN's resources have remained relatively unchanged. Still, FinCEN has achieved notable successes in its efforts against money laundering and has achieved significant successes in husbanding those resources.
As I mentioned before, Acting Director Baity, former Director Stan Morris, and the men and women of FinCEN all should be commended for their considerable accomplishments. While we are proud of FinCEN's achievements, we recognize that there is room for improvement. As part of our ongoing oversight, management, and policy development responsibilities, Treasury has initiated comprehensive steps to review financial crime enforcement, not just at FinCEN, but across our bureaus.
While not yet complete, the review process has helped us identify key areas where FinCEN could improve in the context of Treasury's overall efforts to combat financial crime, to combat money laundering. These steps complement existing oversight, including weekly meetings between senior FinCEN management and the Office of Enforcement, and daily briefings on significant developments provided by a FinCEN representative to Under Secretary Kelly or his designee.
As money laundering has garnered increasing attention throughout the enforcement community, the regulatory community, and financial community, FinCEN has had to respond in multiple ways, prioritizing scarce resources in order to meet its many obligations.
In the context of these challenges, we view the recent and ongoing GAO studies as providing a valuable assessment of FinCEN's effectiveness and future direction; thus providing us insight into ways in which we could do our job better.
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Although FinCEN effectively serves numerous law enforcement agencies and investigators, we recognize that case support and coordination can always improve. Consistent with the recommendation of the recent GAO study of FinCEN's products and services, FinCEN will work to further communicate its capabilities to potential customers.
One thing that I would note is that there was some discussion of FinCEN's communication of information to agencies, and I believe the figure was one in four agencies approached did not know about FinCEN's resources. I think as we go through our testimony, you will see that while the news may not travel out to the field as expeditiously or as effectively as possible, FinCEN has been decidedly inclusive in bringing agencies, as agencies and institutions, to the table. There may be problems with getting the information down from the top to folks in the field, but that is something that FinCEN is addressing.
In recent years, FinCEN's customer base has grown as the level of attention devoted to money laundering has expanded. And as has been noted, law enforcement agencies are coming to FinCEN more, and it's expected that law enforcement agencies will come to FinCEN more to ask for more case reports.
FinCEN's participation in the Interagency Coordination Group, or ICG, highlights the value of coordination efforts. The purpose of this group is to share money laundering intelligence in order to promote multi-agency money laundering investigations. The group includes the Internal Revenue Service, the U.S. Customs Service, the U.S. Secret Service, the Drug Enforcement Administration, the Federal Bureau of Investigation, and the United States Postal Service. FinCEN and the Department of Justice's Criminal Division serve as advisors to the group.
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Another useful vehicle for outreach and policy coordination is the Money Laundering Working Group, co-chaired by the Departments of Treasury and Justice. This group addresses policy and coordination issues relating to money laundering, and provides an additional means for FinCEN and others to gather information to improve FinCEN's products and to get the message out to law enforcement that those products are there and those techniques are available.
The GAO study on products and services highlights the need for FinCEN to continue stringent safeguards against potential misuse of its confidential law enforcement databases. It is true that the FinCEN tools are tremendously powerful and they have to be carefully monitored.
Although we believe that FinCEN's current policies in this regard are sound and adequate protections are in place, there is the issue of auditing. And we understand that there appears to be a tension between wide dissemination of information to appropriate agencies and the prevention of information misuse.
In light of this tension, in light of all of our concerns about the protection of privacies of some of the most sensitive personal information, this is an area that merits close attention and it will get that.
Even as FinCEN continues to expand its outreach and attempts to further improve the products and services it offers law enforcement, we are encouraged by the survey included in the GAO study on FinCEN's products and services, which indicates that fully 90 percent of respondents using FinCEN's products, 90 percent, believe that they provided leads, listed assets not previously known, and provided a substantial amount of help or were useful in other ways.
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The GAO's current study of civil penalty enforcement at FinCEN will likely indicate what our own analysis is also telling us, and in fact it has indicated what our analysis is telling us and what we have discussed. And that is civil penalty enforcement through FinCEN could be significantly more effective.
While FinCEN's work with Federal regulators, the Bank Secrecy Act Advisory Group, and its approach of industry partnerships can enhance compliance, more can be done.
We understand that the GAO study to evaluate FinCEN's international role, while not final, has revealed certain areas that they've raised with this subcommittee. Because money laundering knows no borders, international efforts are an important component of any comprehensive strategy to address money laundering and financial crime.
Treasury and FinCEN have worked together to coordinate and enhance international efforts to prevent money laundering, both bilaterally in countries such as Mexico and Panama. Although in many of the delegations to Mexico, as well as to Panama, I was actually the lead person on the delegation, I could not have accomplished my job without the support of FinCEN personnel that accompanied me on those trips.
In addition to bilateral efforts, there are multilateral efforts through organizations such as the Financial Action Task Force, or FATF. Given the volume of the requests for FinCEN assistance from around the world, FinCEN and Treasury are committed to prioritizing their bilateral assistance, their involvement in multilateral organizations, based on the nature of the money laundering threat and the prospects for a nation's substantial improvement following assistance from Treasury.
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The Department and FinCEN should build on successful efforts by targeting FinCEN's participation strategically and developing enhanced assessments of its international work. We look forward to the results of the GAO study to complement our review of this facet of FinCEN's mission.
Finally, FinCEN must continually enhance its technological resources to meet both case support and regulatory challenges. While FinCEN has already established its role in using innovative information technologies and artificial intelligence targeting, efforts to improve these tools will continue.
The Treasury Department expects FinCEN to continue to play a central role in its overall strategy of prevention, vigorous case support, and international cooperation. In the coming months, we look forward to working with this subcommittee as we advance our mission and that of FinCEN.
In our oversight role, we at Treasury will work with FinCEN to build upon its strengths so that it can better provide dynamic analytical case support in the fight against money laundering and related financial crimes. We will work with FinCEN as we have on an ongoing basis to discuss its regulatory initiatives and develop those initiatives.
We look forward to the completion of the remaining GAO studies on FinCEN to complement our own reviews.
And again, Mr. Chairman and Mr. Sanders, I thank you for your continuing support and your interest in our efforts.
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Chairman BACHUS. Thank you.
And now we'll hear from FinCEN.
STATEMENT OF WILLIAM F. BAITY, ACTING DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK
Mr. BAITY. Thank you, Mr. Chairman. Mr. Chairman and Congressman Sanders, I am pleased to appear before you this afternoon and grateful for the opportunity to discuss the efforts of FinCEN.
Oversight means interest in our programs, our initiatives, and even our shortcomings. This interest furthers a common goaleffective and cost-efficient measures to fight against money laundering.
Today's hearing focuses on GAO studies that review FinCEN's regulatory, civil penalty, law enforcement support, and international programs. While we have not seen two of the studies which are in various stages of completion, many of GAO's issues are the same as those raised in our ongoing assessment of our work. Mr. Chairman, I will address those issues this afternoon.
First, I'd like to briefly summarize FinCEN's programs and priorities. I have provided the subcommittee with the complete text of my testimony and ask, Mr. Chairman, that it be included in the record.
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FinCEN has three responsibilities. The first, established at the time of its founding in 1990, is to support increasingly sophisticated financial crime investigations. The second, which came about when the Office of Financial Enforcement was consolidated into FinCEN in 1995, is to administer the Bank Secrecy Act, or the BSA. The third, which grew out of both functions, is to build a global network of nations working together to combat money laundering.
People often ask how these programs fit together. The answer is simple. The BSA is, and was intended by Congress to be, an information collection device for law enforcement. As you know, we are reworking the BSA along the lines set by the Congress, to make the information more useful to law enforcement and less burdensome to the financial industry.
The goal of FinCEN's international efforts is to build a coordinated system of rules that restrict money launderers' use of the financial system.
Melding these programs into a new sort of agency has not been easy. From the ground up, we have built a constantly evolving network of expertise and cooperation, and now you and we are asking for an inventory of how our programs are working, alone and together.
We are committed to honestly assessing our strengths and weaknesses and soliciting frank views from our partners and customers on where our energy should be directed as we move forward.
Since 1995 when FinCEN took over administration of the BSA, it has issued ten proposed rules, seven final rules, and an interim rule. Another final rule and proposed rule are currently under review with Treasury. As the subcommittee knows, the regulations are aimed at improving the quality and type of information for law enforcement, while streamlining and reducing unnecessary reporting for financial institutions. In the interest of brevity and because the rules are described in detail in my written testimony, I will not go into them at length now.
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I would, however, like to emphasize the approach we have taken in developing and issuing regulations. Our rulemaking process is driven by our strong belief in the need for dialogue and consultation with affected industries every step of the way.
Our objective is to listen, gain an understanding of the issues at hand, and fashion regulations which blend often conflicting needs into programs which are fair and produce the desired results. This is not an easy task and the process moves more slowly than we would like. But we think the cooperation we gain by being willing to listen and to change course when needed is well worth the effort in the long run.
An example of this approach is the outstanding support we receive from the American Bankers Association. Because our relationship has been built over time, with respect for each other's integrity of purpose, we enjoy a frank, honest rapport that is so critical to problem solving and creative thinking on these issues.
We try to replicate this spirit with each group we regulate. For example, tribal gaming representatives, the securities industry, and the broad range of groups FinCEN refers to as the money services business or MSBs.
The successful achievement of these goals requires partnership and flexibilityqualities which come into play over and over againwhether it's working through differences regarding currency transaction report exemptions for banks or deciding how to adapt suspicious activity reporting to the gaming industry. These relationships have been and continue to be critical as we move to finalize, for instance, the MSB rules. We anticipate these rules will be published this summer.
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FinCEN recently reviewed the GAO's report on our regulatory initiatives. I would like to briefly comment on the report's sole recommendation that FinCEN submit a multiyear action plan to Congress. We, of course, strongly agree that Congress should be kept informed and we have actively endeavored to meet that obligation, both formally and informally.
But regulatory drafting should be done carefully. It is not an assembly like predictable process. The world of money laundering changes rapidly. In our view, committing deadlines before we fully understand the problem and then trying to enlist everyone's cooperation undermines the objectives we hope to achieve.
Turning now to the area you have asked GAO to study, FinCEN's processing of civil penalties. We too are concerned by the inventory of open cases, and I believe that we must pay greater attention to this part of our regulatory program.
While we welcome the GAO's independent evaluation of our case-processing activities, I am not waiting until that audit has concluded. We are conducting our own review to determine the causes of these delays. We have taken an inventory of the status of each case, and I am assessing what further steps need to be taken.
Mr. Chairman, if you and this subcommittee would desire, FinCEN would provide quarterly progress reports to this subcommittee on how we are planning to address this issue.
I would offer one note of explanation, although certainly not an excuse. The majority of cases that are now being referred to FinCEN involve non-bank financial institutions, such as money transmitters, check cashers, money order sellers, and casinos.
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In many of these businesses, it is much more difficult to obtain records and other documentary evidence to reconstruct the transactions than it is with banks. Also, investigating penalty cases requires experienced personnel, and they are difficult to recruit and train. But we have begun to address this issue, Mr. Chairman, and again, while these are not presented as excuses, we will keep you informed of our progress as we work through the situation.
Now I'd like to address the issues related to our products and services for law enforcement. As the subcommittee knows, our programs to support law enforcement fall into two categories. First, in-house support for field requests pertaining to data searches and analysis. Second, programs such as Platform and Gateway, which enable others to take advantage of FinCEN's services while using their own resources. This approach enables us to accommodate the increasing demands for our services.
I would like to point out that, as with all Government agencies with sensitive information, FinCEN has strong security precautions in place which are carefully followed. These apply to all FinCEN personnel, as well as all other agencies using our system. GAO's review of our Gateway program suggested the need to put in place an additional audit plan to further ensure only authorized use of our system. Our Gateway team is currently in the process of developing such a plan.
GAO was also concerned that we take action to better inform our customers about our products and services. We have a very aggressive outreach program which includes training and information programs at FinCEN, on-site visits to law enforcement venues, participation in conferences, and continuously updating our website which is available to all law enforcement. However, Mr. Chairman, we do recognize the need to continue to work with law enforcement regularly to improve our efforts.
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FinCEN carries its theme of coordination and cooperation into the global arena where it is now recognized around the world as the leader in the international fight against money laundering.
While this recognition clearly has benefits such as the ability to set and influence agendas, and the opportunity to participate in many forums, it also carries with it responsibilities including the need to respond to constant requests for guidance and assistance. FinCEN cannot shirk its leadership role in this area, but neither can we meet every request for assistance that we receive.
Thus FinCEN must prioritize its international agenda. Over the next five years, Mr. Chairman, our international efforts will be focused on four principal areas: First, promoting international anti-money laundering standards; fostering the global network of Financial Intelligence Units, or FIUs, as they are called; finding solutions to international money laundering schemes; and providing training and technical assistance.
Mr. Chairman, I hope I have addressed the issues which concern and interest you. I'd like to leave you with what I consider are two very important points. First, FinCEN will always be evaluating its effort. In the changing world of financial services and the new money laundering vulnerabilities, flexibility and reassessment on our part are imperative.
Second, as I said in my opening, FinCEN's three key missions work together to reinforce this organization we call a network. This network with its interconnected responsibilities brings together diverse groups with specialized expertise. And it is this networking approach which continues to make it more difficult for criminals to launder their money here and around the world.
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As you noted, Mr. Chairman, our former Director, Stan Morris, often stressed the interdependence of these functions. Until his retirement this year, he worked tirelessly to build on that interdependence. We seek to build on this legacy to make this network even stronger.
Again, the support and the interest the subcommittee continues to show in the role we are playing to combat money laundering is gratifying. We commend you, the Members of the subcommittee, and especially Chairman Bachus, on your outstanding leadership and your knowledge of a very complex issue. I would be pleased to answer the subcommittee's questions. Thank you.
Chairman BACHUS. Thank you. We have talked about these civil penalty cases, and you said that you'd give us a quarterly report on what's happening. Have you begun to address this, or have you just talked about it, or are there any concrete steps that have been taken? Where are we today?
Mr. BAITY. If I could, Mr. Chairman, we've actually taken several steps that I believe are concrete. First, again, as I think we all agree, to understand how to address a problem we need to understand where we are. We have gone through every case that is open in FinCEN to make a determination of where we stand on it. We have actually closed cases since the GAO initial review when they came in to see us.
We are in the process, Mr. Chairman, of bringing new resources to bear through the hiring process and elsewhere to focus on this problem. We have actually moved that part of our organization into different facilities that I think will make it much easier for them to work.
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But there remains a question that we must deal with as we go through this process, Mr. Chairmanthe need for bringing the right kind of personnel to this problem. Because as I mentioned, the most recent types of penalties coming in are from a different mix in the past. We will be glad to lay out our plan for you.
Chairman BACHUS. Thank you.
Mr. SANDERS. Thank you, Mr. Chairman. I thank both of you for your thoughtful statements.
Mr. Baity, I think we all recognize that crime is becoming increasingly international and no one country can deal with these problems alone. Can you tell us how FinCEN, how your international efforts support local law enforcement agencies in the United States?
Mr. BAITY. Let me begin, Mr. Sanders, by responding that our efforts here are to work to basically raise the safety net, so to speak, because money launderers and criminals will always go to the point of least resistance.
Let me just give you a couple of examples which go into how our international efforts do come to benefit us on the domestic side. The Egmont Group, which consists of financial intelligence units which are being developed around the world much like FinCEN, has developed a training workshop process where they share information throughout these agencies on certain types of money laundering activities.
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Just recently we participated in an Egmont meeting where we talked about how suspicious reports can be better utilized by local law enforcement. This is very important because suspicious reporting in the United States is really in its infancy, only two years old. But our foreign counterparts in many countries have been doing this for quite some time.
We are now able to take that experience and bring it back home, so to speak. These shared experiences help us analyze the types of suspicious reporting that we're seeing from our banks. We are then able to give that information to U.S. law enforcement.
Another example relates to our mandate to require suspicious reporting by the security industry. One of our foreign counterparts has done a study on money laundering in the securities industry. We are using that study to help develop a regulation that will make the best sense for the U.S. securities industry.
Mr. SANDERS. OK, thank you. And if I could, Mr. Chairman, ask Mr. Johnson a question.
Assistant Secretary Johnson, could you briefly address how FinCEN fits into and operates in the Treasury Department's international law enforcement efforts, please.
Mr. JOHNSON. There are, as Mr. Baity has just mentioned, and as you mentioned in your question to Mr. Baity, there are fewer and fewer borders, particularly when we're talking about financial crime, and particularly in the arena of money laundering.
Page 36 PREV PAGE TOP OF DOC To combat these problems, we have a strategy that attacks the problem domestically, which would be through the regulatory front; that is, with prevention. And second, it attacks the problem of money launderers who successfully defeat the regulations or simply violate the laws.
But money launderers will often go to the point of least resistance and they will leave these borders and try to conduct their same activities elsewhere. So what we need to do is engage essentially in institution building. We are trying to build investigative institutions through training, regulatory institutions, establishing FIUs.
We advise other nations, discuss with other nations improvements to their statutory schemes, because many countries may have sophisticated financial systems, but don't have a parallel sophisticated anti-money laundering regime either statutorily put in place orif the statutes are thereregulatory regime.
We need to conduct those efforts if we are going to be, in the long run, effective. FinCEN has been a very important component of those efforts. In many of the countries where within Treasury the countries have been identified as being vulnerable to money laundering, FinCEN has provided technical assistance with the establishment of FIUs. FinCEN has helped us, as we have commented, on other nations' statutory or regulatory regimes.
They have provided, when very senior-level Treasury visits have taken place, they have provided invaluable support to those visitors. When I have addressed foreign ministries or law enforcement agencies either here or discussed with other governments abroad the problems of money laundering, the need to address the problems within their system, FinCEN has provided significant support, pointing, for instance, to Mexico.
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Shortly after I was sworn in as Assistant Secretary, I traveled to Mexico as part of the high-level contact group that's led by General McCaffrey. FinCEN helped me develop my approach to the Mexicans. They helped set up the Financial Intelligence Unit in Mexico. They designed the computer software that was going to be put in place in their Financial Intelligence Unit, and Mexico now has a unit that's up and running. They helped advise me about what suggestions I should make to the Mexicans about changes to their laws. And I think there's a very good story that we've been able to develop in that area as a result of FinCEN's support.
Mr. SANDERS. Mr. Johnson, thank you very much. Thank you, Mr. Chairman.
Chairman BACHUS. Thank you. The banking industry has expressed some concerns with the proposed tier two CTR exemptions. Are you addressing these concerns? Do you know of any?
Mr. BAITY. I believe we are, Mr. Chairman. I think this is a good example of what I discussed in my opening statementthe need to discuss and understand the issues. We have met not only with the financial communities to discuss or to consider this phase two of the exemption process, but also with the law enforcement community at the same time. Here is a good example of why we need to try to balance what obviously are going to be competing interests in the exemption process. We are in the process of finalizing those discussions and hope to move forward with phase two in the near future.
Chairman BACHUS. When do you expect the final exemptions to be published? How far are we?
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Mr. BAITY. We're still working with the Department to go through the final phase of it. We are in consultation with Mr. Johnson regarding the next step, but I'm not sure of when that will be. I think it would be fairly soon though, because we have met with the industries and obtained their input, which was very crucial in this regard.
Chairman BACHUS. On the money service business regulations, I think those aren't going to be final until Treasury develops a plan for enforcing those money service business regulations.
Let me ask you this, and I'll ask either one of you. Could you give us any idea what the reporting thresholds will be under the final MSB rules? Do you have any thoughts there?
Mr. JOHNSON. Well, I might start the answer and Mr. Baity can finish it. But with respect to reporting thresholds, there are several proposed rules out right now and we're working on final rules. We have certain policy issues that we have to explore and resolve and we're working with FinCEN and with all the components of Treasury to resolve the issues, such as reporting thresholds, to be placed in the final rule.
The other issue with respect to enforcement or the timing, as these hearings and as the GAO study have pointed out, one of the issues that we need to deal with as a part of our oversight function, is the question of resources. And we want to make sure that once we put the additional burdens in place, we have the resources to match up with those additional burdens that would be placed on FinCEN and on other components of the Treasury Department.
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In evaluating the final rules and evaluating the policy considerations, we do need to addressand we are addressingthe issue of resources. It's something that we constantly need to monitor and that's an important element of the money services business discussions within Treasury.
Chairman BACHUS. Is the cyberpayment industry going to be included, do you know?
Mr. JOHNSON. Because we haven't issued a final rule and our decisionmaking process is pending, while I can discuss the process and at least wanted the budgetary issue raised, I can't forecast what the end result is going to be. But there have been comments from that industry, and you can rest assured we have heard their concerns.
Chairman BACHUS. OK. But you're pretty far along on developing an enforcement plan?
Mr. JOHNSON. I would say that we're fairly far along. So much so that whatever final rules come out, we expect to be sometime within the next few months.
Chairman BACHUS. There's been some misunderstanding recently on whether or not FinCEN is willing to provide private written Bank Secrecy Act commentaries and explanation to the financial services industry.
Could either of you explain if private written commentaries are still being provided or issued?
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Mr. BAITY. Mr. Chairman, to answer that, let me put it into context, because it goes to issues in terms of what we need to do vis-a-vis the commentaries as well as issuing a public version of these rulings.
One of the areas which our compliance office also is charged with is trying to put together and compile these rulings. The American Bankers Association has been extremely helpful in assisting us as we begin to put together our commentaries and our public rules.
Instead of continuing to try to issue the private rulings, we have consciously decided that it would be better to take stock of where we are and move forward with the work that the American Bankers Association has started for us, and put this into the public arena where it should be.
So that, I think, is where we've chosen to put the emphasis, because we think that will be much more helpful in the long run.
Chairman BACHUS. OK. Let me ask final questions here. Who sets the priorities? Is it Treasury? Is it FinCEN? Or do you get together and talk about it?
Mr. JOHNSON. Well, priority setting is an iterative process. Ultimately, the priorities are set by the Department. But through my assistance to Under Secretary Kelly with oversight, I discuss priorities, whether or not it's on the international front, the regulatory front, or whether in other areas of concern.
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I met with Stan Morris, when he was Director, on a weekly basis. I continue those meetings with Acting Director Baity, and we discuss our priorities. To say that one person gives a final stamp would suggest a different sort of relationship than the one that we're trying to develop with FinCEN, where we have in FinCEN some extraordinarily talented experts in these areas.
They draw not only from the regulatory side, but the enforcement side. They bring in detailees from other agencies so that there is an enhancement of the information that they have and their knowledge of the true problems. Those are brought to us, and together we discuss priorities.
Ultimately, of course, it is the Under Secretary of the Treasury, acting for the Secretary, that decides the bulk of the priorities, and if the priorities are great enough, or the issues are great enough, then they're brought to the Secretary.
Chairman BACHUS. OK. I am going to conclude with this. And this isn't going to be a question, it's going to be a request.
We spent time talking about regulatory initiatives that you've completed. There are some that you hadn't completed, hadn't been finalized. Regulation for foreign bank drafts, which are linked to various forms of money laundering, including peso brokering, which this subcommittee has had testimony on, they hadn't been finalized.
Number two, tier two CTR exemptions that I mentioned. Those hadn't been finalized. Number three, money service business regulations hadn't been finalized. And fourth, regulations for delegating of civil penalty authority haven't been finalized. I'm not even sure they've been proposed.
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Could you get me some written response in the next few weeks how these are being prioritized, and specifically, when they'll be done, and what are the time-lines on them. Just give us a written report back. Is that possible?
Mr. JOHNSON. Yes, sir.
Mr. BAITY. Yes, sir.
Chairman BACHUS. OK. Gentlemen, I appreciate your testimony here today. Mr. Johnson, you and I had a discussion in the office and you satisfied me, I think, in that meeting about some of the things we discussed on some of the international travel. And I appreciated what you outlined at that time, the approach that you were taking. And so I am not going to go into that. I appreciate it. Thank you.
Mr. JOHNSON. Thank you, Mr. Chairman.
Mr. BAITY. Thank you.
[Whereupon, at 2:40 p.m., the hearing adjourned subject to the call of the Chair.]