SPEAKERS CONTENTS INSERTS
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TRENDS IN MONEY LAUNDERING
THURSDAY, APRIL 15, 1999
U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit, and
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
The joint subcommittees met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Marge Roukema, [chairwoman of the Subcommittee on Financial Institutions and Consumer Credit], presiding.
Present for the Subcommittee on Financial Institutions and Consumer Credit: Chairwoman Roukema; Representatives Bereuter, Castle, Barr, Kelly, Riley, Vento, C. Maloney of New York, Bentsen, Sherman, Inslee and Moore.
Present for the Subcommittee on General Oversight and Investigations: Representatives King, Sanders, Goode and Gonzalez.
Also Present: Representatives Waters and Velazquez.
Chairwoman ROUKEMA. I believe we are ready to commence with our hearing here today.
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If you will bear with me one moment, I think I have some sort of a statement regarding the procedures here. As most of us realize, but I will simply repeat them, our procedures are that we hopefully have a five-minute presentation and that the Members will try to confine their initial questions to five minutes; and, of course, we can always have a second round.
It is also understood that any questions or responses can automaticallywe can ask for unanimous consent, but under the rules of the subcommittees, any written questions can be submitted and written responses as well. Most often, people want to state what those questions would be and give you the opportunity to hear them, put them in the record and then ask for written responses at a later time.
That having been said, I think we are ready for this hearing.
Today we are holding a joint hearing between the Financial Institutions and Consumer Credit Subcommittee and the General Oversight and Investigations Subcommittee. This series of joint hearings on money laundering issues are being initiated today; and I certainly want to welcome our colleague, Chairman Peter King, and other Members of the General Oversight Subcommittee for joining Mr. Vento and myself at this initial hearing.
This is the beginning of three days of joint hearings from the two subcommittees on the extremely relevant and growing problems of money laundering. Today's hearing will focus on trends in money laundering, such as bulk cash smuggling and the use of the so-called money-services businessesMSBsas we refer to them, which include the issuers of travelers checks, money orders, money transmitters, and so forth.
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The second hearing is Tuesday, April 20, and will focus on the Bank Secrecy Act and various other reporting requirements.
I would like to point out that Members are well aware of, as has been frequently brought up and discussed, the ''know your customer'' rules which were recently withdrawn by the Federal banking agencies. The ''know your customer'' rule, which was a money laundering rule, produced over 300,000 public comments. I guess you might say that it must be relevant if it gets that kind of focus.
I, along with several other Members of the Banking Committee, was among those that filed a negative comment. I said back in January that the proposal was seriously flawed and applauded the agencies for withdrawing the rule. However, I want to stress today that withdrawing the rule that raised so many justifiable comments does not solve the problem. I would hope that this series of hearings that we are going through will be helpful to all of us in terms of reasonably addressing those problems.
Privacy certainly is an important issue to the American public, but any proposal regarding privacy rules must balance the valid needs and concerns of the Government with respect to money laundering, and for that reason it will be my hope that the Members of the subcommittees will recognize that on April 20, next week, the subject of the Bank Secrecy Act and ''know your customer'' will be focused on, and perhaps we can limit our remarks today on that subject until next week. It is not irrelevant. They are directly interrelated.
The third and final hearingand we are still working on setting up a datewill examine the problem of offshore money laundering and what the United States and international community is doing to address the problems of money laundering through offshore jurisdictions.
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I would note the advisory issued last week by the Treasury Department regarding Antigua and Barbuda. United States financial institutions were warned to not direct or route transactions through financial institutions located in Antigua because of concerns related to Government oversight related to institutions located there.
Money laundering is linked to organized crime and the drug trade. I believe those who are here certainly have full understanding of that.
Let's be clear about one thing. Organized crime cannot succeed without cash being laundered. As we will hear later in rather vivid detail from the U.S. Assistant Secretary Jodi Avergun, from the Eastern District of New York, and the Texas Assistant Attorney General, Donald Clemmer, illegal drug operations produce billions of dollars of cash each year in the United States. Law enforcement has testified many times before that money laundering is the Achilles' heel of organized crime. The drug lords need to get the estimated $40 to $60 billion cash back into the mainstream of the economy.
Over the last twenty years, the United States has made a huge commitment in both money and manpower to fighting organized crime in general and the illegal drug trade in particular. The toll that illegal drugs have taken on American families and youth has been devastating, and I don't think we need take the time here to stress the grief and the pain that it has caused our society, our families and the human tragedy for families and our local communities.
Fighting money laundering is about fighting drugs. As we go through these three days of hearings, we must remember the drug connection.
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But despite the high profile and legislative initiatives that Congress has taken in recent years and the high profile that I think law enforcement agencies have been giving it, all efforts have been notably unsuccessful. I guess what I am hopeful of is that what we learn today and in upcoming hearings will be whether or not this lack of success has been the result of lack of effort, a lack of legislative authority, or whether we are not understanding completely the law enforcement problems, and I think we have many here today who are able to help us in that regard.
We are looking, of course, today beyond traditional financial institutions such as the banks and the S&Ls, and so forth, to see where and how money launderers are operating outside those forums.
One issue that we are looking at is the Administration's money laundering strategy. That is one focus for today.
Last year, the Congress enacted the Money Laundering and Financial Crimes Strategy Act of 1998. I do not see Congresswoman Nydia Velazquez here today, but it was her initiative and her good work that brought us that legislation.
The legislation required the Administration through the Treasury Department to formulate a national strategy to address money laundering. The national strategy was to be submitted under that legislation to the Congress by February of 1999. We are now in the middle of April, but that submission has not yet been made by the Treasury Department.
Page 6 PREV PAGE TOP OF DOC I believe that the Administration and the Treasury Department are committed to fighting money laundering, but I am concerned about the fact that we are well past the statutory deadline for that, as well as other statutory deadlines, and that is the reason that I am asking what is the problem? This is a growing problem. Is it lack of statutory authority or lack of enforcement capability? And we are going to ask those questions today of our panelists.
Another area we will be looking at is the problem of bulk cash smuggling. As the Federal bank regulators and law enforcement officials have made money laundering through insured depository institutions more difficult, money launderers have apparently resorted to the smuggling of large amounts of U.S. cash and currency over the border. There are reports about billions and billions each year smuggled by planes, trains, automobiles and ships. It is a fact.
I have introduced legislation, H.R. 240the Bulk Cash Smuggling Act of 1999, which is meant to address in part the problem of this bulk cash smuggling. This Act would criminalize the smuggling into or out of the United States.
And one might ask, what does that have to do with anything? I thought we had done that. Why is this legislation that is so obvious and apparent necessary?
It is because in 1998 the Supreme Court decision invalidated the civil forfeiture of monies which had not been reported to authorities.
My understanding is that H.R. 240 is strongly supported by the Administration because it would deal with the issue as raised by the Supreme Court, and I look forward to a more detailed discussion of the Supreme Court decision and how we can work together with the Administration to correct that.
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The final area that we will be examining involves the non-bank financial services arena, which is now being referred to as the ''money-services businesses'' or ''MSBs.'' MSBs include money transmitters, issuers and sellers of travelers' checks, money orders and foreign exchange agents and check cashers. It is estimated that more than $200 billionwe are talking about real money here, my friends$200 billion is estimated annually to go through these MSBs.
Law enforcement and Congress have both known for some time that money launderers have used financial institutions such as these, and the Treasury Departmentand here I am sad to have to report this, but I have to lay it out in preparation for making the best use of our panelists here todaythe Treasury Department was directed in 1994 to promulgate regulations registering the non-bank financial institutions. Proposed rules were issued by the Treasury Department in mid-1997. Those rules were addressing three issues: registration, currency transactions reports, and suspicious activity reports requirements.
The three MSB rules involve some controversies such as the scope of registration requirements, the appropriate dollar levels at which MSBs would have to report currency transactions, and under what circumstances suspicious activity reports should be filed by the MSBs.
In that regard, I would note that Mr. Vento and I are no strangers to those rules. We filed a joint comment letter back in 1995. A major study of MSBs was completed in mid-1997. At that time, the Treasury Department told Congress that the MSB rules would be final by July of 1998. But the Treasury Department has not finalized those MSB rules. Again, as with the National Strategy on Money Laundering, it is quite troubling to all of us that the Treasury Department has not met the statutory deadline.
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These are some of the questions that have brought us here today. It is even worse because, during the time lag, almost five years since the Money Laundering Suppression Act was enacted, the Treasury Department, as I have advised them in the letter and in the invitation today, has to explain to us and to the American people why it has not been able to finalize any of these rules in the five years that we have given them, a certain date when such regulations needed to be final.
In closing, I would like to note that we will hear quite a bit of testimony today, and I hope it will be constructive testimony to help all of us determine how we can improve the work that we are doing.
We will hear not only from the Treasury Department, but also from the men and women in the field. We will be hearing from the U.S. Attorney's Office for the Eastern District of New York about the New York metropolitan area Geographical Targeting Order. We will also be hearing from the Texas Attorney General's Office about what they have seen in Texas. We fully expect that their experiences are not isolated and will be realistically constructive in helping us to deal with these growing problems.
I would also like to point out that the Administration has made it very clear that only certain elements within the MSB industry are a problem, and I am sure that they will testify to that today, as opposed to the industry itself. We must not lose sight of the fact that the MSB industry is, by and large, mostly law-abiding entities, but we do want objective analysis of how we can all legally and cooperatively work together.
Page 9 PREV PAGE TOP OF DOC It certainly is my hope that this will help to facilitate the Treasury Department to issue enforceable rules. And whatever additional legislation may be necessary, we wait for their advice and counsel and any way in which we can help get stronger enforcement to existing statutes. We stand here ready to work, but we have to have a full disclosure of what those problems are.
With that, I turn to my Ranking Member and friend, Congressman Bruce Vento.
Mr. VENTO. Thank you, Madam Chairwoman.
I want to thank you, Chairman King and Ranking Member Bernie Sanders for their efforts and contributions to this first of three joint hearings focused on money laundering.
I understand this hearing will be useful as an opportunity to set the stage and state the level of understanding concerning the breadth and depth of money laundering. Again, we can all also better understand the status of regulations implementing the anti-money-laundering laws of the 1990's.
Further, we are ready to hear what are the views of the regulators while learning the actual potential effect of laws and regulations on customers and businesses and institutions. I am especially interested today in learning why there has been a continued delay in regulation of money-services businesses even as we discussed the bulk cash smuggling issue.
No doubt we will be focusing next week on ''know your customers,'' and I would comment, notwithstanding the Easter celebration of resurrection, this rule will surely remain dead. While the ''know your customer'' aspect of money laundering regulations made a splash, other provisions have not received the spotlight, the spotlight from the Executive or Legislative Branch and from the constituencies that will be impacted.
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I share the disappointment of the Chairwoman regarding the tardiness of regulations for the MSBs. I would like to see some priorities placed on other aspects of money laundering regulations implementing the SARs and the MSB proposals, in particular the registration obligation which can set up the picture frame for the regulations going forward. I, for one, would like to know why it is not possible to go forward with that post haste.
Madam Chairwoman, as you know, the laws we have put in place are fundamental to ending the role of money laundering and the illegitimate and harmful enterprises which, of course, benefit from it. We need effective, but fair, regulations on a timely basis that hook up on the private sector businesses, be they regulated financial institutions or small mom and pop stores with money-services as partners, to work with ending the scourge of money laundering.
We surely need strong anti-money laundering laws and regulations to thoroughly implement those laws we have worked hard to write, including the most recent passed last year. Ms. Velazquez was the driving force behind that, requiring a coordinated strategy to address these financial crimes perpetuated through our payment system. We need those regulations on a timely basis, at the very least to send a message that money laundering activities are a priority of our national and State governments.
I am encouraged by this hearing and some of the testimony before us. This is not the time to abandon the Bank Secrecy Act or money laundering laws. Controversial regulations in the rule should not become the rationale for destroying laws and the necessary policy that can and do make a difference for law enforcement around our Nation and the world.
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Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you.
Now our Cochairman here today, Congressman Peter King.
Mr. KING. Thank you, Madam Chairwoman. Thank you for the assistance you and your staff have given to me, also Mr. Sanders and Mr. Vento. I think it is important that we schedule these joint hearings.
As you stated, today we are meeting to examine money laundering. It is an issue which goes right to the heart of our communities, right to the heart of the war against organized crime, and I think it is important to note that law enforcement officials have done an excellent job in trying to keep one step ahead of the criminals who need to launder their drug money.
Actually, the numbers speak for themselves. We have a chart here showing that in 1998 the U.S. Customs Service made 1,227 seizures of drug money headed out of the U.S., and that was a 73 percent increase over the number of seizures made in 1996. These 1,227 seizures amounted to $68.4 million in lost profits to the drug lords.
In 1999, Customs is on pace to seize even more drug money than last year. Now, keep in mind, these charts reflect only Customs seizures of currency headed out of the U.S. When you include all seizures of financial instruments and street cash, Customs took away approximately $426 million from drug dealers in 1998.
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A growing number of drug dealers, as you and Mr. Vento stated, are using money-services businesses, or MSBs, such as money transmitters and check cashers to launder their currency. There are insufficient regulations in place to monitor these businesses.
As we stated, it has been five years already. I look forward to the testimony today to get some kind of estimate of when these regulations will be in place, and it is important that they be promulgated, enacted and carried out.
Next week, on April 20, the subcommittees will meet to scrutinize the reporting requirements under the Bank Secrecy Act. Specifically, we will struggle to balance individual privacy rights against the need to detect and prosecute money launderers. There has been renewed interest in the issue of personal privacy in the wake of the controversy surrounding the recently withdrawn ''know your customer'' regulation. I opposed the regulation because I felt that it sacrificed individual privacy rights. I was pleased to see the enormous public reaction to this proposal was respected and the regulation withdrawn.
The April 20 hearing will focus on the Bank Secrecy Act, and we will hear from privacy activists and law enforcement officials who maintain that the BSA reporting requirements are essential in the fight against drug dealers and money laundering.
The third joint hearing does not have a date yet, but it is going to address the growing problem of offshore banking havens. I look forward to the witnesses and the testimony. I believe this type of joint activity is essential if we are going to carry out our mandate and do all that we can to assist law enforcement in the very difficult job that they have.
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Chairwoman ROUKEMA. Thank you.
The Ranking Member, Mr. Sanders, of the General Oversight and Investigations Subcommittee.
Mr. SANDERS. Thank you, Madam Chairwoman. I just want to congratulate you and Mr. King and Mr. Vento for your efforts in putting on these important hearings. I concur with much of what has already been said.
I would just like to briefly touch on another issue, and that is to say, as concerned as we all are about the laundering of money for drugs and other illegal activities, the issue of money laundering goes beyond the confines of our domestic concerns in the United States and it becomes very much of an international issue.
As the Ranking Member of the Subcommittee on General Oversight and Investigations, I have long been concerned about many aspects of the International Monetary Fund, the IMF. And recently, as you may know, House Majority Leader Dick Armey and Representative Jim Saxton, who is the Vice Chair of the Joint Economic Committee, in a letter to the Secretary of the Treasury they said that the United States should use its influence to deny further IMF loans to Russia until Congress is told what happened to $4.8 billion lent last August.
So there is a great deal of concern that I share about what is happening to taxpayers' money from this country when it goes to Russia in terms of going out to offshore banks. Some of it may be done honestly by officials in Russia, and we know that there are honest people in Russia running the government and there are dishonest people running the government. But in terms of public policy, the people of this country should have a better handle on what is happening to our contributions to the IMF which end up in Russia. We are talking about huge sums of money.
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So, Madam Chairwoman, I applaud you for holding these hearings and think that we should also be taking a look at some of the international implications and IMF implications of money laundering as well.
Chairwoman ROUKEMA. I thank the Member.
Mr. Barr, is there an opening statement that anyone on this side wants to make?
Mr. BARR. Yes. I appreciate this hearing and the upcoming two hearings that will focus on other aspects of money laundering. As a former U.S. Attorney, I know how important this aspect of our overall law enforcement effort, particularly regarding organized crime and drug activity, is; and I think, by and large, the Bank Secrecy Act has proved to be a very valuable tool for attorneys and law enforcement personnel across the country.
Unlike some of my colleagues, I am not really terribly concerned that we have not finalized the rules that will result in implementing a fairly significant expansion of the Bank Secrecy Act to MSBs and so forth. My concern is that we take a very hard look at that before we get involved in applying these same sorts of procedures currently applicable to banks and other more sophisticated financial services institutions which have operated very well with suspicious activity reports.
You have banking institutions which are very concerned about their reputations; and I think you have, therefore, with somecertainly there is always room to make changes to these procedures so that the proper balance, as Mr. King referred to, between privacy rights and the needs of law enforcement are maintained; and I have already proposed some changes to these requirements, particularly as regards bringing foreign banks within the ambit of having the same reporting requirements applicable to them if they elect to do business in this country; and that will be for future hearings.
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But taking the Bank Secrecy Act and the SARs and applying them to a huge number of financial services institutionsand that term really doesn't apply to many of the check cashing services in any reasonable wayI think presents formidable problems. You don't have the same calibre of people and the same professionalism, and probably 99 percent of the people who come into these institutions would fall into the category of suspicious in one form or fashion.
I think we need to tread very carefully and deliberatively in this area pursuant to the 1994 Act, which I would not have voted for had I been in Congress. So in this rare instance I commend the Administration and the witnesses for moving very deliberatively in this process because I really think, despite the 1994 law sounding very good and certainly there are problems with regard to some of these neighborhood check cashing services and so forth and that is a problem, I would hate to lose sight of the forest for the trees.
I think that we have a very serious problem regarding international money laundering through and with the involvement of major financial institutions here and abroad and financial institutions from abroad operating in this country. And, frankly, my concern is more with redoubling our efforts in those areas rather than developing this whole array of regulations and enforcement personnel to either fan out across the country looking into these neighborhood institutions, which is essentially doomed to failure anyway if we expect to be really able to attack money laundering broadly defined at the neighborhood level, and I think that will give rise to a great deal of skepticism on the part of the public and continued antagonism between our law enforcement authorities and small business people. I think there are plenty of tools available to law enforcement to attack legitimate money laundering efforts, whether it is smuggling large amounts of cash
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I remember Operation Polar Cap ten years ago involved a transmission through simply large amounts of cash. Those cases were prosecuted. They continue to be prosecuted.
So, frankly, I would welcome these hearings to hopefully focus more on strengthening our law enforcement efforts against the major problem, and that is the international laundering of drug proceeds and other proceeds of organized crime and bringing within the ambit of the law enforcement regulatory mechanisms already applicable to U.S. financial institutions and foreign banks that elect to do business in this country. And I think that would go a long way toward getting a better handle on international money laundering, and let's simply use existing law enforcement tools and reporting requirements to attack more on the domestic side. Because I think if we focus too much on neighborhood transactions, the horse is going to get out the back door.
Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. I thank you.
Before calling on the next Member, I would like to point out I neglected to ask unanimous consent to include in the record a series of articles from The Record newspaper, a prominent newspaper in northern New Jersey, a series, and I referenced them in our previous hearings in May of 1998. They had a notable series of articles on the subject of money laundering; and it was an excellent, comprehensive study; and I just want to note that, include it in the record. Reporters Tom Zambito and Jim Haner did an excellent job and very constructive in terms of complete understanding of the issue even in today's climate.
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Chairwoman ROUKEMA. Now, the next Member I think I would like to call on, Mr. Goode.
Mr. GOODE. Madam Chairwoman, first, I want to say thank you for holding these hearings. I do have concerns about going too far into local neighborhood activities, as Congressman Barr expressed. I am certainly opposed to ''know your customer'' in any shape, fashion or form. I think we should remember the outcry that we had in connection with those rules.
Chairwoman ROUKEMA. Thank you.
Mrs. KELLY. In the interest of time, Madam Chairwoman, I would ask unanimous consent to put my statement in the record.
Chairwoman ROUKEMA. I thank you. We are concerned about the voting schedule today.
Mr. Riley, do you have an opening statement?
Mr. RILEY. No.
Page 18 PREV PAGE TOP OF DOC Chairwoman ROUKEMA. Before you entered, we had discussed and noted in the introduction your outstanding efforts, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you.
I would like to begin by thanking Madam Chairwoman Roukema, Chairman King, Mr. Vento and Mr. Sanders for holding this series of hearings regarding money laundering; and I want to thank you for allowing me today to participate in this hearing.
Although most people think that the issues the banking community deals with do not impact the quality of life of the average family, money laundering is a perfect example of how they do. Money laundering and other financial crimes directly impact so many communities. These offenses bring drugs, crimes and economic insecurity into powerless neighborhoods like the ones that I represent.
That is why it is so important for us to meet today. Together we can find ways to stop crime syndicates that are money laundering through our financial institutions and harming our communities. With trends in money laundering changing so rapidly, we must join forces if we are going to keep up with criminals.
Last year is an example of how we win by joining forces. With the help of several Members and agencies and after many years of hard work, I was able to successfully pass the Money Laundering and Financial Crimes Strategy Act. My legislation tackles this crime head on by helping Federal, State, and local law enforcement get the additional resources and support that they need to win the war on money laundering.
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As I look around the room, I see many familiar faces of people who played an integral role in developing my legislation. Let me say that I appreciated your help and enjoyed working with you, and I look forward to working with you in planning this strategy. I also look forward to the insight today's witnesses will provide about their experiences in combating money laundering; and I am pleased to see that the State law enforcement officials and the private sector have been invited as well, because the only way we can win this fight against financial crimes is by working together.
Chairwoman ROUKEMA. Thank you. Congresswoman, we salute your leadership here.
Ms. WATERS. Madam Chairwoman, I would like to thank you for providing leadership in this most important area. Money laundering is a subject matter and issue that we have not spent enough time on, that neither Democrats nor Republicans have been serious enough about, and I think it is about time that we get serious, particularly with the laundering of drug money. If there was no money laundering and no profit, there would be no drugs on the street, and I don't know why we are not tougher.
I am very pleased that you have decided to hold a series of hearings and you have set forth in a very clear way the subject matter of each of these hearings. And while I am concerned about every aspect of this issue, I am not particularly concerned about small community banks and small financial institutions that may be transferring small amounts of money.
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I come today concerned about the same things I was concerned about over a year ago when we held a like hearing. And you are absolutely correct. Ms. Velazquez set us on the course, but not a lot has been done.
In 1998, I had three amendments that I placed into the Money Laundering Deterrence Act, and I have again taken those amendments and put them in bill form and reintroduced them. And today we are here perhaps to get started about some of the same things that I had a concern about then.
I am concerned about the big boys. I am concerned about Citibank, and that is no secret. I have charged that they are ''too-big-to-touch.'' And as we have watch what has happened with Casablanca and the sting operation in Mexico, we find once again that Citibank has gotten off the hook. It bought a money laundering bank called Confia, and Confia for some reason was let off the hook even though we all know and they admitted that they launder drug money and Citibank knew it when they bought it.
You mentioned that Antigua has just been cited. If you go and look at the record, I brought to the attention of this committee Antigua and 50 banks, many owned by the Russian mafia, so a year later for our own people to discover that Antigua is a problem is almost laughable.
One of the amendments that I have would penalize American banks for doing business with offshore banks that are obvious money launderers. Some of the same people were in the last hearing that I questioned on private banking concentration accounts, Citibank, Confia and all of that. I want to see if they know any more today than they knew before, and I am going to ask them why they promised me information that I never got.
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With that, thank you again. I am delighted to be here, and I am hopeful that this will reap us something in the way of some tough public policymaking and see if we can get on the road to some very, very serious work in this area. I thank you very much.
Chairwoman ROUKEMA. I thank you. I believe we are ready to hear the first panel of witnesses.
I do want to welcome the panelists here. We have interlocking jurisdictions here, and they are represented on this panel. We have a representative from the Treasury Department, the Justice Department and the U.S. Customs Service.
The first witness will be Elisabeth Bresee. Ms. Bresee is the Assistant Secretary for Enforcement from the Department of the Treasury. She has served in various capacities at the Treasury Department since 1994; and she, along with all other members on this panel, has exceptional field experience; and that is really what we are seeking here today.
Ms. Bresee is accompanied by Mr. Baity, who is here as a consultant. You will be open for questioning, and Mr. Baity is from the Treasury Department assisting Ms. Bresee.
The second witness will be Deputy Assistant Attorney General Mary Lee Warren of the Justice Department.
Ms. Warren, I don't have your full resume, but I do understand that you have extensive experience both in the Department and in private practice on these subjects.
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Ms. WARREN. My prior experience before Main Justice was in the U.S. Attorney's Office in the Southern District of New York.
Chairwoman ROUKEMA. Thank you. I appreciate that.
So, again, we have exceptional field experience on our panel today.
And our third witness is Ms. Bonni Tischler, Assistant Commissioner, Office of Investigations of the U.S. Customs Service. Again, she has extensive experience in Customs Service, having served there since 1977. Ms. Tischler has had special experience as a special agent in charge of South Florida on the subject of money laundering and narcotics law enforcement.
Certainly we are most happy to welcome you here today.
Without further ado, I will call upon our first witness in the order in which I have recognized them.
STATEMENT OF HON. ELISABETH A. BRESEE, ASSISTANT SECRETARY FOR ENFORCEMENT, U.S. TREASURY DEPARTMENT; ACCOMPANIED BY WILLIAM BAITY, DEPUTY DIRECTOR OF THE FINANCIAL CRIMES ENFORCEMENT NETWORK
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Ms. BRESEE. Thank you very much, Chairwoman Roukema and Chairman King and Members of the Financial Institutions and General Oversight Subcommittees. I am Elisabeth Bresee, Assistant Secretary for Enforcement, from the Department of the Treasury. With me today from Treasury are William Baity, the Deputy Director of the Financial Crimes Enforcement Network and Assistant Commissioner for Investigations Bonni Tischler of the U.S. Customs Service.
I am also pleased to be here with Mary Lee Warren who we work closely with at the Justice Department on anti-money laundering and all sorts of different law enforcement matters.
As you know, Under Secretary Johnson could not be here today because he is testifying before a subcommittee of the Senate Appropriations Committee.
Chairwoman ROUKEMA. I should note that the Under Secretary, Mr. Johnson, has been very forthcoming and did come and attend meetings with Members of Congress to answer any additional questions or personal questions we might want to address to him in view of the fact that he was unable to be here today, and I did want to recognize him.
Ms. BRESEE. The Department of the Treasury welcomes these hearings and your continued interest in the fight against money laundering. I have submitted a full statement for the record, and I would like to summarize that before taking your questions.
As you all know, money laundering is anything but a technical crime. Criminal activity and the subsequent laundering of the illicit proceeds it generates pose grave threats to societies, free market economies and democratic institutions. Just as drug lords and criminal organizations endanger the security of our people, drug money and other illicit income endanger our financial institutions and damage our economies.
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Zeroing in on the launderers is anything but easy. The actual acts through which laundering occurs are themselves, in isolation, not only legal, but commonplaceopening bank accounts, wiring funds and exchanging currencies in international trade. That means that our enforcement efforts must consider the costs we impose on legitimate transactions in order to find the illegal ones. We also must consider the impacts our efforts have on the perceptions of privacy regarding financial information.
Partial figures give us some idea of the size of our money laundering problem. The Office of National Drug Control Policy estimates that approximately $60 billion is spent on illegal narcotics each year. If 80 percent of that is profit, then drug sales alone generate $48 billion to be laundered each year. Given numbers of this magnitude, it is tempting to simply say that whatever the precise number is, it is too much. However, we know that we can do better than that. Without numbers in which we have a reasonable degree of confidence, we can't hope to measure our success in attacking this problem.
We are working to formulate a methodology that will let us begin to measure the magnitude of money laundering. I chaired a meeting in January with representatives from all relevant Federal agencies, both law enforcement and economic policy, to identify the data sources and analytical tools that we can use in this effort.
As we have come to understand money laundering better, we have learned that we must address this problem in a coordinated manner. That is why the Money Laundering and Financial Crimes Strategy Act of 1998, also called the Velazquez Act in honor of its sponsor, Representative Velazquez of New York, represents an important step and an important responsibility for Treasury.
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The Act directs Treasury to develop and implement a national anti-money laundering strategy in consultation with the Justice Department and other entities. Under that statute the strategy must include goals, objectives and priorities to both prevent and combat money laundering. It must also include the designation of high-risk money laundering and related financial crimes areas.
The legislation also authorizes Treasury to develop a grant program, making resources available to State and local law enforcement agencies for anti-money laundering enforcement. As demonstrated by the El Dorado Task Force in the New York area, collaboration between Federal, State and local authorities is crucial to the fight.
Since passage of the Act, Treasury's Office of Enforcement has worked diligently to fulfill its mandates. We have consulted with State and Federal agencies and representatives of the private sector. We believe we have made significant progress toward completing the strategy. We appreciate the subcommittees support in this area and will continue our close consultation with Congress on the strategy. We hope to have it cleared through the interagency community and deliver it to Congress in the next few months.
El Dorado's work also played an important part in the formulation of Treasury's proposed rules for the application of the Bank Secrecy Act to what we have come to call MSBs. MSBs is a newly coined term that refers to different kinds of financial services providers, such as money transmitters and check cashers and sellers of money orders and travelers checks. These businesses account for the movement of billions of dollars each year, but we know relatively little about them. While the subcommittees could likely obtain a list of every bank or broker-dealer in the United States within hours, if not minutes, no one can provide any Government authority with a list of all of the businesses that offer to send funds abroad or exchange currency.
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In formulating our rules, our aim has been to strike a balance between law enforcement and legitimate business concerns. There is no existing national regulatory structure for MSBs as there is for the banking industry. Therefore, we cannot proceed until we are sure that we have a way to reach and work with the tens of thousands of businesses that may be affected in some way by the rules.
In these tight budgetary times, building and paying for such a program is far from easy. We can't impose obligations on businesses both large and small until we can hold up our end of the bargain.
I know you want to know when the rules will be finalized. We proposed all three rules at the same time because we wanted to give industry and the public an idea of our focus and the problems with which we are concerned. But it may be that the rules will not be finalized at the same time.
We expect that the registration rule naturally will come first and in the near future.
I want to conclude my testimony by speaking for a moment about other issues of concern to Treasury as we survey the money laundering landscape.
Money laundering is not a series of isolated crimes. Entire money laundering systems have been created to move and dispose of criminal funds. Unless we work against these systems, our efforts won't have the effect that we are seeking.
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Again, I would like to thank the subcommittees and the full committee for your continued interest in this crucial law enforcement matter. We look forward to working with you in examining our programs, evaluating our progress and making corrections where necessary to our strategies and tactics.
Chairwoman ROUKEMA. Thank you.
Ms. Warren, please.
STATEMENT OF HON. MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Ms. WARREN. To Madam Chairwoman, Chairman, the Ranking Members and the other Members, I thank you for the opportunity to appear before you today.
I would like briefly to review from the Department of Justice's perspective some potential trends in money laundering and highlight some of law enforcement's attacks on money laundering and suggest some areas where our current legislation needs to be strengthened in order to continue our progress against this moving and evolving target.
As all have said, the landscape has changed dramatically from the time the Money Laundering Act was first introduced in 1986 from a domestic to an international concern. We see the laundering in one country of proceeds of crimes committed in another, and we see the currency moving across borders. These trends are a result of the success U.S. laws and law enforcement have had in denying illicit cash proceeds and money launderers' access to our financial institutions. As a result of the success, illicit cash proceeds and money launderers must look more than ever before to those other financial institutions, the MSBs that all have spoken about.
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A second trend is the conversion of illicit proceeds into exported goods. We have seen the distancing of the drug cartels from the money laundering structures set up to repatriate their illicit proceeds.
This is seen most dramatically in the Colombian Black Market Peso Exchange System with which these committees are familiar. Billions of dollars worth of drug proceeds generated in the United States are laundered through the Colombian Black Market Peso Exchange in Bogota, and these narcotics-generated proceeds supply the funds for the movements of billions of dollars worth of smuggled U.S. and foreign consumer goods into Colombia. In short, what starts out as drug currency on the streets of the U.S. cities ends up as smuggled consumer goods on the streets of Bogota, Cali, and elsewhere. And most significantly, this dollar-for-peso exchange on Colombia's black market fuels the illicit drug trade that preys upon both Colombia and the United States. Both countries have begun to take steps to identify and attack the use of the black market peso exchange process by narco traffickers. Colombia, for the first time, has enacted a law making it a crime to smuggle goods into that country. It has also given its customs service the necessary police powers to enforce these.
On the U.S. side, the Department of Treasury, with DOJ participating, has set up an interagency group targeting this process. Together we brought together over 200 Federal, State, and local law enforcement and regulatory personnel earlier this year to meet and discuss our plan of attack on the Colombian Black Market Peso Exchange. We will continue to work domestically and internationally with our counterparts to expose and dismantle this process.
A third trend mentioned before is the bulk cash shipping of illicit proceeds in every imaginable means. U.S. law enforcement has made all the efforts it can with available resources to target this bulk cash shipment and concealment. First, it is essential that this activity is recognized as the pernicious crime that it is.
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Chairwoman Roukema recently introduced legislation in H.R. 240 that will extend the law to make bulk cash smuggling a crime, and law enforcement is very appreciative of this. The bill provides for the new offense and importantly, also sets out a list of findings articulating the seriousness of and the harm caused by the smuggling of the bulk cash. In addition, the statute would authorize the confiscation of the smuggled money in accordance with usual civil and criminal forfeiture proceedings and recognize innocent owner rights and provide a set of criteria for mitigating the forfeiture to meet Eighth Amendment concerns. We urge support for H.R. 240.
The laundering of proceeds of foreign crimes in the United Statesanother identified trendis the growing use of U.S. financial institutions by foreign criminals to launder the proceeds of their foreign crimes. Most foreign crimes are not listed predicate offenses to which the Federal money laundering laws now apply. Consequently, we are seeing an influx of these proceeds from organized crime groups. New legislation is needed to keep the United States from becoming the world's repository of foreign criminal proceeds. The globalization of money laundering is clear. It is no longer just between two countries, but often involves many countries.
In ''Operation Casablanca'' that was mentioned before, eighteen different countries' bank accounts were used, and we are seeking forfeiture in those eighteen countries at this time. The U.S. has been using the existing law to their fullest and appropriate extent. More than 2,000 defendants have been charged under the money laundering laws in Federal court for each of the past three years. Fifty percent of those cases are related to drug trafficking. The others are divided between white collar crime and organized crime. We also use the forfeiture statutes to the same strong effect. We are working with our international partners in that forfeiture area.
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Let me offer some suggested areas for legislative fixes in order to attack today's various and changing modes of international money laundering. Some were introduced last year, and we stand ready to work with your staff on these as appropriate this term.
Beginning again, enact H.R. 240 and make bulk cash smuggling a criminal offense. Also make it an offense for a currency courier who knows that the money is unlawfully derived to transport that money in interstate commerce. Enact penalties for violations of Geographic Targeting Order requirements for the filing of reports.
In terms of the black market transactions, require forfeiture claimants who purchased drug dollars on the black market to prove as part of their innocent-owner defense that they took all reasonable, affirmative steps to determine the legitimate source of the currency.
Provide Federal prosecutors greater access to foreign business records that may be used to trace the money sold on the Black Market Peso Exchange. Either the claimant waives the foreign bank secrecy law that conceals his transaction records in that country or he should suffer dismissal of his claim.
Bar fugitives from contesting forfeiture actions unless they surrender on criminal charges. Authorize Federal courts to order the repatriation of criminal proceeds from abroad and authorize pretrial restraint of all properties subject to criminal forfeiture. In terms of encouraging the cooperation with foreign governments, provide for the freezing of U.S. assets of defendants who have been arrested in a foreign country and for the confiscation of proceeds of specified crimes under Federal law. Create a procedure for enforcing Federal confiscation orders and make it a crime to launder the proceeds of specified crimes in the United States.
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I would like to conclude by expressing the appreciation of the Department of Justice for the continuing support of the co-chairs and its committees have demonstrated over time for anti-money laundering and asset forfeiture activities. I thank you again for the opportunity to appear and again we would welcome your questions.
Chairwoman ROUKEMA. Thank you.
Ms. Tischler, please, from the U.S. Customs Service.
STATEMENT OF HON. BONNI G. TISCHLER, ASSISTANT COMMISSIONER, OFFICE OF INVESTIGATIONS, U.S. CUSTOMS SERVICE
Ms. TISCHLER. Madam Chairwoman, Mr. King, Members of the subcommittees, I am pleased to join my colleagues from the Departments of Justice and Treasury to discuss our efforts in combating money laundering. In the interest of time, I ask you for permission to submit a longer statement for the record.
In order to target the money launderers and the systems they use, the United States Customs Service has been given a broad grant of authority in the conduct of international financial crime and money laundering investigations. This authority is primarily derived from the Bank Secrecy Act and the Money Laundering Control Act. Beginning in 1978, Customs implemented an aggressive strategy to combat money laundering. Our undercover money laundering investigations have been particularly successful resulting in the seizure of over $700 million in the past seven years. These seizures represent a mix of both profit and operating capital.
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As the term ''bulk cash smuggling'' implies, criminal organizations collect sizable amounts of currency derived from various crimes and then smuggle the cash in large shipments out of the U.S. However, smuggling cash is not without risk. In fact, it is at this stage that the profits of criminal organizations are most vulnerable to law enforcement efforts.
There are a number of reasons for criminal organizations to smuggle cash. The first and most important is to avoid the reporting requirements of the Bank Secrecy Act. Additionally, currency smuggling is used to evade filing currency transaction reports which do require the reporting of transactions greater than $10,000 conducted in U.S. financial institutions.
In the early 1980's, the placement of large amounts of bulk cash in domestic U.S. banks was the preferred method of choice for criminal organizations. However, because we aggressively enforce the BSA compliance issue and several successful major money-laundering investigations forced criminal organizations to smuggle more of their profits out of the U.S. to countries with dollar-based economies and less stringent basic secrecy laws, the level of difficulty has gone up.
Recent trends have pointed to a marked increase in bulk shipments of cash. Our analysis reveals that undercover investigations such as Operation Casablanca and operations such as those conducted by the El Dorado Task Force in New York forced drug trafficking organizations to the bulk cash shipment method.
Seizures of bulk cash shipments are now routinely made at virtually every major airport and seaport in the U.S. In the past year, large bulk cash seizures were reported in New York, New Jersey, Chicago, Miami, Los Angeles, and clear across the Southwest Border. The concealment methods used to bulk ship cash are limited only by the imaginations of the criminals in these organizations.
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We have discovered and seized bulk shipments concealed in aircraft, boats, cars, canned goods, toys, appliances, coolers, water heaters, stereo gear, scuba tanks and machine parts. We have even arrested people who have swallowed or ''internally carried'' cash.
Despite our best efforts, we believe that we are only catching a fraction of the cash shipped out of the U.S. One reason is that cash is relatively easy to conceal and move. Detection is an enormous problem for us. Another issue is resource allocation. The Customs Service primarily conducts inspections of inbound shipments of goods and persons in a search for drugs, weapons, and other contraband.
Still, the number of outbound currency seizures at our land borders, seaports, and airports has continued to rise nearly doubling in a two-year period. As the chart before you shows, in Fiscal Year 1996, the Customs Service made 709 seizures of outbound cash shipments that totaled $49 million. The following fiscal year, the number of cash seizures increased to 876 with a total value of over $55 million.
In Fiscal Year 1998, the amount of seizures grew to over 1200 and the total amount of cash seized increased to $68.4 million. Interestingly, this was the same fiscal year that Operation Casablanca was concluded and the New York GTOs kicked in.
This year, the Customs Service is again on track to have a record year. Through February of 1999, Customs made 687 seizures of cash with a value of over $28 million. The number of seizures made in the first five months of this year nearly matches the number of seizures made in all of Fiscal Year 1996. We believe that additional inspectors and special agents dedicated to currency smuggling and financial investigations would significantly enhance those figures.
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The Customs Service has made some stunning seizures of bulk cash shipments in the past few years. In June of 1998 Customs inspectors in Newark, New Jersey, targeted a container aboard a vessel destined for Venezuela. A 20-foot box, which allegedly contained truck parts, was examined by the Newark Outbound Enforcement Team. Using a mobile x-ray van, the inspectors discovered $11 million hidden within the truck parts.
Three weeks ago in Miami, Customs stopped a 166-foot steel hulled freighter as it neared the mouth of the Miami River. Customs and other law enforcement agencies searched the vessel, and we found four toolboxes in the pilothouse of the ship. Each toolbox was shut with a padlock. Upon removing it and opening the toolboxes, we discovered and seized over $1.3 million in cash.
During Operation Casablanca, Customs established a Chicago task force to investigate the Juarez Cartel's drug operations in Chicago. From August 1997 through May of 1998, Customs agents removed over $10 million in bulk currency that was waiting to be delivered to couriers on its way to Mexico.
Our efforts on the Southwest Border continue to produce dramatic results. All Southwest border ports of entry report substantial increases in bulk cash shipments. Just recently, we seized $3.9 million. And just the other day, we seized another $11 million on the way to El Paso and Juarez.
On the legislative front, I would like to take this opportunity to thank you, Madam Chairwoman, for your leadership and sponsorship of H.R. 240, the Bulk Cash Smuggling Act of 1999 which addresses the Supreme Court decision in U.S. vs. Bajakajian. This legislation takes the standard failure to report currency and monetary instrument offenses and adds the element of ''knowing concealment.'' In this way, we can focus on those who knowingly smuggle unreported cash.
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The second issue that might appear soon before Congress involves a search of outbound mail. With the exception of diplomatic pouches, outbound U.S. mail is the only other method of transportation immunized from warrantless searches at the border. Relative ease with which criminal organizations can ship cash is not lost on those organizations who know that just a small four pound international letter-class mail package can, in fact, contain about $200,000 in cash.
Finally, Madam Chairwoman, I would like to take a moment to update you and other Members of the subcommittees on Operation Casablanca. Last week two Mexican banks, Bancomer and Banca Serfin, each pleaded guilty to criminal money laundering. Bancomer forfeited over $9 million to the Government and was fined an additional half-million dollars. Banca Serfin forfeited over $4 million and was also fined half-a-million. The third bank that had been indicted, Confia, agreed to forfeit over $12 million to the Government. To date, eighteen Mexican bankers and their associates have pleaded guilty to charges ranging from money laundering to drug distribution. The trial of the remaining six bankers and their associates is going on in Los Angeles as we speak, and other trials are scheduled for later in the year.
Thank you for inviting us to appear before you. I would be happy to answer any questions that you might have at this time.
Chairwoman ROUKEMA. I thank all of the panel, and I will quickly get to my own questions.
I would ask that all three of you perhaps comment on what otherMs. Warren spoke to the subjectbut is there any other legislative needs or statutory needs that you feel is not being covered under current law? Ms. Warren has already commented on that. I don't know whether Treasury spoke to that question or the Customs Service. It seems to me that you have outlined some needs that you have with respect to Treasury and Justice Department. But is that just a cooperative need or is it a statutory requirement, additional statutory requirement?
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Ms. Bresee, would you like to comment or Ms. Tischler? Either one or both.
Ms. BRESEE. With respect to legislation, I would agree with Ms. Warren's comments and also commend you, Madam Chairwoman, for your support of the bulk cash smuggling legislation which certainly would be very helpful to the Customs Service, and we have joined with the Justice Department in supporting that bill.
Chairwoman ROUKEMA. Thank you.
Yes, Ms. Tischler.
Ms. TISCHLER. The only thing else I would like to reiterate is the issue with first class mail. It has been troublesome on a number of fronts. In addition to money laundering, we do have a problem with outbound high technology and America's secrets being shipped out in first class mail.
Chairwoman ROUKEMA. This evidently is a well-known need. Although this subcommittee would not have primary jurisdiction, there are ways that we could take some leadership here and work with otherand coordinate with other committees of jurisdiction, but obviously that needs to be something that has to be thoroughly aired and aired immediately because, evidently there is no question about it.
Ms. BRESEE. That provision is part of the Administration's International Crime Control Bill, the outbound mail.
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Chairwoman ROUKEMA. What is the status of that now? You can add it to the record at a later time.
Ms. WARREN. It is still being proposed, but it is an interagency effort to bring together all of our international crime needs in a single package.
Chairwoman ROUKEMA. It hasn't been introduced yet? Will you please submit further information for the record in that regard?
Ms. WARREN. We will certainly make it available to you all.
Chairwoman ROUKEMA. I do, however, want to focus on the Treasury because, Ms. Bresee, I need more specificity with respect to how you are going to comply with the requirements of the law that for five yearsover a five-year period we haven't gotten your recommendations for regulation and how you are going to implement it and what is the problem? Is the problem the lack of enforcement ability, the lack of specificity in the law, or a combination of that plus personnel needs? But many of us, including myself, are terribly distressed by the apparent lack of any rational reason for these long periods of delay. So can you please help us here?
Ms. BRESEE. Certainly. I don't think the problem is with the law. I think, as we discussed some Under Secretary Johnson yesterday, the issue has beenwhen we proposed the rule in 1997, we got fairly extensive comments which we have been working through and had five public hearings which generated a great number of pages of transcripts for us to sort through to deal with the various comments in particularagain as we discussed, with an industry that does not have a formal structure to regulate it the way the banking industry does. We want to make sure we do these rules carefully.
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In addition, there have been, certainly, resource constraints. Again, because we don't have the structure that we have in the banking industry with regulators that are in place and ready to help us to enforce these rules, we need to develop that structure. In doing that, FinCEN has relied traditionally on the I.R.S. for support in enforcing the Bank Secrecy Act. I think shortly after Under Secretary Johnson testified before this subcommittee last spring, the I.R.S. reformed, and a restructuring act was passed which involved a great deal of additional demands on their resources. And we are trying to sort through that right now to see how we can cover all of the different demands that we have. We have a working group right now that is really going to focus very quickly on the resource issues, and we expect to get back to the committee in 45 days and let you know the results from thatthe Resource Working Group.
Chairwoman ROUKEMA. That 45-day time period would only be for recommendations, not specific enforcement mechanisms?
Ms. BRESEE. We have been sorting through separately the policy issues. And they are substantial as some of the Members have mentioned with respect to making sure that we are able to carry out these rules, that we are getting to the right level of businesses, that we are not getting to all of the smaller businesses that we might not want to be covering, but that we are getting to the right level of businesses so that this is uniform.
So we have been sorting through those policy issues. We have made quite a lot of progress in that front, but the resource issue, we just need to state, really is an important one, because again we don't want to issue rules that we are not able to enforce and implement fully. We want to make sure that we can educate this industry so that it knows how to comply with the rules. The rules have both civil and criminal sanctions attached for non-compliance. So again we feel we have a responsibility to ensure that we are able to do this successfully.
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Chairwoman ROUKEMA. Well, that sounds reasonable exceptand it would be reasonable if it were just an isolated one-year period, but this has been successive years, an inadequate response to at least three statutory requirements and over a five-year period, I would think we would have had some progress, some demonstrated progress. If you need more authority or more funding, then let us hear it. If you need clarification in the statute, let us hear it; but I think it is impossible for me to defend a five-year time lapse here in one form or another. Do you want to respond to that, or Mr. Baity?
Ms. BRESEE. I will attempt to respond. I think that we have made progress in the five years. Certainly not the progress that the subcommittees would have expected us to make. I would acknowledge that, but I think we have made progress in learning more about this industry and again making sure that we are going to issue regulations that are clear and that the industry that is affected know how they apply to them. That is really the substance of the comments that we got were to ensure that they are clear, that they are enforceable, and that we will have a structure in place to carry them out.
Chairwoman ROUKEMA. Mr. Baity.
Mr. BAITY. Thank you, Madam Chairwoman.
If I could, I would like to elaborate because I think the point that you raise in terms of the delays are important, but I want to make it clear to the subcommittees that in this timeframe, that there has been significant activity. If you would bear with me just briefly, I would like
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Chairwoman ROUKEMA. Please, because I think that is central to this subcommittee hearing.
Mr. BAITY. I would actually, if I could, go back to 1994. When the legislation was passed and we were statutorily required to register these businesses, the first thing, candidly, we did was look around and learn how little we knew about these entities and operations on a national level. We knew that they existed, but we did not know the breadth, the composition, or how they operated. So immediately, what we attempted to do, with law enforcement and then with industry, was to learn more about these businesses. And frankly, we found out very quickly how little we knew and, in fact, how diverse these businesses were.
Chairwoman ROUKEMA. You are not suggesting that you didn't have the cooperation of the Justice Department in ironing these things out?
Mr. BAITY. No. I think, in fact, what I would suggest is that collectively we were finding out how little we knew about them in terms of location, composition, operation, critical things that are important to learn about in terms of vulnerability to money laundering. I would also suggest then it became clear to us that we needed to try to reach out to the industry, because, as you point out, working together and to create a forcible regulation is very necessary. And by 1995, we instituted a study with Coopers & Lybrand to actually, for the first time, put together some significant understanding of the breadth of the industry. And as you pointed out, with the $200 billion figure, that was really the first time we were able to even get a handle on the amount of dollar transactions that were going through the businesses. I guess I would suggest that, as Congressman Barr said, we started out not knowing the forest from the trees. And we knew we needed to reach into significant parts of the community that, candidly, had never been significantly regulated by the Federal Government, especially for money laundering and those types of activities. And that, as Ms. Bresee pointed out, there were no structures in place to even tell them what type of information we were going to request from them and to educate them.
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And then in 1996, with the Geographical Targeting Order which you heard about, we started to learn a lot about these industries and how money was being moved, especially for purposes of money laundering. And that brought us to 1997, when we were then at a point of sitting down and writing proposed regulations. I would also point outbecause I know you have another panel to hear from, while we differ sometimes with industry on threshold levels and inclusion, we could not have done what we did in those two years without industry helping us understand how they operated. And that was critical to us as we went forward.
And then once we issued the proposed regulations, which brings us to 1997, we then held five public hearings with the regulated industries. The hearings generated well over 80 written comments. And while it was not the KYC rules, in terms of comments, that is a significant amount of comments with very significant issues. While we cannot go into where we are with the final regulation, let me assure you, Madam Chairwoman, and all the Members of the subcommittees, that those comments that we received are appropriately reflected in our final regulatory process.
Chairwoman ROUKEMA. We are going to be looking forward to that 45-day period.
Mr. VENTO. In that vein, I note from the testimony of Ms. Bresee, it indicates on page 9 that there are 200,000 different locations of which money-service businesses operate. And I expect that there are categories that would be included and others that would not. For instance, that is counting the 40,000 post offices. So do you anticipate post offices being included in the final rule?
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Ms. BRESEE. No.
Mr. VENTO. In testimony that is going to be presented later today, there is a suggestion here that Mr. Hemmig, who represents the check cashers, is going to testify that check cashers pose no money laundering threat. Further, he states that check cashers who are agents of money transmitters or money remitters should not be required to register under the MSB regulations which are, of course, not proposed yet, because this would be a needless duplication. Do you have any comments on that?
Ms. BRESEE. I think I would turn that over to Mr. Baity to see what kind of comments we got on the proposed rules for check cashing.
Mr. BAITY. Let me suggest that as we went through the rulemaking process we determined that all of the money-service businesses that we have included in the rule have vulnerabilities to money laundering. So while we strongly believe that most of these institutions are law abiding, there have been vulnerabilities in all of the industries that come under the money-service business regulations. And we have seen that not only in the Geographical Targeting Order, but we also have seen this in matters in Texas, along the Southwest Border, with exchange houses and other businesses. So we would suggest that vulnerability does exist in these money-service businesses.
You raisedif I couldanother question in terms of principals and the agents. When Congress enacted this legislation, we believed there was a recognition that we would include some agents in the registration process. As part of the comment period, we received substantial comments about the level that we should bring in agents as part of the registration process. In fact, your letter, Chairwoman Roukema and Mr. Vento, back in 1995, raised that issue with us. Again, let me suggest to you that we have incorporated those comments about the level of which agents would be brought into registration in our draft final regulation. And I think our regulation does reflect those issues that you raised.
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Mr. VENTO. I think that the testimony from Justice by Deputy Assistant Attorney General Warrenyou state here the Treasury representative of the panel will describe in detail on May 21, 1997published three notices dealing with money-service businesses, travelers checks, money orders, sellers, and money transmitters. And, of course, then they went on. But the question was what are the numbers that are accomplished? What would be met through that particularI guess the issue is if you are going to go out and have 160,000 store-fronts reporting, that that probably is going to be an avalanche of paper that is going to be of no use to anyone.
Mr. BAITY. We agree with you 100 percent there. No one is suggesting that 160,000 of these entities should register. Let me make that clear. What we are trying to do is strike an appropriate balance. We have seen that, beyond the principals, vulnerablities exist where the transactions occur. We are trying to focus on, in terms of which agents or outlets are registered, an appropriate level that will bring them under registration and not try to register them all.
Mr. VENTO. We are sort of debating the rule. I think it does present the difficulty that you face in terms of attempting to move through with the rule. I appreciate that. I note, for instance, one of the requirements in this Deputy Attorney General's testimony says that transmitters are remitting $750 or more in cash outside the United States. A new identification process is proposed to be put in place. Well, that obviouslythat would affect, or could affect a substantial number, I suppose, if they chose to have that type of a transmission, that type of a transaction function that they performed. Obviously, it may begin to put some limits on what the range of services is that they can provide which obviouslyif they are already doing this on occasion, they obviously don't want to be subjected toI expect they would say ''Well, you will have to go over to a different service for that; we are not going to provide it.'' So I think that is one of the concerns, obviously, that will be raised by the money-service businesses.
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Ms. BRESEE. That rule is the rule we received the most comments on and has been the most difficult.
Mr. VENTO. Well, on the court case concerning the H.R. 240 which has been sponsored by our Chairwoman, I am interested that they suggested that this was merely a reporting requirement, the Supreme Court did. This is a Supreme Court decision. And so thisyou know, we are hearing about all these seizures by the Customs in terms of bulk cash. So, I mean, what is the authority if, in factis it a reporting requirement here? How do you treat that from the standpoint of prosecution in light of this particular court decision?
Ms. WARREN. In Bajakajian, it was an interpretation of the particular statute at issue. That is the necessary report to Customs of cash greater than $10,000 being taken out of the country. That was the particular statute they focused on. Under H.R. 240, the focus is on the crime itself of smuggling bulk cash out and recognizing that.
Mr. VENTO. I understand that is a proposal though. That is not the law right now. I am suggesting as we listen to Ms. Tischler explain the interception of, I guess, $68 million worth of cash last year, they are on another pace to do the same thing this year, I am concerned about what the authority is. Is it all just reporting authority that we are seizing this cash under that basis, Ms. Tischler?
Ms. TISCHLER. Let me say this. We seize cash in a number of different ways. The Bajakajian case really applied to an individual who is outbound from the U.S. And they talked about the issue of it only being a reporting law. But when the bulk-cash issue comes to the fore, it usually is unattached to any individual and no report is ever filed.
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I have to tell you historically, because I have really been working in this area for a long time in the 11th Circuit, which takes in South Florida. When I first started to work in Operation Greenback in 1980, the courts were actually saying, ''Well, you can't even seize cash until the plane actually takes off, so you'll have to turn it around and bring it back,'' which, we thought was a little bit precipitous on their part. So, basically, law over the years was made by courts actually allowing us to intercept. That was just aircraft. Most of these seizures that you see in front of you that we brought in were actually going out by boat. The type of seizure we see, bulk cash going out by aircraftwhich is another issueare things like igloo coolers, smaller bulk cash in cartons, the really obscene seizures that we intercept on the way to Colombia or someplace else, are mostly by boat and nobody is attached to them. And nobody ever really comes back and challenges the seizures. So that has never really been before the court.
Mr. VENTO. It sounds like, from the Supreme Court decision, it could be a problem down the road if they were to do that.
Ms. TISCHLER. It might be a problem, but it is the civil forfeiture that is a problem and the Justice Department is working with us on this in turning this into criminal forfeitures.
Mr. VENTO. The Justice Department is working with you on that, and they would obviously like this law.
Chairwoman ROUKEMA. It demonstrates we need legislation.
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Mr. VENTO. They feel they don't have much of a basis to stand on; is that correct, Ms. Warren?
Ms. WARREN. Well, Customs proceeds under their right to inspect outbound cargo and to seize smuggled goods of all kinds, and in this case it is smuggled currency.
Mr. VENTO. It is obviously falling under a different group, other than this reporting, so you actually have otherthat is what I was trying to get at in terms is there other law
Ms. WARREN. Under the forfeiture authority, but we would also like to proceed against the individual.
Mr. VENTO. On a criminal basis, not just civil?
Ms. WARREN. Yes.
Ms. TISCHLER. When we do backtrack on those procedures, we do go against them criminally, which is the point I was trying to make. It is not a civil forfeiture at that point, and it becomes evidence in terms of prosecuting the individuals anyway.
Chairwoman ROUKEMA. If the gentleman would yield, I would just say I should have acknowledged with Ms. Warren's testimony that she identified some areas where we might want to expand Section 240, and this may be an area where we can work together with Customs to make it tighter and a more comprehensive approach to the problem. We can use Section 240 as the basis for that; but if there are some loopholes there, we will want to close them. I yield back.
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Mr. VENTO. Thank you. I am done.
Chairwoman ROUKEMA. And now Chairman King, please. Sorry we kept you waiting so long.
Mr. KING. Not at all. I just have one question for the entire panel if they could each answer it. As far as the extent to which you think MSBs are significant in the overall issue of money laundering, is there any way you can perhaps quantify it, by percentage or otherwise, in the big picture? How significant are the MSBs? I think Mr. Barr was raising questions about the significance. I would be curious myself as to any estimated dollar amount, any way you can quantify the significance?
Ms. BRESEE. I don't think we have an estimated dollar amount. I think one of the things that we have learned with money laundering generally is when we have had stronger laws in place with the banks then money launderers have had to go other places. When we put the GTO in effect in the New York area, what we saw was an increase in bulk cash smuggling. So what we have seen is we need to cut off all of the various roads for money laundering to make it more difficult and more expensive. And so I think, again looking at this industry, not because it represents a greater threat than every other industry, but because we need to make sure we are closing off all of the various avenues for money laundering. I don't know if any other panel members have any things to add.
Ms. WARREN. I definitely agree. We have sealed the banks most completely from the launderers having direct access to them, so they have sought these other institutions and they have sought to corrupt some of them. And we have had prosecutions in Federal court of check cashers and certainly the GTO individuals, the remitters. Because we have been effective through our laws and enforcement in the banks, the money launderers have to seek other ways and they now have applied greater pressure to the MSBs.
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Ms. TISCHLER. I have to sayif I can just add on to that again, when I started out I was just a little old agent on the street in Miami working in 1980 when we really had nothing except the Bank Secrecy Act, there was no Money Laundering Act yet. We would go to the banks, for instance, and we would say, ''What about this customer that we saw coming in here with this duffel bag full of cash the other day?'' And they would say, ''Oh, just business.'' I mean, we didn't have a moral responsibility for deciding, you know, where this cash came from. Well, really over the intervening years, they decided they did have a moral responsibility and the banks have been great about knowing your customer. And that avenue has been more or less cut down, butand I can tell you from experience all they do is just shift from one methodology to another.
Bulk cash has been something they have been doing all the time. As we narrow the focus in the institutions, naturally they go to more of a smuggling method. In New York, when we put the GTO on up there, those two operations I was talking about, Wire Drill and El Dorado, they resulted in a seizure of over $18 million in cash, 137 arrests, 83 indictments, and 59 convictions, all for money laundering. So even though it may seem like a small portion of the problem, it is rather extensive when you are looking at a geographic area and an industry that, in fact, is being used as a conduit for illicit cash to go to the Dominican Republic or Colombia.
Mr. KING. Now you said you, in effect, shield the banks from money laundering. How equally effective do you think you can be in shielding the MSBs when the regulations come? Do you expect to get the same rate of success on the MSBs or is there going to be another avenue they are going to go to?
Page 49 PREV PAGE TOP OF DOC Ms. TISCHLER. I think one can hope for success. I think we certainly caught their attention in New York, and I think we wouldn't have had the comments that came in on the proposed legislation and regulations as they did if they weren't turning into somewhat of a believer. And I think you will hear from the representative from the industry they are all good guys and certainly, as Ms. Warren pointed out, we consider that a great portion of them are good guys. But any industry can be misused, and I think that is what we are seeking here is to close off the avenue for illicit use.
So after what I saw with the American banks for the most part and their rate of compliance with the Currency Transaction Reports and their ability to file Suspicious Activity Reports that we do, in fact, review, I think the same will be true of the industry; and they will police themselves.
Mr. KING. Thank you very much. I yield back.
Chairwoman ROUKEMA. Thank you, Mr. Chairman.
Ms. WATERS. Thank you very much, Madam Chairwoman. Let me just say to our witnesses who are here testifying today, I respect the work that you are doing, and while I am not as excited about the work with of these money-services businesses as I am about the banks, I agree. That is an avenue that should be closed off too. All avenues should be closed off. But let me just say, Ms. Tischler, of course people don't walk into the banks with duffel bags full of money anymore. They have private bankers. And let me just say, I heard somewhere that the money-service businesses that are being targeted are targeted for about $200 million total in transactions.
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Let me go back to Citibank again. Raul Salinas laundered $180 million, one person, through Citibank with a private banker, and Citibank didn't give a darn about ''know your customer'' rules. They didn't ask Mr. Raul Salinas where he got the money from. They knew that he did not have any visible line of work. His brother was a president. He had no way that he could show that he had $180 million. They assigned him a private banker. They wire transferred this money offshore. And so, while maybe some credit can be taken for this marvelous work that has been done with the banks, let me just ask you how many banks have lost their charter as a result of being convicted on money laundering?
Ms. TISCHLER. I know of five banks in Miami that did, but I can't answer past the early 1980's.
Ms. WATERS. Ms. Tischler, what happenedMs. Warren wasn't able to answer this last time either.
You were supposed to send me the information. I specifically asked last year how many banks had lost their charter or were convicted of money laundering, and today I still don't have it. And I submit to you that it is still a problem. You know what this reminds me of? This reminds me of the problem that we have dealing with crack cocaine and powder cocaine and the disparity in sentencing. We found a way to target one people who are silly, stupid, with one crack cocaine who get mandatory minimum sentencing who are doing long time. Five grams of crack cocaine, mandatory five years in prison, 19 years old. Some people we are looking at who are doing 15, 20, 30 years in prison. You have got these MSBs, and let me tell you, I know there is some unsavory activity in some of them, not all of them the check cashing and all of that. But it pales in comparison to what I believe is going on with those I consider ''too-big-to-touch.'' I am absolutely insulted and outraged by the fact that Confia, a drug money laundering bank in Mexico, purchased by Citibank, who knew what they were, was ableeven after they are identified, they are in the stingto buy out and nothing happens to them. Nothing. Absolutely nothing. And that is outrageous. And I submit to you that you can do all you want with closing off these little ones, but until you have got enough nerve and enough courage to go after the big ones, then I am not really impressed. And I think that is where the money laundering problems are. So again, who can get me some information to let me know?
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Ms. Warren, can you tell me how many banks have lost their charter as a result of being caught laundering money, drug money?
Ms. WARREN. I cannot tell you that. I can try and find it out for you. I can give you a chart of all the financial institutions that have been charged and convicted of money laundering offenses in the past five or ten years.
Ms. WATERS. I specifically ask about the charter. The amount of money is so big. What do you think a bank cares about a $12 million fine? What do you think Confia cares about a $12 million fine? They are laundering so much money. That is a throwaway. I want to know how many have lost their charters.
Ms. WARREN. We can seek to get that information from the Federal Reserve and from the nationally-chartered banks and the State-chartered ones, but we do not have that information as part of the conviction in the case.
Ms. WATERS. Thank you. I appreciate your help. I want to know if you will help me. I think it will be very enlightening to find out what is not happening with the big boys. And I want to tell you I don't know how much money, and you can't answer the question about how much is going through these money-service businesses. I don't want to find out that this is but a pebble in the ocean, and we pretend as if we are doing something magnificent when we still haveand we can't get around Citibank. We cannot get around Citibank. We can't get around it. I yield back the balance of my time.
Page 52 PREV PAGE TOP OF DOC Chairwoman ROUKEMA. I would just observe to my colleague, Ms. Waters, that there will be, on the second panel, a U.S. Attorney that I think references Citibank in another context, but it may be a question that you want to address to the Assistant U.S. Attorney. In any case, it is a question that has to be addressed in terms of what the legal requirements are, not just general accusations; but I guess Justice will want to respond or take that under consideration. All right.
Mr. Barr, please.
Mr. BARR. Thank you, Madam Chairwoman.
Ms. Bresee, how many SARs are filed each year?
Ms. BRESEE. By the banks right now, about 75,000.
Mr. BARR. And how many CTRs?
Ms. BRESEE. It would be approximately 12 million CTRs.
Mr. BARR. Approximately how many institutions are there that fall into the category of being required to file CTRs in the appropriate statutory circumstances?
Ms. BRESEE. I apologize for the delay. Approximately 12,000 banks and 200,000 other non-banks that would be filing CTRs.
Page 53 PREV PAGE TOP OF DOC Mr. BARR. Now, when we switch to the category of the MSBs, how many are we talking about? How many businesses or entities are we talking about there?
Ms. BRESEE. By that I think you mean that we would be including under the registration requirement?
Mr. BARR. Right.
Ms. BRESEE. I think we believe we would end up registering, at most, 30,000. I think there are over 160,000 outlets around the country; but of that, we would be registering a smaller portion as we have discussed earlier today.
Mr. BARR. Do we have any idea at all how many transactions we would be talking about by those 30,000 entities?
Ms. BRESEE. No, I don't think we do. By transactions, do you mean all of the business that they do?
Mr. BARR. I imagine it would approach hundreds of millions of transactions, wouldn't it? Certainly tens of millions, probably?
Ms. BRESEE. There is approximately $200 billion of cash flow each year that goes through the MSBs. That is just in terms of the total cash.
Mr. BARR. I am just trying to get some handle on the magnitude of what we are talking about, which bothers me to some extent. Let me ask a very fundamental question. Exactly what sort of activity iswhat is the nature of the activities that are of concern to us, and is there any of that activity that cannot be reached under existing laws and regulations if there is a real suspicion that there is money laundering going on that rises to the level that would be of concern to a U.S. Attorney's office?
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Ms. BRESEE. I think I would ask Bonni Tischler to talk about what we learned during El Dorado and the GTO in that area. But one of the things we learned when we started out is that the amount of money that was going to Colombia through the transmitters in the New York area, for example, what we learned is that the average family would be sending approximately $30,000 a year back to family members in Colombia, which was higher than the average income of the families in that area which was approximately $27,000. So clearly that was over the amount that might be sent back from that community to Colombia. That is what started the GTO, and in learning that, in fact, that was a method that was being used to send drug proceeds back to Colombia.
Mr. BARR. But all that can be reached under existing laws and regulations, can't it?
Ms. BRESEE. Right now with respect to the money-services businesses, there is no registration for us to learn even what are
Mr. BARR. But the activity itself can be?
Ms. BRESEE. The MSBs are currently required to file CTRs, the over $10,000 cash reporting. They do have that requirement. They don't have the requirement to file the Suspicious Activity Reports at this time under the Bank Secrecy Act.
Mr. BARR. What is the threshold that you all are looking at possibly for the MSBs. I saw one figure of $750 with regard to a transaction of involving money going from an MSB in this country to a foreign account or foreign person overseas.
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Ms. BRESEE. That was the original proposal in the rule that we put out with respect to the reporting requirement for money going overseas. As I noted earlier to the Chairwoman, that rule has received the most significant number of comments so we are looking at that number closely. We are looking at what would make sense in that area because that is certainly
Mr. BARR. The $10,000 requirement for CTRs, I have had concern expressed to me by businesses and constituents that that is far too low with inflation and so forth. So I think we ought to be looking at possibly raising that. My point is I think we can do a better job of existingof enforcing using the existing statutes, existing regulations, I think this would beand I know this isn't really your problem. It was really done in 1994 to some extent. I think this would be a massive headache, a massive undertaking, which would engender tremendous resentment on the part of a lot of small businesses and I really question the return. If there really is money laundering to the level that would rise to being of importance to the U.S. Attorney going on, I think that they can certainly reach it through good use of existing prosecutorial investigative resources. So again, I appreciate the fact that you all are being deliberative in these regulations. And, hopefully, during the course of these hearings that we are having, if there are problems that you all have identified, if the 1994 law does reach too broadly, we need to go back and refocus on it perhaps. I hope you all will let us know that. Because I just think that if we start getting involved in requiring reporting requirements for every MSB in the countryand I think the estimate of 30,000 may even be somewhat lowfor every transaction of $1,000 or more, whatnot, where are the people going to come from to make some sort of sense out of all of that?
Page 56 PREV PAGE TOP OF DOC And if you say from existing resources, then you are taking them away from other perhaps much more important cases. Or you say, ''Well, we are going to need more people,'' and it then just becomes sort of a snowballing effect. So I am sort of rambling, but those are some of the concerns that I have as both a former prosecutor, as a Member of Congress, and some of the concerns I am hearing from businesses out there.
Ms. BRESEE. I think you have raised a lot of the concerns that we have been sorting through during this period of looking at the comments we received. Certainly we don't want to be receiving reports that aren't useful to law enforcement. It is going to be an imposition on the industry, and so we want to make sure it is an imposition that is also useful in fighting money laundering.
Mr. BARR. Thank you.
Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you.
Mr. BENTSEN. Thank you, Madam Chairwoman.
Let me apologize for missing your testimony. I was tied up in another meeting. Let me follow up on Mr. Barr's comments. The $750 level, I have to agree with him. I know in my area of the country, we have a large number of immigrants who still send money back to their families in Mexico and Central America. I would be concerned one, on the amount of data that you would have to collect and two, the potential suspicion directed toward people in the normal course ofwhat is really the normal course of business for them because there are just a lot of people who immigrate to this country who, as I say, still have family and still send back a large amount of their paycheck every week or every month to the family back in their original country. And so that is something I would hope that you would consider. Plus, I think Mr. Barr is onto something that this is just a vast amount of data that could really tax the resources of both the Treasury and Customs.
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The other questionthe question I would like to ask isand I know we have a second panel. And I met yesterday with one of the panelists from the Texas Attorney General's Office, but to what extent are youare the Federal agencies working with the State regulatory agencies in developing your regulations for the MSBs, and how you will oversee the MSBs? Because if I understand correctly, I am certainly not an expert on the Texas law on this, but if I understand correctly, Texas already has some statutes in place as it relates to MSBs, and it would seem to some extent you could piggyback on that. I don't know what other States have in place.
Ms. BRESEE. We are consulting with the State authorities. I think one of the things that we have learned is that all of the States are not doing this in the same way and some are doing more than others. I don't know the details of Texas, but it may be that Texas is doing more than some of the other States are doing. But we agree, we don't want to recreate the wheel here. We want to make sure we are working with them effectively.
Mr. BENTSEN. And inI don't think you could do this statutorily, but you wouldn'tyour intent would not be to preempt the State regulatory authority, but to work in conjunction with it?
Ms. BRESEE. Absolutely not. No. Instead we would see the State as a partner, the State authorities as partners with us in this effort.
Mr. BENTSEN. Thank you.
Page 58 PREV PAGE TOP OF DOC Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you. I believe we should thank the panel. I would just add one question which the staff indicates to me I didn't make explicit in my previous questioning, although I asked about the MSB rules in the 45-day commitment. While I acknowledged or made reference to the fact that under the statutory requirement, the national money-laundering strategy regulatory proposals were due in January of this year. They are not here yet. Can you give us more certainty as to a date when you will have those regulatory recommendations for us?
Ms. BRESEE. I am sorry?
Chairwoman ROUKEMA. The national money laundering strategy. The statutory requirement was that they be submitted to Congress by January of 1999.
Ms. BRESEE. I believeactually it was February 1. The law was.
Chairwoman ROUKEMA. February 1. I am sorry.
Ms. BRESEE. We need all the time we can get here. The law was passed, actually, the very end of October, and we have been working very diligently. But I think that that timeframe to start the beginning of November to February 1 just was really not enough time for us in particular, and this year is the first year that we are developing the strategy. But as I mentioned
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Chairwoman ROUKEMA. Excuse me. You made that clear in your testimony, but can you give us a date certain or a timeframe in which we can expect this? Or are we going to have to communicate publicly yet again with Treasury?
Ms. BRESEE. I don't believe you are. We will keep you very closely informed on our progress. We expect it will be just a couple more months now. We are doing the final interagency process. We have done a lot of consulting in this area both with the Justice Department, with State and local law enforcement, and with private authorities. We just have the matter now of getting this through interagency clearance, getting a final product to the printer, and the various technical aspects. But we have made quite a bit of progress, and we will keep you informed.
Chairwoman ROUKEMA. Thank you very much.
Mr. Chairman, do you have a final question?
Mr. KING. No.
Chairwoman ROUKEMA. Thank you. We greatly appreciate your attendance and your relevant testimony.
Would the second panel please come forward? We have here a second panel with two witnesses, in the order of their testimony will be Assistant U.S. Attorney Jodi Avergun. Ms. Avergun is Assistant U.S. Attorney in the Eastern District of New York and she has been with the U.S. Attorney's office since 1990, so she comes with considerable experience.
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Mr. KING. And she is or was a constituent of mine. Welcome.
Ms. AVERGUN. And I still am. Thank you.
Chairwoman ROUKEMA. She can't be too bad then.
Chairman King was alluding to making some negative references to Newark and Customs responsibility there, and I said it is just because Newark is doing such a good job.
Our second witness is Mr. Donald Clemmer, Texas Attorney General's office. He is an Assistant Attorney General there in Texas and has been with the Chief of the Financial Crimes and Specialized Prosecutions Division since 1993.
With Mr. Clemmer is someone who is not testifying, but is a resource here for our panel today, Supervisory Agent David Boatright, also from the Texas Attorney General's office, and we appreciate your attendance here.
Without further delay, Ms. Avergun.
STATEMENT OF HON. JODI L. AVERGUN, ASSISTANT U.S. ATTORNEY, EASTERN DISTRICT OF NEW YORK
Ms. AVERGUN. Thank you, Madam Chairwoman and Mr. Chairman and Members of the subcommittees. Thank you for the opportunity to appear before these subcommittees to discuss emerging trends in money laundering in the New York metropolitan area and our successes in New York in dealing with a previously damaging form of money laundering, the money remittance.
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I am pleased to appear here on behalf of Zachary Carter, the United States Attorney for the Eastern District of New York, and I also wish to gratefully acknowledge the assistance of my colleague, Assistant United States Attorney Bonnie Klapper, for her help in preparing this written statement.
Money laundering is perhaps the most crucial aspect of the narcotics transaction, more so than the actual importation of narcotics to the United States or the sales of narcotics on the streets here. Without an ability to realize the proceeds of a narcotics transaction, the importation and sale of narcotics is without benefit to the narco-trafficker. We thus appreciate your interest in the financial side of narcotics trafficking and your willingness to combat money laundering on the financial institution level.
As I have noted in my statement, there is a vast money laundering problem in New York. Customs and Treasury Department records indicate that close to one-third of the approximately $30 billion a year laundered through the United States, $9 billion, is laundered out of New York. In New York we have been very fortunate to work with the El Dorado Task Force, a Treasury-led task force that comprises thirteen State, local and Federal agencies in combating money laundering. Between 1996 and October 1997 my office was very unfortunate to participate with the El Dorado Task Force in its innovative and successful use of a Geographical Targeting Order to target specifically the order wire remitting industry in New York.
The GTO, which went into effect in August of 1996, targeted twelve licensed money remitters and their agents in New York City and northern New Jersey, who sent vast sums of money to Colombia. What the GTO experience showed us was that the wire remitting industry had clearly been co-opted by drug dealers for their own uses. The legitimate users, the ones who some of the Members have expressed concern about, had been irrelevant and, in fact, were not being seen as a center of profits for these money remitters and their agents, and they started to focus their efforts on getting the drug money and, in fact, they were completely co-opted by drug dealers.
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The GTO required the targeted remitters in the relevant area to file reports of all cash remittances of $750 to Colombia and to require from the senders one of three types of photo identification.
What we had found prior to the GTO was that senders of money who were sending in amounts under the present recordkeeping requirement of $3,000 were using false identification to send the money, and it was making impossible our efforts to track back to the actual narcotics dealers who were providing the money.
The GTO in New York caused the displacement of this method of money laundering. Intelligence indicates between 1997, when it ended and fairly recently, that drug dealers were just not using the money remitting industry to get their money back to Colombia.
The initial stages of the GTO caused an immediate drastic increase in drug dealers' need to use bulk container shipments to get their money back south. $63 million was seized in the first six months of the GTO, and after the drug dealers have had time to regroup, we see what they are doing now.
Ms. Warren previously discussed with you the Black Market Currency Peso Exchange, and that is a huge problem in New York. Bulk shipments continue to be a very popular mechanism with drug dealers; and as Ms. Tischler told you, we have seen money secreted in car parts, electronics, any containerized goods heading to South America, and it is in fact my office that is prosecuting the case of the $11 million seizure in these car parts in Newark.
Page 63 PREV PAGE TOP OF DOC There are several recent cases in our district which illustrate how the narcotics money laundering through the Black Market Peso Exchange works, and I would like to briefly describe those to you to show you how this type of money laundering impacts on our district and what we are able to do about it.
There is a fairly straightforward debt replacement scheme which uses money orders to deposit narcotics proceeds into the accounts of debtor companies providing goods to Colombian businesses. A worker for a money laundering organization in New York picks up cash drug proceeds at the actual stash location. The worker will then take the cash and purchase money orders from multiple locations in amounts under the current recordkeeping requirement of $3,000. The payees on the money orders are left blank and then the money orders ultimately find their way to the accounts of businesses at which legitimate Colombian importing companies have debts. The money is credited to these particular business accounts in the guise of a payment of a debt to that business, and the money enters the banking system.
We have determined within the past year over 300 companies in Miami and New York that receive these bulk money order payments, and we need to focus our efforts more on educating companies that receive third-party payments like this that they may be the victims of a Colombian black market peso exchange, another financial transaction which illustrates the black market peso exchange mechanisms through cash transactions into bank accounts operated by money laundering organizations.
Again, Colombian peso exchangers obtain pesos in Colombia. They take narco-dollars in New York and deposit them into accounts that are then sent to pay the debts of these legitimate Colombian companies that have paid pesos.
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The scheme works essentially the same way as the money order scheme except that the step of purchasing money orders is eliminated and direct transfers of cash are made instead. This method is particularly prevalent in New York, where the bulk of drug cash exists, and industries which are most commonly being seen today as being involved in this type of money laundering include electronics, appliance industry and the textile industries.
We have prosecuted several cases successfully in this area with the El Dorado Task Force. In one such case, eight defendants were indicted for their roles in opening checking accounts through which money orders were transferred in the debt replacement scheme. All five of the defendants apprehended pled guilty. The main organizer of the scheme had control over 42 separate bank accounts through which her smurfsher workersmoved over $12 million in less than a year to companies operating in the Panama Free Trade Zone.
In another successful investigation conducted in the Eastern District of New York, twelve Lebanese nationals pleaded guilty to money laundering and/or structuring charges involving their participation in a scheme in which the defendants picked up cash from drug dealers directly, deposited it in structured payments and then it was transferred outside. This investigation identified over $35 million laundered in that particular way. The El Dorado Task Force seized $2 million in cash that had not yet been put into the banking system and froze $600,000 remaining in the bank accounts, and that is what has developed as a result of the successful efforts of El Dorado and the GTO.
As I stated at the outset, money laundering is the most important aspect of the narcotics transaction and we in the United States Attorney's Office for the Eastern District of New York are proud to be on the cutting edge of money laundering enforcement activities together with our law enforcement colleagues in the Treasury Department and Justice Department. We realize that the only way that the successful efforts such as the GTO in New York can be duplicated in New York and nationwide is through the cooperative efforts of law enforcement agencies working jointly in tailored industry-specific investigations, and we are particularly gratified that your committees have expressed an interest in our efforts.
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Thank you for this opportunity to appear before you today, and I would be happy to answer any questions.
Chairwoman ROUKEMA. Thank you.
STATEMENT OF HON. DONALD J. CLEMMER, ASSISTANT ATTORNEY GENERAL, OFFICE OF THE TEXAS ATTORNEY GENERAL; ACCOMPANIED BY DAVID BOATRIGHT, SUPERVISORY AGENT, OFFICE OF THE TEXAS ATTORNEY GENERAL
Mr. CLEMMER. Madam Chairwoman, Mr. Chairman, Members of the subcommittees, my name is Don Clemmer, I am an Assistant Attorney General for the State of Texas. I work for the Attorney General of Texas, Mr. John Cornyn.
What I would like to do is rather than read any submitted testimony, I would like to confine my statement to a summary of some of the points and then answer any questions that you might have.
First of all, I would like to stress that what we do is rather than focus on the global or international aspect of money laundering, what we have to do as local authorities is deal with it at a local level. We don't have the resources to look at what is going on outside of the country, or even in many cases what is going on outside of our State.
Page 66 PREV PAGE TOP OF DOC Of the $30 to $60 billion that is laundered by drug traffickers every year, it all begins essentially with a much smaller amount of money that is collected from drug sales that has to be transferred and processed and eventually put to use by the drug cartels. That is the area that we focus on. We look at those instances where someone is taking in, say, $100,000 to $500,000 a week and laundering that sum. It is those smaller amounts that make up this huge money laundering amount that has been testified to today. Let me give you some examples of the types of cases that we have worked on and how we have made strides in this area only because of the cooperation we have gotten from Federal authorities and the ability we have had to access Federal resources.
In particular, we began in 1993 with investigations into wire transmitter businesses in Houston. It became apparent to us through analysis of BSA data provided to us that there were a number of businesses in that area taking in substantial amounts of cash and eventually transferring that cash through banks to Colombians who were involved in the drug cartels.
What we did was using that information, we targeted several of those businesses. Overall, those businesses were responsible for laundering approximately $450 million a year. We targeted some of the businesses with some of the higher dollar amounts and started looking at what they were doing. And basically we had a situation where very small strip center operations, businesses that were no bigger than a hundred square feet, were supposedly taking in small amounts of money from individuals who wanted to wire transfer that money back to individuals in South America and taking the bulk of the day's receipts and taking that to the bank and transferring that to corresponding accounts outside the country. We started looking at those businesses. What we found was those businesses actually had no walk-in customers. People were not coming to those businesses with $200 or $300 to send back home. Those businesses existed to do nothing more than take in $200,000 a week, $300,000 a week, create false receipts to show that money came from legitimate sources, and then take that money to the bank and wire transfer that money. It was obvious to us that these businesses were just money laundering fronts and nothing more than that.
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We began enforcement actions using various statutes that the State has, both licensing and money laundering statutes, and ultimately we were able to turn this $450 million a year money laundering scheme to where today through those businesses we only see $10 million a year going through those same accounts.
Now, what we managed to accomplish and what I want to stress through this part of my testimony, we impacted those businesses and it could not have been done without access to the BSA data, the BSA information that the Treasury Department provides to us. We were the first State to be given access to that information, the Currency Transaction Reports, the suspicious currency transaction reports and now the Suspicious Activity Reports. We make extensive use of that information. Without that information, we could not have identified these businesses in the first place. They would have gone completely undetected. We are not set up to deal with that without having that information resource. So I want to stress to you that is a vital part of what we do. BSA data is something that we could not function without.
Also the Federal authorities stepped in and helped us in our investigations and helped us move forward with prosecutions and investigations and provided resources in the way of manpower, investigators and other background information sources. So it is something from a State and local level we have to have Federal cooperation from our end to make an impact on those businesses that do, to me, make up the initial money laundering threat. Those businesses that first take in the money before this becomes this $60 billion figure that moves around the globe and eventually in the drug cartel pockets.
Again I would like to emphasize that through the HIDTA program, the High Intensity Drug Trafficking Area program, which helps us fund some of our projects, through the Gateway program that the Treasury Department has developed to allow us BSA data, we have been able to do what we do. Without that we could not function.
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Finally, what I wanted to touch on is some of our State regulations that we have in effect today which in some ways mirror some of the legislation on the Federal level and some of the proposed legislation.
In 1992, we first passed a licensing statute for what we would call today money service businesses. Any business involved in currency exchange, any business involved in currency transmission, currency transportation, those businesses are required to get a license in our State to conduct that type of business. If you do it without a license, you are basically committing a felony offense.
Now we recognized in passing those statutes that there are many legitimate businesses and financial businesses already in existence that were already regulated by the Federal Government and under other State regulations, and so we exempted those businesses from our regulations. We don't regulate the banks under this and we don't regulate many other traditional financial and service providers under these statutes, but we do attempt to regulate those types of businesses which I first described, those businesses that launder $100,000 or $200,000 at a time.
We also enacted other statutes such as a currency reporting statute, which is basically the same as the Federal currency reporting statute, where anyone receiving over $10,000 has to file a State report. Again, though, we didn't want to overburden businesses with such reports, so what we did was we said if you file a Federal report you don't have to file a State report so long as the State can access those reports, and Treasury has allowed us to access those reports. If we were not able to access those reports, we would have to access them through a State proceeding, which would be costly for us and costly for the businesses involved.
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That is basically what I wanted to emphasize through my testimony. I realize that I am out of time. I would like to thank the subcommittees, again for allowing us to appear here and testify. Attorney General Cornyn is very concerned about these matters and obviously money laundering is a very serious threat in our State, and I would be happy to answer any questions that the subcommittees have.
Chairwoman ROUKEMA. Thank you. That has been very helpful and you did try to stay close to the time limit. I appreciate that.
Your testimony does invite very specific questions and because you are doing a good job, I guess my questions are how do we get from here to even a better job, despite the fact that you have outlined certainly from the point of view of Texas the wonderful cooperation you have had at the State and Federal level.
I am going to leave for Mr. Barr some of the obvious questions about the overregulation and the impositions that are realistic or unrealistic on these MSBs. I do want to ask both of you on the basis of your extraordinary experience here, and since you have stressed the cooperation that you have gotten, having heard the first panel, how would you, either on the basis of your El Dorado experience or on the basis of Texas' evident success internally in Texas, how would you now want to see us at the Federal level move to improve eithereither close statutory loopholes or to improve this regulatory authority to help you do your job?
You referenced, I believe, the money laundering fronts and we all knowevidently law enforcement all knows who they are, but how can we reasonably get at more effective enforcement there without violating or overextending ourselves? And the Gatewayyou made reference to the Gateway program, BSAs, but are we really adequate enough? What statutory requirements do you need, or how would you advise Treasury on those regulatorytheir delays in regulatory authority, in either order.
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Ms. AVERGUN. Thank you, Madam Chairwoman. Obviously my office agrees wholeheartedly with Justice Department's proposals as outlined in Deputy Attorney General Warren's statements.
We would like to see the regulations currently under consideration activated, and we would like to encourage the Treasury Department to sort through the comments as quickly as possible, as have you. We obviously think that a nationwide recordkeeping requirement and a reporting requirement is important to achieve our goals. As we saw in the El Dorado's Task Force experience with Operation Wire Drill and the GTO, we would like to see that become nationwide.
What the GTO did in New York was take a large number of businesses. There were hundreds of money remitting businesses in New York, hundreds and hundreds of businesses in Jackson Heights, Queens and in northern Manhattan that drug dealers could walk into with duffle bags of cash that they used to be able to take to the bank and say, ''Structure this out. Here is my sender list, get this to Colombia.'' We would like to see that stopped on a nationwide level because what the successful GTO effort in New York did was squeeze the money out to our neighboring States. We also diverted money from Colombia to now Ecuador and Peru, so that hasn't really solved the problem, although it solved the problem for us in New York and we eliminated a method in New York. So we would like to see the permanent enactment.
Chairwoman ROUKEMA. Ms. Avergun and then Mr. Clemmer, with that experience, the successful experience in New York, do you see any reason why the Treasury Department cannot come up with reasonable regulations within the foreseeable future? They said a couple of months, certainly in less than the six-month time period now having waited five years?
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Ms. AVERGUN. I am certainly not qualified to know all of the different factors that go into the Treasury Department's decisionmaking process. I would like to see it done and the Justice Department
Chairwoman ROUKEMA. But on the basis of the experience that you have had, you see no impediments, undue impediments to actually instituting these regulatory requirements at the local level?
Ms. AVERGUN. My understanding is that the impediments are the objections of legitimate business owners about the costs of increased compliance, increased record filing, and I understand that that is what is trying to be weighed in enforcing these regulations and in trying to get them enacted.
Chairwoman ROUKEMA. Thank you.
Mr. CLEMMER. Yes, Madam Chairwoman.
I believe some of the Federal improvements that we would like to see are some of the things already proposed such as criminalizing bulk smuggling, improving laws in that area.
We do have a State statute that deals with people who physically transport currency. It is something that has to be dealt with. I think Mr. Boatright, who is here with me today, could give you some information about bulk smuggling and how we have seen that increase in those types of schemes, because although we have had success with wire transmitters, obviously those people laundering those same amounts of money have turned to different ways of doing it. They are still there. It is up to us to find out where they are and begin to prosecute those people.
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Along those lines, for what the Federal Government can continue to do for us, it mainly comes down to not a question of regulation so much as continuing to provide us access to the information that is currently kept by the Federal Government. As long as the regulations stay in place that allow that information to be reported and then disseminated to the States, I think that gives us our best tool. Technologically we can see some improvements in terms of how quickly that information is made available and the form it is made available in, and that is an issue of resources more than anything else.
Proactive targeting has always been important to us.
Chairwoman ROUKEMA. You mean Federal personnel resources?
Mr. CLEMMER. I would think that is part of the problem when you are dealing with these millions and millions of records, how to input that data and make it available to each State that needs that information. And I think from our standpoint we don't have resources to deal with that and I don't know what the Federal Government's situation is. But we someday would like to see the Treasury Department's FinCEN, see them target these money laundering operations so that the information does not come to us in raw form, that it comes to us with more of afor instance with a suspect already targeted. That is pretty much an ideal. I don't know when you can get to that point technologically. There are a lot of funding issues with anything like that.
Your final question about why the regulations can't be drafted and implemented more quickly, I wish I had an answer for that. It is kind of beyond my experience as a State prosecutor to say what are the issues involved there. Again, the sooner the better for us.
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Chairwoman ROUKEMA. You haven't felt restricted by that?
Mr. CLEMMER. At this point, no.
Chairwoman ROUKEMA. Is there anything that Mr. Boatright would like to supplement with on the basis of his experience?
Mr. BOATRIGHT. Thank you, Madam Chairwoman and Members of the subcommittees.
I would like to point out one recent experience that we have had in Texas involving the bulk transportation or the bulk smuggling of currency. I supervise a group of agents, State agents that investigate and refer for prosecution money laundering cases, and we recently were involved in one particular investigation that began with just a random or routine traffic stop in Texas along one of our highways that resulted in the initial seizure of $528,000 in currency that was hidden in the panels of a van traveling down the highway, and this was an ideal situation. What we were able to do in this particular investigation starting with that random, routine traffic stop, we were able to work it back throughout the entire organization that was responsible for transporting this currency. We were able to identify all of the actors involved, all of the players, all of the vehicles that they had utilized over about an eighteen-month period. We were able through enforcement activities to obtain all of their internal records that this smuggling operation had maintained. And we were able in the end to identify about $75 million that this one small organization of ten to twelve people were responsible for moving from Houston, Texas, to our Southwest Border in a period of about eighteen months.
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I just point that out to the subcommittee as an example of the types of things that we are seeing at the street level and the types of investigations that we are involved with and the numbers to us, that is a significant amount of currency that a small organization was responsible for moving.
Chairwoman ROUKEMA. But the statutory requirements are fine except that you want, as I do, the bulk cash smuggling correction, closing that loophole in the law that will help you more effectively.
Mr. BOATRIGHT. In this particular example we were able to prove the required drug nexus to show that those were proceeds of narcotics trafficking.
Chairwoman ROUKEMA. Thank you.
Mr. VENTO. Thank you, Madam Chairwoman.
I was going to have Ms. Avergun explain the Colombian black market peso exchange. I have read it three times, and I don't understand it yet. I understand one of the problems and the reason that it is being brought up here, we started out with cash transaction reports and have moved now to MSBs and apparently now there is a focus on them. But these other activities, both the bulk transfer and the Colombian black market peso exchange, is basically where we are driving these dollars, this crime money.
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And while I can understand it, I think the predicate of this, as I see it, is of course that there is a complicity on the part of the Colombian government. Is that the bottom line here? That they are choosing not to regulate even though these type of activities are improper, that they are choosing not to regulate, Ms. Avergun?
Ms. AVERGUN. The experience with the Colombian government, as Ms. Warren stated, they very recently enacted a law making black market peso exchange illegal. It was something that was being done in Colombia and accepted. It was not that the Colombian government was complicit in it, it was just that they knew about it and didn't seek to do anything about it.
Mr. VENTO. It is a matter of omission. They have the law, and now the question is will it actually be followed. We have to be realistic about it. It is not my task to indict or criticize that particular government, but at least I think we ought to know what issues that the Administration, or that we ought to be pushing that government to in fact answer if this is a problem.
Now, with regards to the money service businesses, I would note, and Mr. Barr talked about the $750 limit and you asked for that and said it is important. The Treasury Department wasn't defending that very well.
Ms. AVERGUN. I can tell you why we picked that number in New York, if that would help, and I think it might.
Page 76 PREV PAGE TOP OF DOC The $750 limit was very seriously considered by the Treasury Department and by FinCEN, by the U.S. Attorney's Office, based upon the previous year's investigations of these money remitting organizations. The GTO was preceded by approximately four years of investigation into the money remitting service where actual transactions were analyzed. We subpoenaed all of the invoices sent out by the targeted money remitters. There were electronic surveillances done, informants, arrests, cooperating defendants, and the intelligence indicated that the legitimate transacter who was sending money home would come to the United States to better his or her life was not sending anywhere near $750 home. It was in the $300 to $500 range, and that the illegal transactions, the drug transactions were being doneclose to, but under the $3,000 recordkeeping requirement. So we picked a number that was well over the $300 to $500 average number, but still significantly below the $3,000 number to make it unappealing for the drug dealer to go in and launder his money, but not to chill the legitimate user from being able to send money when needed.
There were no additional requirements that were placed, it was just that the dollar number was lowered. When somebody went in with $3,000 or less, they still had to show identification and that is really what the GTO did. It required identification so that accurate information
Mr. VENTO. That improved the situation. I understand that is the same policy that the Postal Service uses, a similar type of policy, so it wasn't that unusual. These MSBs were going to follow the same procedure that the Postal Service does, correct?
Ms. AVERGUN. Exactly. People were not going to the Post Office to launder money.
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Mr. VENTO. I am just trying to see what the difference was. You point out that often this idea of cash deposits by smurfs, a term commonly used in law enforcement to refer to a vast army of low level employees tasked by a money laundering organization. Are we talking about the same person here?
Ms. AVERGUN. Yes. The same person would go into the wire remitter with the bag of money who is now hired or tasked to open these bank accounts or purchase money orders.
Mr. VENTO. So this is the same group of persons that we are talking about here that were accomplishing this on a broad scale. You point out one main organizer had control over 42 bank accounts and they moved $12 million and so it does add up.
Mr. Clemmer, I was interested in your comment when you pointed out that the wire transfer businesses in some areas in your jurisdiction in Texas were principally pretty easy to identify. They did not have this constant flow of individuals as apparently was the case in the New York area, the GTO area, but in fact they were just more conspicuous. They were doing large bulk transfers and they would take it over to the bank. Isn't this where the bank would then in fact have a cash transaction report that would take place?
Mr. CLEMMER. Yes, sir, that is exactly what happened. That is the way that we would first identify these businesses, would be the fact that the currency transmission business would take a $200,000 cash deposit to the bank, deposit it into their business account, and from that account wire transfer that money to another bank account or out of the country. So the only cash transaction report that was there was identifying that business. And that is what led us to those businesses themselves.
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Mr. VENTO. It looked like some sort of bona fide business because it was a money service business, right?
Mr. CLEMMER. A business that existed solely to take this money back in.
Mr. VENTO. Obviously if someone is in this activity, this is not exactly a competitive marketplace, so the fees are somewhat excessive. Are the fees actually reported by these MSBs then?
Mr. CLEMMER. The businesses don'tthe criminal businesses don't keep any type of records that will reveal anything regarding what they are taking in as a profit. What we know from investigations is if a business like this takes in in a single week say a $300,000 bulk shipment of money to launder, they will charge somewhere in the 6 percent range as their fee from the criminal organization to launder that money. At the level that they are purportedly wiring legitimate money, it is very rare that you see that done through most of these businesses. However, we are talking about the ones that we have targeted and for the most part eliminated. But the fees, again it is something that has just arrived between the criminal organization and the criminal business and that tends to be the fee that they charge.
Mr. VENTO. I would think that based on our colleague Ms. Waters' questions here, this points back to the banks in terms of the cash transaction accounts in terms of being used in this particular conduit, at least in the example that you gave here.
Page 79 PREV PAGE TOP OF DOC Something that caught my eye, and this had to do with the testimony of the Assistant U.S. Attorney, Ms. Avergun, and that is that in the Miami area you had 300 businesses that were involved in actually this activity?
Ms. AVERGUN. Not that the businesses were knowingly involved, but that we identified between New York and Miami in the past year 300 businesses that are being paid these third-party money orders which we have recently identified as a mechanism of the black market peso exchange.
Mr. VENTO. So this sounds like a more reasonable number.
Mr. Clemmer, what is the number in Texas?
Mr. CLEMMER. In Texas it is very hard to estimate what we are looking at. We have approximately a hundred licensed businesses that do this type of work, currency transmission or currency exchange. But there are so many of these businesses that are not licensed that we don't know about.
Mr. VENTO. First, you have to get all of these licensed. That seems to be a logical thing to do.
Mr. CLEMMER. We have tried to get as many licensed as possible to regulate their business and see what is going on there.
Mr. VENTO. Or registered some places.
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Thank you, Madam Chairwoman.
Chairwoman ROUKEMA. Thank you. That is an interesting point and it didn't occur to me that this is an important segment that is unlicensed. I hadn't focused on that.
Mr. BARR. Thank you.
Wouldn't it be fairly easy for States to require licensing? They license everything from hairdressers to pest exterminators. There is nothing prohibiting any State from requiring whatever licenses they can get through their State legislatures to regulate people that deal in large amounts of cash; is that correct?
Mr. CLEMMER. That is accurate, and that is something that we have done. The problem is more on the enforcement end that someone who wants to launder money can set himself up as a dummy business, take in these bulk amounts of currency, get them through his so-called business account.
Mr. BARR. Wouldn't those run afoul of both Federal and State fraud statutes in addition to the various drug laws?
Mr. CLEMMER. I think they obviously do. It is a question of identifying those people initially, and the only way that we can do that presently is through currency transaction reports, or SARs, that come back to us. And, unfortunately, there is some delay time on the reports so the person who contracts with a Colombian money broker to launder, say $1 million, he may have three months to launder that money through a bank account before the currency transaction reports start coming in and we start seeing that person. He may then close that account and move to another account or operation. So it is problematic from the standpoint of targeting these people and identifying them quickly enough to enforce our licensing statutes. In some ways it is a resource issue. In other ways it is just a targeting issue.
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Mr. BARR. It is also, I suppose, something that could be addressed by something as basic as reworking the forms. The SARs and the CTRs, they could be simplified to a great extent. There could be much more use of real time electronic data collection and transmission and so forth. I apologize for rushing through. I have to leave in a couple of minutes.
I would like to compliment all of you for doing something which is the best way to attack this problem and that is using existing laws imaginatively within the framework of joint operations, good prosecutorial work, and the results such as the El Dorado Task Force speak for themselves. You heard my comments earlier about my skepticism about getting into a huge regulatory morass of MSBs and so forth. Other than complimenting you all on the work that you are all doing within the existing framework of laws, indeed I think as you indicated in your statement, Ms. Avergun, this could be used as a model elsewhere.
Explain to me briefly, because I am not familiar with it, the Geographic Targeting Order. That is something that you went to the New York authorities for?
Ms. AVERGUN. No, it was a Treasury Department regulation. It was proposed by the U.S. Attorney's office and FinCEN to the Treasury Department and it was enacted under then-Secretary Kelly, and it was an order that provided that initially twelve money remitters in the New York metropolitan area and northern New Jersey for all transactions of $750 and more of cash fill out the form and require one of three official types of identification. It was initially propounded for 60 days. Then it was expanded 7 times, I believe, for a total of fourteen months, during which period we were able to eliminate the money remitting industry as a method of money laundering in New York.
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Mr. BARR. So you identified there was a serious problem in this identifiable segment of the financial market, you developed an imaginative solution to it within the framework of existing laws and regulations and you took it down.
Ms. AVERGUN. I think that is a fair characterization.
Mr. BARR. I think so, too, and I think we ought to be focusing our efforts of replicating that at the State and Federal level rather than sort of a blunderbuss approach. You are doing a very good job with existing resources, where you need to go to the Treasury Department or to a State authority and say, ''Look, we are not interested in going after an entire industry just to churn up a lot of reports, there is an identifiable problem with an identifiable sector of the economy.'' You could justify the use of the $750 threshold in that instance and there was a sound basis for it and it worked. I commend you for it and do hope that our colleagues in Congress and in the Administration pay attention to what you are doing and use those resources because I think the results are spectacular without the need for a lot more regulation and a lot more cost and so forth.
Thank you for what you all have done and for being here.
Chairwoman ROUKEMA. Thank you, Mr. Barr.
I just note that Chairman King had to leave for a committee markup that he could not be absent for, so he apologizes.
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Mr. BENTSEN. Thank you, Madam Chairwoman.
Mr. Clemmer, in Texas you all are working off of transactions at a $3,000 or less level; is that right? That is when you are looking at the MSBs? Is that the way that I understand it? You are looking at the volume of low dollar transactions, I guess, is that sort of your trigger?
Mr. CLEMMER. It is a combination of looking at factors like that, but also looking at the total dollar volume that these businesses are putting into their bank accounts. We have regulatory reporting requirements within our State banking laws that say a certain amount of money that comes in must be reported, and then we also have our currency transaction report equivalent that requires anything over $10,000 to be reported. I think the way those regulations are used right now, they have been fairly effective in trying to deal with the problems that we have identified. We do have some problems, though, with businesses that have come into being recently that are usingrather than moving Federal Reserve notes into the banks in Texas, they are moving money orders into the banks in Texas, and those money orders are apparently purchased outside of the State with the drug proceeds and then shipped into the State into some of these same types of businesses that formerly laundered cash. Now they are using money orders to launder their proceeds. And the problem we face there is whether or not our State statutes are broad enough to require reporting of these money orders that go into the banks. It is an issue that we are dealing with in our State legislature, and it points out the problems that we see any time you successfully impact one money laundering scheme, there is always going to be another one and it is important to stay on top of this and continue to move forward.
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Mr. BENTSEN. The Texas law, as you have explained it to me, though, allows you to go into any MSB and look at their individual receipts so you don't focus as much on the individual dollar amount as volume transactions that are going on, and then you say, ''OK, under the law you have to show me who has been buying the wire orders from you.'' And I guess you are saying with this new concept of a secondary transaction with a money order, you don't have the authority to go back to track the money order and how that is acquired. I guess the point is, and it goes back to this $750 level and obviously any level that is picked and it appears in the Eastern District that you all and the Treasury Department tried to come up with above the mean or above the average of what the ordinary person is sending back. Any number is going to be arbitrary and any time you set a number people are going to try to figure out a way to get around it, so you try to set it low.
I would hope that the Feds will look at what the Texans are doing, and there may be problems with how the Texas law applies. I am still concerned that, one, you end up creating a target of somebody who shouldn't be a target; and two, you end up creating an incredible problem of having too much data and getting caught behind all of that data where you have hundreds of thousands of $749-and-less transactions that you have got to look at and try to piece together a pattern of what is happening.
Mr. CLEMMER. Exactly. I think you have identified some of the problems that are there very clearly.
Mr. VENTO. If the gentleman would yield. In reading his testimony, it says, ''In calendar year 1997, the State investigators reviewed 6,384 BSA reports totaling $185 million,'' and it goes on. In 1998 it was 7,265 reports. Obviously getting this data, even with this amount, it indicatesand I note the same was true of the work that was done by the attorney, Ms. Avergun, in terms of that testimony as well, there is just a lot of minutia that has to be worked through. I think the issue, it was once thought that transaction reporting was going to be a panacea. We would have sort of the magic bullet in terms of dealing with this, and as I observed earlier, and others have, too, it has sort of evolved.
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Mr. BENTSEN. Reclaiming my time, let me ask very quickly, the way these things work, the way that the MSBs work, at least you found, some are fly-by-night operations and some are backroom operations. They piece together all of these transfers and then they take them in bulk to any bank or institution that offers international wire transfer services and then you track it from there. And as a result, the legitimate and perhaps halfway legitimate ones are licensed, and the others you can't get a handle on to license. What authority do you have when you identify one of these? Does a State have authority to shut these down or do you call in the Feds?
Mr. CLEMMER. With the unlicensed businesses, we have both civil injunctive powers that we can close their businesses down. If they have accounts that are ongoing at the time, those accounts can be placed into receivership.
From the criminal side, we have the authority to prosecute them in the State court for just being involved in this business without being properly licensed, and that is a third degree felony, which is a fairly serious crime in our State, and that by enforcing those types of banking laws, by doing that we have had most of our successful outcomes, because those laws have enabled us to directly target the activity that they are engaged in, the unauthorized banking rather than trying to prove upwhich is virtually impossible with this type of businessrather than trying to prove up the drug nexus to that money. We can get certain information that shows us it is drug money, but not the type of information that would really support a criminal conviction. So by enforcing our State banking laws, we have had much more success than trying to go at them strictly as a money laundering target.
Page 86 PREV PAGE TOP OF DOC I think just to touch on one other thing, our experience with the level of legitimate money that goes into these types of businesses, and again most of these MSBs are not the type that we have targeted. We are targeting those that are off on the fringe, that are real criminal enterprises. What we have seen is that legitimate amounts to be wire transferred to South America, that does average around $300 or so. The illegitimate businesses, those amounts are farther up, more the $2,000 level, so I can see that our situation is analogous to the situation in New York as far as what we are seeing, the individual transactions.
Chairwoman ROUKEMA. Ms. Waters.
Ms. WATERS. Mr. Boatright, you mentioned an operation which identifies vehicles and others that might be suspicious and we had such an operation in California, and they said it had reaped them some arrests that led to indictments. Could you describe your operation for us?
Mr. BOATRIGHT. The case that I discussed, the $75 million that this organization moved over that eighteen-month period, I would not classify that really as an operation. It was justthat case just started by a routine traffic stop. It was not any kind of ongoing proactive identification. It merely started with an out of the clear blue sky routine of someone getting stopped for a traffic violation, and it led to other things.
Ms. WATERS. Mr. Clemmer, you have described your operation quite well, and I think I agree with Mr. Barr, and you seem to agree with him also, that you can be pretty effective in closing down some of these operations because of the pure violation of banking laws and other kinds of violations of law. You probably can do as well with building and safety laws; they are probably violating something.
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Recognizing that, what percentage of the drug money that may be laundered in your State is coming through these operations as opposed to bulk rate shipments or other kinds of operations? Can you guess or do you know?
Mr. CLEMMER. I am not sure that I have a real good number on that that I can give to you, and it changes from year to year as different businesses and different schemes come and go. I don't know if Mr. Boatright has any further comments.
Mr. BOATRIGHT. Again, I don't have a solid number for you, but I would submit to you that we have seen an increase in bulk transportation as a result of both the New York GTO and our operation in Texas. Those have put pressure on those MSBs and have required the money laundering organizations to find other methods to move their money. As a result, other methods like bulk shipments have become one of those.
Ms. WATERS. Are you familiar with the Cali Cartel, the big drug cartels?
Mr. BOATRIGHT. In general terms, yes.
Ms. WATERS. Do you think that these would be methods that they would use to move their money? Do you think this is how they would move their money, through these operations?
Mr. BOATRIGHT. I believe someone else, maybe on the earlier panel, commented that most of their bulk shipment currency was leaving by vessel and being secreted in different types of equipment and furniture and different items.
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Ms. WATERS. Could I guess that while these operations certainly may be successful and perhaps could even be more successful, and that there is some movement of drug money, that the big cartels probably do it differently? Is that a good assumption? The big cartelsthe Cali Cartel, for example, is not moving their money through $2,000 transactions out of these kinds of operations, would you say?
Mr. BOATRIGHT. My experience from an enforcement standpoint, whether it is a Mexican drug organization or a Colombian drug organization, is that they spread their liability out in different methods. They utilize some of all. They use bulk transactions, they use wire transfer, money orders, they use all of these methods.
Ms. WATERS. I am really talking about the size of the operation as opposed to the origin of it. I am trying to find out whether the big cartels use these money services businesses as opposed to something else?
Mr. BOATRIGHT. I was personally involved in an investigation that targeted one of the top ten money launderers in South America, and we worked with Customs out of Miami and that organization strictly used money services businesses to launder their drug money.
Ms. WATERS. OK. I would like to ask Ms. Avergun what you know about the Citibank investigation out of New York relative to the Raul Salinas money laundering?
Ms. AVERGUN. I am sorry to tell you that I don't know anything. I am from the Eastern District of New York and I believe my colleagues across the river in the Southern District are handling that case.
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Ms. WATERS. You have heard about it, though?
Ms. AVERGUN. This morning, yes. I am familiar from the newspapers with Mr. Salinas and Citibank, but I don't know anything specific about that investigation.
Ms. WATERS. Thank you.
Chairwoman ROUKEMA. Thank you, Ms. Waters.
Mrs. MALONEY. Thank you, Madam Chairwoman, and I really congratulate all of you on your hard work.
I really would want to know a little bit about the Bank Secrecy Act. Any transaction over $10,000, banks keep the names; and then who do they give it to? You? They give it to Treasury. Who else has access to that?
Ms. AVERGUN. I believe that the way it works is that CTRs, the suspicious transaction reports, Currency Transaction Reports, are filed in a centralized data keeping place in Detroit, Michigan, which is then accessed by law enforcement agencies. There is quite a bit of lag time in the time in which the transaction occurs and then actually gets reported to Detroit and then gets published. It is available to law enforcement agencies, though, generally, the Treasury Department agencies are the most adept at retrieving it.
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Mrs. MALONEY. Who else has access to it?
Ms. AVERGUN. To the Detroit record center? I believe only law enforcement.
Mrs. MALONEY. Only law enforcement? And that is it? No one else can have access to it?
I was reading in your statement that out of $30 billion that you believe was laundered, $9 billion was laundered in New York City.
Ms. AVERGUN. Those are the current estimates.
Mrs. MALONEY. That is astronomical, absolutely astronomical. And you mentioned the devastating impact the GTO had on the money remittance industry in New York City. Could you elaborate a little more on that?
Ms. AVERGUN. Yes. As my written statement hopefully explains, we were basically able to close down the money remittance industry as a method of money laundering.
We do not find in investigations nowand I really want to talk about from the end of the GTO until about midyear last year, because things have changed since then. But from the end of the GTO until, let's say, six to eight months ago, what we saw was that people were not taking their drug cash into money remitting businesses to be sent to Colombia. It was understood commonly among drug traffickers that that industry was scrutinized, that we had made it too costly and too difficult to get the money out that way.
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Unfortunately, with the lapse of the GTO and without the finalization of the regulations that this subcommittee and everyone else has been expecting, what we find happening is that the money remitting businesses in New York are slowly raising their threshold level again back up to the $3,000 recordkeeping requirement. We find more businesses opening again, and we find people somewhat more willing to go back to that method of money laundering, and that is somewhat disturbing given our previous successes in the area.
Mrs. MALONEY. And how are you able to identify which remitters were participating in illegal drugs through this survey form in Detroit?
Ms. AVERGUN. What really started it was SARs data. The Suspicious Activity Reports started it, where we would get information from recipient banks that these money remitting companies, as Mr. Clemmer has testified, were depositing huge amounts of money into the bank. It led us back to the money remitting agents, and the El Dorado Task Force started analyzing the amounts of money that were being sent out by these agencies and being taken in by the agencies, that there were recordkeeping requirements that we were able to analyze.
And what we saw was clearly structured amounts of large bundles of cash with insufficient, incomplete or just false information being filled out by the actual people bringing in the money. We also saw almost all of these huge numbers of money going to Colombia, and it was out of sync with the gross national product of the Colombian community in New York City.
We then began doing undercover operations within these money remitters. Actual agents went in and said, ''Here, send my drug money, just make up whatever name you want.'' And then actually doing prosecutions of the agents and getting information that way.
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And, as I stated before, electronic surveillance, agents standing on the streets surveillancing that people were notlegitimate individuals were not going in with $200 to send out, but that huge amounts of money were going out and it wasn't justified by the population and by the demographics. And that is how we ultimately targeted the particular remitters that were targeted to be subject to the GTO.
Mrs. MALONEY. New York is also the center of a lot of new technologies. What new technologies are drug dealers using? Are they on the internet? Are they exchanging information that way?
Ms. AVERGUN. My particular expertise as Chief of the Narcotics Section is the telephone communications capabilities that people have, which I understand is beyond the jurisdiction and scope of this subcommittee, so I don't want to bore you with it. But suffice to say that
Chairwoman ROUKEMA. I don't think we would be bored.
Ms. AVERGUN. We are behind the eight ball in the communications capabilities. We are just way behind what the communications capabilities are. There are satellites that they communicate by and all sorts of cellular telephones. The phone cards make it extremely difficult to keep track of them. That is wheremy knowledge of how technology has helped the criminal element to the detriment of law enforcement.
Mrs. MALONEY. Thank you very much.
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Chairwoman ROUKEMA. Thank you. Well, I am most appreciative of your testimony here today. You have really been very helpful and given us some supplementary information that we can now apply to those in Treasury and Customs and other law enforcement areas to discuss and see how we can expedite this process. It is very clear that those of you in the field have much to contribute of a practical nature, and we will take it under consideration here and take it back to the proper authorities. So I do thank you.
And if you have further comments to submit for the record, as you heard me introduce the subject, any further information you have please submit to myself, Chairman King, and our Ranking Members, Mr. Vento and Mr. Sanders, for inclusion in the record. Thank you very much.
Now I welcome the third panel. We can have the benefit of the industry's approach to these subjects. They are on the firing line in more ways than one.
I do thank you for your patience. You have heard testimony here today; and, as I said, you are on the firing line in more ways than one, whether we are talking about drug traffickers, money laundering or Federal regulators. So we are very anxious to hear your approach to your problems and the legitimate questions that have been raised here by the panel today.
Without further ado, I will welcome Mr. Raymond Hemmig, who is speaking on behalf of the National Check Cashers Association. Mr. Hemmig is Chairman of the Compliance Committee of the National Check Cashers Association and is President of ACE Check Express, Inc. Where is ACE Check Express located?
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Mr. HEMMIG. Madam Chairwoman, our business operates in 29 States. We are headquartered in Dallas, Texas.
Chairwoman ROUKEMA. Headquartered in Dallas. That is what I was interested in.
Joining Mr. Hemmig is Mr. Ezra Levine. Mr. Levine represents the Non-Bank Funds Transmitters Group. Mr. Levine is well known in the money laundering communityI hope for good reasons, not for bad ones.
Mr. LEVINE. Madam Chairwoman, I would say it is the anti-money laundering community.
Chairwoman ROUKEMA. I think that is the way we will say itthe anti-money laundering community. But maybe others are fearful of you, too.
Mr. Levine is a law partner with the firm of Howrey & Simon, and where is that located?
Mr. LEVINE. Right here in Washington, DC.
Chairwoman ROUKEMA. Right here in Washington, DC.
We welcome you to the hearing. Thank you very much.
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Mr. Hemmig and then Mr. Levine.
STATEMENT OF RAYMOND C. HEMMIG, CHAIRMAN, ACE CASH EXPRESS, INC., ON BEHALF OF THE NATIONAL CHECK CASHERS ASSOCIATION, INC.
Mr. HEMMIG. Madam Chairwoman, again I am Chairman of ACE Cash Express. We are a chain of retail financial services stores that operate in 29 States. I am testifying today on behalf of the National Check Cashers Association, or NaCCA as we refer to it, which represents professional check cashers across the United States serving the public at more than 6,000 locations.
I currently serve on the Association's board of directors, its executive committee; and, as you noted, I am chair of its Compliance Committee, so I believe it is most relevant to be at this hearing. I was also a founder and President of the Texas Association of Check Cashers as well.
We appreciate the opportunity to be here and provide testimony today regarding efforts by both the Government and private industry to combat money laundering.
The professional check cashing industry cashes approximately 180 million checks annually, with an aggregate face value of over $60 billion. We employ more than 25,000 individuals, providing many individuals with entry-level jobs as well as opportunities for advancement.
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From the inception of our Association, we have worked with Treasury to combat money laundering. Our leadership has established and maintained direct lines of communications with officials of FinCEN, IRS, and even the Uniform Law Commission to ensure that our members are in compliance with applicable statutes and regulations.
Most of all, our Association places emphasis on educating our membership about their role in this anti-money laundering effort. We have provided comprehensive compliance manuals to each of our members. This was written by a noted expert, Charles Morley, specifically for our Association; and these manuals are updated as new regulations are formed. It provides practical information to managers to assist them in training their employees in their responsibilities.
We have also condensed the set of practical procedures governing compliance issues in an employees' handbook.
I think it is also important to remember that, under the Bank Secrecy Act, check cashers and other non-depository institutions are required to report all currency transactions equal to or exceeding $10,000. In addition, our members maintain logs of money transmissions exceeding $3,000; and that was adopted along with the Money Laundering Suppression Act of 1994.
As it relates to the money services businesses regulation and their three elements as published in May of 1997, we made many recommendations in response to these regulations; and most important was that the check cashers who serve as agents of money transmitters should not be required to register separately as money services businesses.
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The regulations already call for money transmitters and money order issuers, for example, Western Union or Travel Express, to register all of their agents. This alone will encompass over 99 percent of our industry. Separate registration should be limited to those few check cashers who would not be identified to FinCEN already through their money remitter principals.
Duplication of registration, I believe, is senseless and onerous to most businesses, many of which are very small businesses. If FinCEN does not decide to eliminate duplicate registration, then we urge the threshold for registration for money order sellers to be reduced, not increasedreduced to zero, in fact.
Unlike check cashing, money order sales, as has been testified today, and perhaps money transmission can and have been used to launder money. A study done for FinCEN found of the 146,000 locations where money orders are sold, excluding the 60,000 post offices in the U.S., I want to point out only 5,600 are check cashing locations. Thus, under the Treasury proposal, only 4 percent of the locations would be registered, while 96 percent will not be registered. I believe this condition creates an unintended competitive disadvantage.
Also, we believe the threshold for filing reports of foreign wire transmissions should be increased from the $750 level to a level approximating $3,000. This will avoid imposing huge burdens on the industry and would not materially advance the interest of law enforcement in our opinion. It is an educational ease request, if nothing else.
As it relates to the need for updated public comments, the draft FinCEN regulations, as were previously noted, were published in May of 1997. Our comments, like those of other interested parties, were submitted by the deadline of September 30. Over eighteen months have passed. There have been significant developments in the form of evidence and information on perpetration of money laundering since early 1997, some of which we have heard here today.
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We believe that FinCEN should rethink its regulations and properly republish them for comment almost as soon as possible. The comments submitted almost two years ago may no longer be reflective of the contemporaneous business and/or regulatory conditions.
NACCA urges Congress to convey to FinCEN the need to publish regulations promptly after a brief period for updated comment. Perhaps 30 days for updated comment, with a mandate for publishing the final regulations 30 days later would seem both fair and reasonable to all concerned.
In conclusion, we support the effort to combat money laundering. However, we do believe that several of these proposals need to be redirected or modified as I have outlined and I have further outlined in my written statements. As always, we stand ready to discuss these issues with you and others of the Department of Treasury; and, again, I thank you and would be pleased to respond to any questions.
Chairwoman ROUKEMA. Yes.
STATEMENT OF EZRA C. LEVINE, PARTNER, HOWREY & SIMON, ON BEHALF OF THE NON-BANK FUNDS TRANSMITTERS GROUP
Mr. LEVINE. Thank you, Madam Chairwoman.
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You indicated earlier that I was counsel to the Non-Bank Funds Transmitters Group. That is correct. That Group is made up of Travelers Express, Moneygram, Western Union, Thomas Cook, Citicorp Services, American Express Travel Related Services and Comdata Network.
These companies, like all non-bank financial institutions today, are subject currently to the BSA recordkeeping and reporting requirements. They are required to file CTRs just like banks, comply with the wire transfer rules just like banks, and in the case of the members of the Non-Bank Funds Transmitters Group, they voluntarily file SARs pending the ultimate resolution of the SAR rulemaking now at Treasury.
They are committed to compliance with the BSA because they don't want to become conduits for illicit sums. It is kind of obvious. Their efforts to develop effective anti-money laundering compliance programs have long been recognized by FinCEN, including a number of notations in the recent preamble to the rulemakings. According to FinCEN's Coopers & Lybrand report of this industry in general, these companies in the aggregate, along with the Post Office, account by far for the vast majority of non-bank transactionsdepending upon how you look at itabout 90 percent nationwide.
In your invitation, you asked specific questions generally about the MSB rulemakings that are pending, and some of those issues have been addressed by the Treasury Department officials that were here earlier today. But you are obviously aware that two years ago FinCEN issued a group of three rulemaking proposals. They involved four discrete subjects.
Page 100 PREV PAGE TOP OF DOC The first one involved the redefinition of money services businesses. While these regulatory definitions in the scope proposed were largely unnecessary, the Group supports efforts to clarify the regulations and has submitted proactive comments. When I say they were largely unnecessary, what I mean is that the scope of the redefinition could have been made narrower. Had it been made narrower, perhaps it could have been done faster.
A lot of issues were raised in that rulemaking. For example, the rulemaking included stored-value cards, which is a very controversial issue today. The issue then was, why include it at that point? Perhaps you leave that, particularly when coupled with registration.
There has been a lot of discussion today about the registration proposal, and it is quite true, and I am aware of the fact that you and Ranking Member Vento sent a letter in 1995 to FinCEN saying, ''Look, in balancing this, please be aware of the congressional intent and the conference report which clearly expressed that this not create an undue paperwork burden for everyone, regulated and regulator alike.''
Now, FinCEN established the threshold of $50,000 a month as the cutoff for those that would have to be separately registered. At that level, that would amount to about 50,000 registrations. What the Group proposed, and we believe this is consistent with the intent of the conferees and your letter, which clearly I agree with, was a $500,000 per month threshold which, by our estimates of the industry, would result in about a thousand registrations nationwide. We think that is pretty good. That is workable. It is a nice balance. That is the second rulemaking area.
Page 101 PREV PAGE TOP OF DOC The third rulemaking, of course, is Suspicious Activity Reports. FinCEN said, ''Look, let's use a $500 threshold.'' Banks now use a $5,000 threshold, sometimes less, if I am right. We can't figure out how many will be filed. We think it will be millions. We think it will cost aboutand this is not an exaggeration, it is in our rulemaking commentsof about $150 million a year. The reason for that is so many transactions these days by the unbanked are in multiple money orders to pay rent, and so forth, at over $500.
What we suggested is a $5,000 threshold on the retail side and no threshold, a case-by-case analysis for the back-end where companies like Travelers Express, Western Union, American Express look at bulk batches of money orders, travelers checks, wire transmissions and analyze: ''Where are they going? Are they coming back from Panama? Is there suddenly a surge from a particular location?'' Then they file the pinpoint SAR which is useful to law enforcement.
Finally, there are privacy issues with SARs. All of these SARs go to the IRS Detroit computer center. I am not saying that is bad, but clearly to a lot of people in the United States, when information is held by the IRS, that is a hot button. Therefore, it seems to me, in light of the political fallout on ''know your customer,'' to the extent one should tilt, one ought to tilt in favor of fewer reports rather than too many reports.
And, finally, what we call the ''CTR Proposal'' at $750. Right now, group members on wire transfers all over the United States are recording data at $1,000voluntarily looking at ID, verifying the ID, and maintaining it. We thinkand this we have great data onthere are about 43,000 money transfer sales outlets. We believe that this report at $750 will create the filing of one million more reports at that level because it is an automatic filing. This is not a suspicious reportyou don't have any discretion. So you are going to file the report. There are about a million transactions at $750 or more that go out of the country. So you will have a million more CTRs.
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What we have recommended is $1,000 recordkeeping. Let's do that by rule. We do it now. It is easy to implement. You get the ID. It is on record for five years. Law enforcement can get it, and that is terrific.
And at $3,000, which also happens to be the wire transfer threshold, you don't have to teach the sales outlets another number. That is when you file the report. You get about 40,000 to 60,000 reports a year instead of a million. That seems to work.
And one note, because you might askmaybe you won't ask, but let me presumeand that is there was a lot of discussion in the last panel and the panel before about the effect of this on the New York GTO. I have nothing bad to say about the New York GTO, but picking up on something that Congressman Barr saidand I really think it is right; we make it in our commentsthe GTO was an effective tool when used in New York. It is on the books. Why not use it?
If $750 is a pertinent level to use in a specific case, whether it is Miami, whether it isI am just picking citiesLos Angeles, Phoenix, someplace, it can be used under existing law. Why burden the entire country with a $750 rule that generates one million new reports? It makes no sense.
And, finally, what we see, too, is because of the New York GTO, FinCEN said it, the people said it earlier today, bulk smuggling is increasing. We think Customs needs resources. It is the big trend.
Page 103 PREV PAGE TOP OF DOC And I think I am running over. I am happy to answer any questions.
Chairwoman ROUKEMA. Very interesting testimony, and we are not going to stretch this out.
You referred to Mr. Barr. Before Mr. Barr left, he just asked if there would be any otherto give you an opportunity to address with specificity some of the issues that the other two panels addressed, and you have, to some extent. You anticipated my reference, Mr. Levine, in terms of the GTO, but maybe I misunderstand either your position or the current existing situation.
It was testified to by a previous panel that, with the end of the GTO, we lack adequate regulations. Why can't we reinstate the GTO requirements? You are suggesting that it is there now. It is my understanding that the GTO would have to be reinstated. But why in so limited a way? Why can't we use the experience that was garnered, the successful experience, and apply it at different locations across the country and use that as the basis for closing the loopholes in existing law? We have got to expedite the process, it just seems to me, without overburdening you.
And, by the way, I associate myself with some of the concerns of Mr. Barr. Certainly the fact that you congratulated Mr. Vento and me for our original letter, you know that we don't want to unnecessarily burden the industry. But I have got to be frank with you. I will go over your testimony carefully, but your industry has been accused as really being obstructionist in terms of dealing with the legitimate problems that law enforcement and Treasury are having in terms of setting up new regulatory requirements. There seems to be no other reason for this unjustifiable, in my opinion, unjustifiable delay year after year after year, and your industry is being blamed for that, really.
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I would like to give you the opportunity to respond with specificity to, one, that GTOis that a pattern that we could be using applying more broadly? And, two, how do you respond to those charges that you are the obstructionists in preventing us from developing a national strategy consistent with what law enforcement has already learned?
Yes, Mr. Hemmig.
Mr. HEMMIG. Madam Chairwoman, thank you very much. I do think that perhaps I was unclear on that. But, as it relates to the authorization of the GTO, my assumption is that it is a very effective law enforcement tool; and, in fact, if there is some obstruction from it not being used on a selected basis, I believe it should be removed. That obstruction should be removed, and it should be allowed.
My difference with a national GTO policy is that it gives perhaps so much additional paperwork, and I think Congressman Barr was on to that point there. There have been millions of CTRs filed. There have beenI don't know what the numbers are of SARs that were filed. Our industry complies voluntarily with SARs.
I think there is a certain amount of credibility lost within the industry when we volunteer information and we don't see results. After a period of time, the horse quits drinking out of that water if, in fact, it doesn't get its thirst quenched; and I think there has been some very great disdain on our side on the delay as well.
Back to the GTO. I think that the amount of the level that it is set at is perhaps, as Mr. Levine has said here, has been set a little bit low on a national basis. We would support from an educational standpoint, just trying to convince 25,000 employees that they would be able to understand something that is consistent with BSA; and making that a $3,000 level I think will catch all of the effects you want, allowing the GTO to be used on a targeted basis.
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Chairwoman ROUKEMA. Thank you.
Mr. LEVINE. In response to your inquiry, we have supported all of the rulemakings. All we have said in any of the rulemakings is they ought to be at reasonable levels.
As to registration, we have said privately to FinCEN repeatedly, registration should go forward even if you have problems with the others. This is an easy issue. It is a discrete issue, and there is a Section 408 mandate on this issue. It ought to be done. It was made far more complex than it needed to be. That is my point on that.
And, in fact, the industry submitted to FinCEN probably over a year ago a draft registration form, a form that says, let's do this, let's get on with it, because there is an easy way to do it. In fact, everybody is in favor of it who is in a legitimate industry because it provides another tool for indicting and convicting those people who are illicitly operating and calling themselves MSBs, if you will, which makes
Chairwoman ROUKEMA. And giving you a very bad reputation.
Mr. LEVINE. Precisely. Let me add, too, you know, Section 408, when it was enacted in the MLSA, creates a civil and criminal penalty for those that don't file under 18 U.S. Code, Section 1960. Now, what 18 U.S. Code, Section 1960this came up earlier today about why aren'tand I think you asked some of the Texas representativescan you put people in jail for being unlicensed? Someone did on the panel. Excuse me, I forget.
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But in fact, there is a little-known provision that Justice almost never utilizes that was an amendment to an earlier law by Senator D'Amato a few years ago. 18 U.S. Code, Section 1960, makes it a Federal felony to operate an unlicensed, under State law, money transmitting business. In about six years, there have been about three prosecutionsor four.
Chairwoman ROUKEMA. We will have our legal counsel here look into that, whether or not that was in the final legislation. Sometimes things are put into a Senate or House bill that doesn't end up in the final legislation. Let's look into that. But I believe maybe Mr. Bentsen was questioning the State and Federal component particularly on the basis of Texas' experience.
I thank you very much. If you have further comments specific to this, please address them to myself, Mr. Vento, and Congressman King so that we can take them under due consideration during our deliberations. Because we do expect to follow this through if only for my own intention of pushing forward my bill which can be used as a core. Thank you.
Mr. VENTO. On the registration question, apparently there is concern about redundant registration. Now, I note that you talked about Senator D'Amato's amendment, stating that it was a State registration responsibility. Is what you are proposing to the Treasury on FinCEN an actual Federal registration?
Mr. LEVINE. Section 408 requires actual Federal registration of the Money Laundering Suppression Act. That is the requirement. All I was sayingand let me make this clear
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Chairwoman ROUKEMA. Excuse me. Are you suggesting that it is not being enforced, that it is in the law not being enforced?
Mr. LEVINE. Yes, I am. Yes, it is not being enforced.
The States will often actually use 18 U.S. Code, Section 1960, as a threat to recalcitrant companies who don't want to get licensed and say ''we are going to refer this to the U.S. Attorney.'' Most recalcitrant companies don't realize it is a fairly empty threat because most U.S. Attorneys won't prosecute under 18 U.S. Code, Section 1960.
It concerns us because it is a wonderful weapon to use against the illicit operators.
Mr. VENTO. In terms of the question I thought two of my staff gave me, you know, it made me wonder if members in your group voluntarily participate, that is, reporting over $1,000. They were in New York meeting. If they were members, was this reported? Did they actually report?
Mr. LEVINE. Yes, absolutely.
Mr. VENTO. We talked about the illicit amount of money going through there. I think there is $30 billion, and $9 million was going through in the New York area.
Page 108 PREV PAGE TOP OF DOC Mr. LEVINE. I don't know about those numbers.
Mr. VENTO. I know you don't. Those were not your numbers. Those were the numbers that others presented. But it would seem to argue where you have a problem like in a certain jurisdiction or geographic area that that is where you ought to concentrate your reporting, rather than spreading it out nationwide.
So I think that the question is, how many of these are members of your organizations and groups that voluntarily do this? They talked about 160,000, I guess, without the Post Office boxes, but your organizations probably only have a small number of those. How many are members of your group, the 160,000, what we call money services businesses?
Mr. LEVINE. Most of that numberthe vast majority of that number are retail sales outlets. There are probably in the United Statesand now I am guessingmaybe between 100,000 and 200,000 nationwide outlets, some regional or local, of ''licensees'' under State law to either sell or issue checks or transmit funds. So, in fact, the six companies that are members of the Non-Bank Funds Transmitters Group have in the aggregate probably about 110,000 to 130,000 sales outlets in the United States.
Some of those sales outlets in the case oflet's talk locallyGiant Food may represent both a Western Union and a Moneygram to transmit funds, as well as a separate company like Travelers Express and American Express to provide other services.
Mr. VENTO. That is where you came up with this 97 percent figure that you had in your testimony early-on; is that right?
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Mr. LEVINE. That is right, Mr. Vento. In fact, that comes from the Coopers & Lybrand report. We never really actually calculated that ourselves.
Mr. VENTO. The magnitude of the problem is getting these large institutions to, in fact, you know, try to work with them to see what is workable. Well, I think the fact that the rules are now probablybecause there is this difficulty in terms of trying to address this.
I also would note that, of course, you stridently state that you don't believe that the money transfer and the wire transfer activity is actually increased in terms of this particular area. And, of course, that wasI mean, I tried to draw that out with Treasury a little bit. I didn't want to spend all day on what the numbers were, but they obviously feel strongly, and I think that the work that was done in terms of the GTO, they were focusing on these money services.
Do you have any response? They talked aboutI will give you time. The smurs and some of the other issues heresmurfs, pardon me.
Mr. HEMMIG. I would like to respond to the question on, again, registration. We arethe only thing we are arguing about is duplicity of registration. We believe in registration. We have supported it all along. We wish it would be done.
I want to make myself clear on that. We want to register as agents of Western Union, American Express, Travelers Express because it covers our industry; and that is the issue I wanted to bring out.
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As it related to your question on the GTO
Mr. VENTO. On that point, it seems to me there must be another issue here in terms of being national or State. I think the States, up to this point, have done most of the regulation. There must be a reluctance on the part of us, in other words, going through a duplicative registration simply because through Justice or Treasury for these purposes may be another case. I am sure they want you to do that because they don't want to take over the fundamental regulation of it.
Mr. HEMMIG. It is not State and Federal, but it is dual Federal registration, not Federal and State.
Back to your comment on the GTO, I want to point out that the check cashing industry wasis active in that area of New York and what the GTO put together in the El Dorado event. No check cashing units were involved in that organization. In fact, no arrests, no convictions, no indictments of this industry.
Check cashing is kind of anti-money laundering in itself. We put currency out, take paper in. The opportunity for money laundering is on the sale of money orders or over wire transmission.
We concur with Mr. Levine. The licensed companies that are the majority97 percent is his number of the companies that provide these services, of which we are agents, do a wonderful job of being able to comply and look at the matters in a centralized database that individual operators would have no ability to do. And I think the regulations delve very completely into these areas, and that is where a lot of our complaints are, and the GTO pointed out that our industry is not involved in that.
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Mr. VENTO. Mr. Levine, did you have any comment about the fact they were talking about one individual having 42 accounts in terms of the wire transfers?
Mr. LEVINE. I am sure that is true. I am sure you are going to find, just like you find with banks and insurance companies and brokerage houses, there are bad apples. I am sure you are going to find, particularly in high population density areas
Remember that articlein fact, I have it with mefrom the New Yorker Magazine about Operation El Dorado, about Morningside Heights in Queens in a seven-mile area having a couple of hundred small ethnic money transmitters, many of whom were unlicensed?
I just don't believe that that is typical of the United States as a whole. I believe that, because of the fact that non-bank money transmission is largely concentrated with not only the companies that are members of the Non-Bank Funds Transmitters Group, but some very honest regional and other operationsand even the Treasury and other people today said that most of the vast majority of these MSBs are honest. In fact, what you have is a peripheral element or fringe element or sometimes people are careless.
I don't believe there is any data to show, for example, that there is increasing utilization of MSBs as illicit conduits.
Mr. VENTO. You heard from Mr. Clemmer, the Assistant Attorney General, of course, with regard to Texas. Commented that he could, in fact, select the illegitimate type. Maybe they weren't licensed. Maybe that is the case he was making. There is still a little confusion here about the registration and licensure, and I apologize.
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Mr. LEVINE. Could I address that issue for you and hopefully clear it up? Forty-five States have licensing laws now. They are safety and soundness laws, not anti-money laundering laws.
Chairwoman Roukema, I recently testified in New Jersey in support of the modern new model law, which was adopted by the legislature in New Jersey last year, which covers both funds transmission and payment instruments, but it is a safety and soundness law. You have to show that you can run the business, that you are not a criminal, that you have the wherewithal, that you post permissible investments. That is what that is designed to do.
And, in fact, out there is a huge database of licensees at the various State banking departments in about 45 States, the District of Columbia, Puerto Ricothere are 45 States that have those laws.
Mr. VENTO. I hope we will get it cleared in our own minds before we conclude, Madam Chairwoman. Thank you for your patience.
Chairwoman ROUKEMA. You have been very helpful. I don't know that you have cleared up all the questions, but we have made a good start today. And if I have follow-up questions for you, I will be sure to submit them between now and before the end of these hearings. But I am going to do everything I can to expedite this process. It has gone on for too long, and I want to get everybody working on this together.
I think maybe this hearing today has helped initiate a more cooperative effort. I certainly have more questions to bring back to Treasury; and, as I said, any further follow-up questions I will be sure to consult with you about.
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And then you, I am sure, will be following our hearing next week where we will be discussing the privacy questions. When you talk about generalities, it is easy, but when you get down to specificsas Mr. Vento and I learned, it needs a little more discrimination. So we shallyes, persist. That is the word. We are persistent, if nothing else.
Thank you very much.
Mr. HEMMIG. Thank you.
Mr. LEVINE. Thank you.
[Whereupon, at 1:45 p.m., the joint subcommittee hearing was adjourned.