SPEAKERS CONTENTS INSERTS
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BANK SECRECY ACT REPORTING REQUIREMENTS
TUESDAY, APRIL 20, 1999
U.S. House of Representatives,
Subcommittee on General Oversight and Investigations,
and the Subcommittee on Financial Institutions and Consumer Credit,
Committee on Banking and Financial Services,
The subcommittees met, pursuant to notice, at 2:07 p.m., in room 2128, Rayburn House Office Building, Hon. Peter King, [chairman of the Subcommittee on General Oversight and Investigations], and Hon. Marge Roukema, [chairwoman of the Subcommittee on Financial Institutions and Consumer Credit], presiding.
Present: Chairman King, Chairwoman Roukema; Representatives Barr, Paul, Hill, Terry, Sanders, Vento, C. Maloney of New York, Bentsen, Sherman, Goode, Mascara, Inslee, Moore, Gonzalez, Waters, and Velazquez.
Chairman KING. The hearing will come to order.
Good afternoon. I would like to welcome you to the second joint hearing on money laundering conducted by the Subcommittee on General Oversight and Investigations and the Subcommittee on Financial Institutions and Consumer Credit, chaired by Congresswoman Roukema. I would like to thank Chairwoman Roukema and Ranking Minority Members Bruce Vento and Bernie Sanders for their continuing leadership on this important issue.
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Today the subcommittees will be examining the Bank Secrecy Act and subsequent legislation which requires the filing of specific reports for certain financial transactions. As we know, the explosion in information technology has proved to be both a curse and a blessing. For instance, many people feel their privacy has been violated by this information technology. I believe that this mixture of beliefs, as to whether or not this is a curse or a blessing, explains the tremendous negative public reaction to the proposed ''Know Your Customer'' regulations, which were withdrawn last month.
Today, however, we consider the effectiveness and necessity of the Bank Secrecy Act of 1970, or BSA, which is a totally separate issue from ''Know Your Customer.'' It is our job today to carefully balance two critical goals. First we must ensure that law enforcement has the necessary tools to track down and punish narco-profiteers who create vast fortunes by stealing the lives of our young people. But we must also respect individual privacy.
Last year, financial investigations conducted by the U.S. Customs Service, based on reports made pursuant to the BSA and the Money Laundering Control Act of 1986, yielded $362.9 million in seized drug money. Customs made over 1,000 arrests based on that information. And that is just one agency's total for 1998. The DEA, FBI, and other agencies, as well as State law enforcement, used transaction reports to take billions of dollars from narco-terrorists in 1998.
We have invited two panels of distinguished witnesses today, representing both sides of this important debate. I will introduce the members of the panels after we have opening statements from the other Members who are here today.
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Mr. Sanders has not yet arrived, so I will ask Mr. Vento.
Chairwoman ROUKEMA. All right. I thank you, Chairman King. I am somewhat constrained to try to keep my comments short, particularly given your nice example here, but I do have a few things that I must say. I do welcome this panel here today.
As you quite correctly noted, we had our first hearing last week and had excellent testimony regarding how law officials go about their new ways to deal with money laundering. And, of course, money launderers, as we have learned, have moved out of the banks, but there appears to beobviouslya significant amount of currencysome estimates up to $30 billionsmuggled every day out of the United States.
And I would like to make mention here specifically of the bill that I have introduced, H.R. 240The Bulk Cash Smuggling Act of 1999. This bill is meant to address some of these problems. It criminalizes the smuggling of cash or currency in excess of $10,000. Prison terms for smugglers are authorized. I don't want to go into the whole piece of legislationbut I do want to stress today that it was identified by people on our panel last week as getting strong support from the Treasury, the Justice Department, and Customs at our hearing last week. And I would assume and hope that, to whatever extent necessary, that our witnesses today address this legislative proposal. I don't know that it's complete in and of itself. Maybe we should be using my bill as a basis to expand the way we address the MSBs.
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We had excellent testimony on the way our departments are dealing with enforcing the law, but they do, obviously, need more tools. We know that the problem is an extensive one. We had good testimony on the success and the extra needs last week. I also would like to point out your reference to the ''Know Your Customer'' regulations and financial privacy. The KYC rules were withdrawn. This produces a very difficult situation. It is more than a balancing act, although I have used that terminology. The result is a conundrum here that we have to deal with in a realistic way.
Now I want to protect privacy. But I also do not want that to be used as a ruse or a means of avoiding the need for the legitimate legislation and genuine tools for the departments, whether it be Treasury, Justice Department, or Customs, to come to terms with this money laundering problem.
The money laundering problem is really very basic. It deals in very real ways with our whole drug problem, but it also deals in ways with avoiding tax laws, and so forth. I am hopeful that this testimony here today will give us greater insight as to how we balance these competing concerens. But I must say that the privacy issue should not be used as a way of avoiding the drug issue and protecting those that are destroying our communities and breaking the laws.
With that, I thank you, Mr. Chairman.
Chairman KING. Thank you, Chairwoman Roukema.
Page 5 PREV PAGE TOP OF DOC Now I am pleased to recognize the Ranking Member of the General Oversight and Investigations Subcommittee, Mr. Sanders.
Mr. SANDERS. I thank you, Mr. Chairman. I am going to have to apologize in advance for leaving soon for another prescheduled commitment, but I want to thank you and Chairwoman Roukema for holding this important series of hearings on money laundering. It is a very important issue.
The significance of today's hearing is to discuss how to balance the Federal Government's obligation to fight money laundering with the constitutional obligation to allow financial institutions to protect the privacy of consumer financial records. And that is not an easy balance to establish, but that is what we have got to work on.
It is important for public confidence in the financial sector that banks maintain a greater level of privacy. It is important for a citizen's confidence in our criminal justice that we have effective measures in place to combat the laundering of funds used to finance criminal operations. And I think that we can all recognize that all of us have a difficult job in front of us in balancing both of these needs.
Congress has the tough job of finding the right statutory balance between law enforcement and personal privacy. The Executive Branch has the equally tough task of constructing regulations that reflect and implement that balance. And the banks have perhaps the most difficult job of all. The banks must bring that balance into effect, recognizing their own dual statutory and regulatory responsibility of fraud prevention and data protection.
Page 6 PREV PAGE TOP OF DOC Those of us in the Government must be willing to accept criticism of the current anti-money laundering statutes and reporting requirements, but all of us here today must be aware that the United States must have strict requirements in place in order to combat money laundering used by organized crime, syndicates, drug dealers, and terrorists. We must be cognizant that, just as a lack of consumer privacy can erode confidence in our financial sector, that confidence can just as easily be eroded by a financial sector that ignores fraud and corruption. Thank you, Mr. Chairman.
Chairman KING. Thank you, Mr. Sanders.
I am also privileged to welcome today our colleague, Ms. Velazquez. Do you have a statement?
Ms. VELAZQUEZ. No, I don't, Mr. Chairman. Thank you.
Chairman KING. I will go to our first panel of witnesses. We are pleased to have with us today Treasury Under Secretary James Johnson. Under Secretary Johnson oversees all Treasury law enforcement operations and personnel. Also we will welcome back todayshe also testified last weekfrom the Department of Justice, Deputy Assistant Attorney General Mary Lee Warren. Ms. Warren is a seasoned veteran of the war on drugs. She was a chief of both the Narcotics and Dangerous Drug Section of Justice as well as the Narcotics Unit of the U.S. Attorney's Office in the Southern District of New York.
Also testifying again is Bonni Tischler of the U.S. Customs Service. Ms. Tischler heads up the Customs Services Office of Investigation and testified last week at our first joint hearing. And, representing the Federal bank regulators, Mr. Richard Small, from the Federal Reserve, and Mr. Christie Sciacca of the FDIC.
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Certainly we in Congress cannot properly consider this issue without the benefit of their insight into the industry and their expertise. So we will begin with Mr. Johnson. I welcome you.
STATEMENT OF JAMES E. JOHNSON, UNDER SECRETARY, ENFORCEMENT, DEPARTMENT OF THE TREASURY
Mr. JOHNSON. Thank you, Mr. Chairman.
Chairman King, Chairwoman Roukema, Ranking Members, Congressman Sanders and Mr. Vento and all Members of the General Oversight and Financial Institutions subcommittees, good afternoon. I welcome the opportunity to discuss today a critical issue facing law enforcement: the role of the Bank Secrecy Act in the fight against financial crimes, particularly money laundering.
I have submitted a longer statement which I would ask, Mr. Chairman, if you would have that submitted for the record.
Chairman KING. Without objection.
Mr. JOHNSON. And, with your permission, I would summarize and then make myself available to discuss these issues with the subcommittees further.
Combating money laundering is a key law enforcement priority within the Treasury Department and within the Administration. Secretary Rubin has often noted that criminals will try every means to separate themselves from their illegal operations but they cannot, will not, separate themselves from their illegal profits. These profits are both the root and the fuel for organized crime; for the drug traffickers, the tax cheats, the fraudsters, as well as the terrorists.
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As both Chairs noted last Thursday, money laundering is the life blood of the criminal organizations that flood our streets with illegal drugs and guns and enables the financial crimes to go forward, the tax code to be violated; it enables the fraudster to thrive. The financial underpinnings of these organizations and these individuals provide a powerful point of attack. To those who suggest that we return to the days before the Bank Secrecy Act, before the BSA, before currency transaction reports were required, before Suspicious Activity Reports were authorized, I say this: We cannot risk a return to the days when criminals could stroll into our financial institutions with bags full of cash to be laundered to be used to fuel their continuing criminal schemes.
I thank the Members of both subcommittees for their longstanding support of the BSA as a powerful law enforcement tool and a safeguard for the integrity of our financial institutions. The BSA's value lies in its capacity to address each of the three stages of the money laundering process: The ''placement'' stage, which is the first stage: This is a stage in which funds are introduced into the financial system in order to move them away from direct association with the crime that generated them; The ''layering'' stage, stage two, involves complex financial transactions to disguise the origin, ownership, and destination of the funds. It is designed to foil pursuit. And the ''integration'' stage, stage three, in which the money is made available to the criminal once again with its criminal origin hidden from view.
Our comprehensive attack on money laundering is built upon the foundation provided by the BSA which, among other things, authorizes the Secretary of the Treasury to require financial institutions: A, to keep adequate records to ensure that the details of financial transactions can be traced when necessary; B, to report on large-scale transactions in currency; and C, to report on suspicious activities. Building on this foundation over the last five years weand by we I mean the Treasury Department, our partners in the Justice Department, our partners in the regulatory communityhave made tremendous strides.
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In the last year alone, for example, the IRS Criminal Investigative Divisionwhich, Mr. Chairman, is a division that I don't personally oversee, but I am involved withinitiated a total of 1,059 money laundering investigations. The total provable amount of money laundered in those cases amounted to approximately $1.6 billion. The IRS Criminal Investigation Division seizures in 1998 amounted to $120 million. For their part, the United States Customs Service had seizures in 1998 that amounted to $426.6 million. These enforcement activities, in turn, helped increase the risk in costs associated with money laundering. Anecdotal evidence from Customs and IRS informants indicates that the fees paid by money launderers to casas de cambio have increased by approximately 4 percentage points from 1.5 percent to approximately 5 percent. We have increased the cost of their doing business.
Notwithstanding these successes, our efforts must continue. As the Office of National Drug Control Policy reports in its National Drug Control Strategy for 1999, Americans spend on the order of $57 billion each year on illegal drugs alone. That is an estimation. Law enforcement experts have estimated that illicit drug traffickers enjoy a profit margin of approximately 80 percent. Assuming these figures, that would lead to a range of approximately $45 billion to $48 billion in narcotics profits.
With these profits in hands, criminals have at their immediate disposal the best tools that money can buy: the latest in computer communications and banking technology and high-priced professional talent. This presents a tremendous law enforcement challenge. The BSA helps us level the playing field.
For nearly 30 years, the BSA has provided an important foundation for our efforts. The Currency Transaction Reports, the CTR; the Currency and Monetary Instrument Report, known as the CMIR; and Suspicious Activity Report requirements are vitally important to our ongoing anti-money laundering mission. Without the BSA and the information it provides, law enforcement would have neither the resources nor the authority required to obtain the information needed to effectively combat money laundering and other financial crimes.
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Through the BSA reporting system, an effective partnership has been formed between law enforcement and financial institutions, our most effective allies in the fight against money laundering. Without this partnership, we could lose the essential paper trails that law enforcement needs to chase down these criminals. We would lose many of the protections for the integrity of our financial institutions.
In my written testimony, I describe several cases which demonstrate the value of the BSA to law enforcement, to prosecutors, and to investigators, including Operation Casablanca, the largest drug money laundering investigation in United States history. In these cases, BSA information was used to help illuminate the financial activities of criminals and to complement other investigative techniques. BSA reporting also helps keep financial institutions free of criminal money and enhances their ability to detect illegal activity directed at those institutions.
Suspicious Activity Reports also help law enforcement in investigations. In Fiscal Year 1997, for example, the FBI reported that approximately 98 percent of the 2,536 convictions in financial institution frauds came from SARs, Suspicious Activity Reports.
The Bank Secrecy Act also provides an important deterrent effect that pushes criminals to other money laundering methods. One of the lessons of the Geographical Targeting Order that resulted from Customs' El Dorado Task Force was that, with that order in place, money launderers were forced toward bulk cash shipments and the result was a large increase in illegal out-bound cash seizures and related arrests by the United States Customs Service.
Page 11 PREV PAGE TOP OF DOC Now in the wake of the withdrawal of the ''Know Your Customer'' rule, it is important to distinguish between the proposed ''Know Your Customer'' rules and the existing BSA rules. The Bank Secrecy Act's Currency Transaction; Currency or Monetary Instruments report; and suspicious activity reporting requirements are narrow, applying only to information held by financial institutions. The SAR rules require the reporting only of particular transactions that a bank should know or have reason to suspect are involved in an illegal activity. The SAR rule does not require that a bank examine the affairs of every customer.
The ''Know Your Customer'' proposed rules, in contrast, could have been viewed as far more intrusive. They would have required the implementation of a baseline for determining if a given customer's affairs varied from the norm. They would have required systems to determine the identity of new customers. They would have required monitoring of customer transactions to identify those that are inconsistent with the norm for that customer. They would have required more internal controls and testing. These requirements go beyond the bounds of the BSA.
I am aware that concerns have been raised about the privacy implications of the Bank Secrecy Act. It is not enough simply to state that its provisions have been found by the Supreme Court to be constitutional. Of course that doesn't end the discussion, as the Right to Financial Privacy Act illustrates.
I want, however, to emphasize three things. First, the Department of the Treasury recognizes the absolute necessity for a citizens' faith in the legitimacy of the financial system in all of its aspects, including the protection of financial information from misuse of any sort. Second, BSA information is limited to specific categories set by statute, based on law enforcement experience. Third, the data received by Treasury under the BSA is held in secure form and open for use only by criminal and regulatory officials and for use in the course of investigations and discharge of their legal responsibilities. In the BSA regulations, we have struck the right balance between the needs of law enforcement and the interests of the banking public in privacy.
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In closing, I thank the subcommittees, Mr. Chairman, Madam Chairwoman, for your support and for your indulgence of the length of my statement. And I will gladly answer any questions.
Chairman KING. Thank you very much, Mr. Johnson.
And Ms. Warren.
STATEMENT OF MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE
Ms. WARREN. Chairman King, Chairwoman Roukema, Ranking Members and Members of the subcommittees, I am pleased to return for this opportunity now to discuss the importance to law enforcement of the recordkeeping and reporting requirements of the Bank Secrecy Act and the Suspicious Activity Report system. I request acceptance of my written statement into the record.
Chairman KING. Without objection.
Ms. WARREN. From the Department of Justice's perspective, both from headquarters and in the field, I want to underscore the enormous importance these recordkeeping and reporting mechanisms play in our money laundering and financial crimes investigations and cases. I will highlight some of the steps we and the Treasury law enforcement components are taking to ensure that we obtain the maximum advantage from this data and offer some specific instances of the successful use of the information in real investigations and cases.
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Those who engage in financial crime and money laundering necessarily corrupt, distort, and use for their criminal purposes the legitimate functioning of financial systems. Although they try to proceed in secret, each of their criminal activities leaves a tell-tale trail. The purpose of the BSA recordkeeping and reporting requirements and the SAR reporting requirements is to ensure that those indicia of illicit conduct are recorded, reported, and made available to law enforcement and regulators to initiate investigations to corroborate ongoing investigations and to be available, over time, for future investigations.
Merely criminalizing financial crimes and money laundering is not enough. Any nation serious about detecting, investigating, and prosecuting these crimes and seizing and forfeiting the proceeds and instrumentalities of such criminal conduct must establish such a regime of recordkeeping and reporting. Indeed, we in the United States judge the political will of other nations, in part, by their recordkeeping and reporting regime. These requirements are basic tenets of international anti-financial crimes and money laundering standards, such as those contained within the 40 recommendations of the 26-nation Financial Action Task Force.
These requirements not only alert Federal, State, and local law enforcement to possible criminal violations, but also serve to protect the safety and soundness of the reporting financial institutions themselves. The SAR system is critical to our efforts in identifying instances when the financial institutions themselves are victimized through fraud and related abuses. It is clear that SARs will become ever more important to our anti-financial crime and money laundering efforts as the availability of CTR exemptions is expanded.
Money laundering schemes are successful as long as they go undetected. SARs are filed for individual suspicious financial transactions. Following the leads provided in SARs allows law enforcement to identify the abuse of financial institutions and, eventually, the underlying crime. Without those leads, much of that activity would continue unchecked. Whatever the nature of the underlying criminal activity, the entities in the best position to bring this activity to the attention of law enforcement are the financial institutions with whom the money launderers are forced to deal. And law enforcement has responded and is responding to these alerts that a financial institution knows or has reason to suspect any of the untoward listed circumstances that prompt the filing.
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As the Under Secretary mentioned, the FBI, in its Financial Institutions Fraud Unit initiated or enhanced 98 percent of its investigations by the use of SARs. In addition, that kind of information led, in the end, just in the last fiscal year, to the return and restoration of $490 million to the victims of those frauds. U.S. investigators, prosecutors, and regulators sift through the data, extract the most valuable nuggets, and initiate new or corroborate ongoing investigations.
From the outset, when SAR reporting was announced in April of 1996, its use on an interagency basis was apparent. In 1997, prosecutors from 20 major districts throughout the country met together in a Treasury and Justice conference on anti-money laundering. One of the important recommendations out of our conference was that each district should establish a SAR review committee.
Let me offer, by way of illustration, a few cases in point where SAR review teams have succeeded. First, in New Jersey. Once a month, a task force there chaired by a senior, very experienced assistant United States Attorney evaluates the SARs that were filed in that month. Whether the SAR implicates a possible BSA violationand about 40 percent of them do so indicateand whether it lists a New Jersey zip code.
The members of that task force are drawn from six investigative agencies, from the U.S. Attorney's Office and from the IRS District Counsel's office. Prior to the monthly meetings, they are given samples of the SARs for review and, at the meeting, discuss the potential for investigation, particularly working in a task force way. The New Jersey process has led to many successful prosecutions, including a series of Medicaid fraud cases and several significant narcotics money laundering cases.
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In San Diego, there is a similar procedure ongoing and, each month, their committee reviews the SARs, typically about 100 per month. They have been very successful in identifying leads helpful to ongoing investigations, as well as prompting the initiation of new investigations.
The El Dorado Task Force, with which the subcommittees are well familiar, has had stunning success and, not surprisingly, the task force has relied on this kind of reporting data.
My written testimony includes a number of success stories drawn from all parts of the country. The underlying crimes run the gamut: narcotics, white collar crime, and frauds against the financial institutions, all instances where BSA and SAR data were instrumental either in initiating or enhancing the value of investigations. This list is, of course, only a sampling of how helpful this data is.
I would like to conclude by again expressing the appreciation of the Department of Justice for the continuing support that the subcommittees have demonstrated for our anti-money laundering and asset forfeiture activities. For our part, we pledge to continue to take fullest appropriate advantage of this information in all kinds of cases; not just narcotics and fraud cases, but in every available area of criminal activity that generates illegal proceeds, often at the expense of some of our most vulnerable citizens. It is essential that this data remain available to law enforcement and not be cut back. Thank you very much.
Chairman KING. Thank you, Ms. Warren.
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STATEMENT OF BONNI G. TISCHLER, ASSISTANT COMMISSIONER, OFFICE OF INVESTIGATIONS, U.S. CUSTOMS SERVICE
Ms. TISCHLER. Chairman King, Madam Chairwoman Roukema, Members of the subcommittees, good afternoon. I am pleased to join my colleagues today in a discussion on the importance and role the Bank Secrecy Act, or BSA, as it applies to our continuing efforts to disrupt global money laundering.
The U.S. Customs Service has a broad grant of authority in the conduct of international financial crime and money laundering investigations. Customs efforts are not limited to drug-related money laundering, but to the proceeds of all crime under our jurisdiction. Jurisdiction is triggered by the illegal movement of criminal funds, services, or merchandise across our national borders and is applied pursuant to the authority under the Bank Secrecy Act and the Money Laundering Control Act.
The BSA is an important tool to law enforcement, particularly to the Customs Service, in conducting money laundering investigations. The audit trails established by the Currency and Monetary Instruments Report, or CMIR, and the Currency Transactions Reports, or CTRs, afford us the opportunity to trace the movement of funds, especially across our borders.
BSA data is utilized at all stages and in all facets of the investigative process. BSA information is used to initiate cases, enhance ongoing investigations by providing corroborating evidence and identifying additional bank accounts, assets, and conspirators. BSA data can be used to establish knowledge of the CMIR reporting requirements. Historical information that is captured on CMIRs or CTRs is used to support ongoing criminal investigations.
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BSA information was used during Operation Casablanca. During that investigation, approximately 80 Suspicious Activity Reports, or SARs, were found to be related to the investigation. And, in addition, Customs special agents and analysts used the information from CTRs to further identify subjects and assets linked to the overall conspiracy.
The Customs Service conducts a myriad of investigations including drug smuggling, child pornography, and illegal export investigations. BSA data is used in many of them.
For example, in February 1999, our Dallas office concluded an investigation of an organization involved in the interstate transportation of stolen baby formula that had been repackaged in counterfeit boxes. An analysis of computerized financial records yielded numerous suspicious CTRs that were filed by various banks. The records revealed that some of the proceeds generated from the sale of the stolen merchandise were, in fact, laundered through financial institutions in the Middle East. This investigation resulted in a 154-count indictment, charging 14 individuals with numerous Federal offenses, including money laundering.
Customs also uses BSA data to identify and target assets owned by criminal organizations. One of the key elements to the Customs anti-money laundering strategy involves the use of Asset Identification and Removal Groups or AIRGs. These groups are comprised of special agents, auditors, and data analysts whose sole purpose is to identify, target, and seize the assets of criminal organizations. In the past three years, these groups have seized over $296 million dollars in ill-gotten gains.
The Customs Service has developed analytical software which has the ability to manipulate import-export trade data, BSA data, and law enforcement databases. Using this system, Customs is able to determine anomalies, trends, and suspicious activities occurring in international commerce.
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Currently we are using the data to focus on the Black Market Peso Exchange. The BMPE utilizes international trade mechanisms to facilitate the movement of illegally generated proceeds. It is designed to maneuver around the currency reporting requirements of the BSA and is one of the most efficient and extensive money laundering systems in the Western Hemisphere. As reported to this committee in the last Congress, it is estimated that the BMPE launders $4 billion in drug monies per annum and has become embedded into international commerce.
The tools contained within the BSA, such as the SARs, are important notifiers to law enforcement entities of suspected illegal activity. Timely notification is particularly important in cases involving advance fee schemes and other fraudulent schemes where there are identifiable victims. Many times, these victims, who are often elderly, would have no hope of restitution or other means of recouping their money were it not for the Customs Service and other law enforcement entities using BSA data to track down and seize that stolen money.
Virtually all of Customs investigations involving advanced fee or prime bank note schemes are initiated from information retrieved from a SAR. Our New York office has begun a number of cases involving these schemes. Customs there has arrested 21 people and recovered over $61 million in money that was stolen in these schemes.
It is the Bank Secrecy Act which gives the Treasury Department the authority to impose a Geographic Targeting Order. As these subcommittees are well aware, it was the New York GTO, which was applied in 1996, that put a spotlight on the corruption of money services businesses by Colombian and Dominican drug trafficking organizations. The GTO was issued as a result of Customs investigations in New Jersey and New York which showed that the twelve originally-targeted money services businesses were responsible for wiring over $800 million to Colombia. To account for that figure in legitimate funds, each Colombian household in New York would have had to send $30,000 to Colombia each year. Interestingly enough, the average Colombian household in that area earned only about $27,000 per year.
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Operation Wiredrill, which operated under the auspices of the Customs-led El Dorado Task Force, conducted investigations stemming from that GTO. Through March of this year, Wiredrill has been responsible for 137 arrests, 83 indictments, 59 convictions, and the seizure of over $13 million in cash and bank accounts.
It is important to note that the Customs Service carefully safeguards BSA information, which is only disseminated for law enforcement purposes. BSA information is available to Treasury law enforcement through the Treasury Enforcement Communications System, or TECS. Access to TECS is strictly limited and monitored. Customs keeps a manual log of the dissemination of BSA data to other than Treasury law enforcement agencies that do not have access to the information via TECS.
Absent the reporting requirements under BSA, there would be no audit trail for illicit, anonymous cash. Thank you very much for the opportunity to appear before your subcommittees today. I would be happy to answer any questions at the appropriate time.
Chairman KING. Thank you very much, Ms. Tischler.
And Mr. Small.
STATEMENT OF RICHARD A. SMALL, ASSISTANT DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Page 20 PREV PAGE TOP OF DOC Mr. SMALL. Mr. Chairman, Madam Chairwoman, Members of the subcommittees, I am pleased to be here today to discuss the Federal Reserve's role in the Government's efforts to detect and deter money laundering and other financial crimes, with a particular emphasis on matters related to the Bank Secrecy Act and suspicious activity reporting. I will summarize my written statement, which has already been submitted for the record.
The Federal Reserve has a longstanding commitment to combating money laundering and ensuring compliance with the Bank Secrecy Act and related suspicious activity reporting requirements by the domestic and foreign banking organizations that it supervises. Compliance with the Bank Secrecy Act and suspicious activity reporting requirements by financial institutions provides timely and valuable information to law enforcement and is the best indicator of the existence of satisfactory anti-money laundering and anti-fraud policies and procedures.
Over the past several years, the Federal Reserve has been actively engaged in the Government's efforts to deter money laundering through financial institutions by, among other things, redesigning the Bank Secrecy Act examination process, developing anti-money laundering guidance, regularly examining the institutions we supervise for compliance with the Bank Secrecy Act and relevant regulations, conducting money laundering investigations, providing expertise to the U.S. law enforcement community for investigation and training initiatives, and providing training to various foreign central banks and Government agencies.
In addition, ten years ago the Federal Reserve stated its own anti-money laundering program and appointed a senior official to coordinate the Federal Reserve's activities in this area. In 1993, the Federal Reserve established a special investigative unit with responsibility for, among other things, the oversight of the Federal Reserve's anti-money laundering program. However, we have long felt that banking organizations and their employees are the first and strongest line of defense against money laundering and other financial crimes. As a result, the Federal Reserve emphasizes the importance of financial institutions putting in place controls to protect themselves and their customers from illicit activities.
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Congress, too, has long recognized that a banking organization's best protection against criminal activities is its own policies and procedures designed to identify and then reject illegal or damaging transactions. In 1986, Congress passed a law mandating that the Federal Reserve and other Federal banking agencies issue regulations requiring domestic and foreign financial institutions to establish and maintain internal procedures designed to assure and monitor compliance with the Bank Secrecy Act.
To understand and properly evaluate the effectiveness of a banking organization's Bank Secrecy Act-related controls and procedures and compliance with the Board's rules issued pursuant to congressional mandate, the Federal Reserve has developed comprehensive examination procedures and manuals. In November of 1997, the Federal Reserve issued newly revised risk-focused Bank Secrecy Act examination procedures. These enhanced examination procedures specifically address anti-money laundering compliance. The examination procedures take a multi-stage ''top down'' approach.
During every examination of a State member bank and a U.S. branch or agency of a foreign bank supervised by the Federal Reserve, specially trained examiners review the institution's previous and current compliance with the Bank Secrecy Act. Examiners first determine whether the institution has included the anti-money laundering procedures in all of its operational areas and has adequate internal audit procedures to detect, deter, and report money laundering activities, as well as other potential financial crimes. This is done through a review of the institution's written compliance program and documentation of self-testing and training, as well as through a review of the institution's system for capturing and reporting certain transactions pursuant to the Bank Secrecy Act, including any suspicious or unusual transactions possibly associated with money laundering or other financial crimes.
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Before I describe how the Federal Reserve uses Suspicious Activity Reports the other Bank Secrecy Act reports, some background information regarding the new suspicious activity reporting system would be useful.
In 1985, the five Federal financial institutions' regulatory agencies developed substantially similar, but not uniform procedures and forms, then known as the criminal referral process, to be used by all financial institutions operating in the United States to report known or suspected criminal law violations. The introduction of the concept of a criminal referral form was the result of efforts of the Interagency Bank Fraud Working Group which has been addressing the problems of combating white collar financial institution crime since 1984.
The use of the forms and the attendant reporting procedures, which were jointly developed by the banking and criminal justice agencies participating in the working group, enabled financial institutions and the banking agencies to report all instances of suspected criminal activities to the appropriate law enforcement and supervisory authorities.
Beginning in 1994, the Federal Reserve participated in an interagency effort to completely redesign the criminal referral process for banking organizations. The result of this effort is the existing Suspicious Activity Reports. The new Suspicious Activity Reports became effective on April 1 of 1996 for all banking organizations operating in the United States and subject to the jurisdiction of the five Federal banking agencies and FinCEN.
You asked whether Bank Secrecy Act and Suspicious Activity Report information has been beneficial to the Federal Reserve's supervisory and enforcement initiatives. The simple answer is that such information has been valuable and has led to numerous supervisory actions addressing wrongdoing by banking organizations and persons associated with them. Federal Reserve staff reviews Suspicious Activity Reports and Currency Transaction Reports filed by banking organizations supervised by us. Our purpose in conducting reviews of Suspicious Activity Reports is to identify for further investigation potential problems that would normally not be detected during the course of an examination, but have been reported by a financial institution as being suspicious. Likewise, we receive Currency Transaction reports before we conduct Bank Secrecy Act examinations in order to better focus the scope of the examination and, when necessary, to more precisely target problem areas.
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While the Federal Reserve's investigative initiatives resulting from our review of these reports are not public and cannot be discussed here, two recent events involving large banking organizations supervised by the Federal Reserved involved public court proceedings or reported cases where the organizations' Suspicious Activity Reports were disclosed. For this reason, I am able to provide some detail about how the Federal Reserve staff used the information filed by the banking organizations.
As the result of a Suspicious Activity Report filed by Bankers Trust, the Federal Reserve conducted a targeted review of certain activities of the bank involving escheatable funds. After our inquiry, staff worked extensively with Federal investigators and prosecutors and the result was the recent guilty plea by Bankers Trust and the imposition of a $60 million fine.
Similarly, a Suspicious Activity Report containing information of suspected criminal activity by a BankBoston official led to the discovery that the individual apparently defrauded BankBoston out of more than $73 million. After reviewing the circumstances surrounding the official's actions, the Federal Reserve sought and received Federal court orders freezing all of the individual's U.S. assets. We are continuing to work with law enforcement authorities during the course of their criminal investigation on this matter. Additionally, on several occasions, the Federal Reserve has commenced enforcement actions against individuals as the result of information first reported in a Suspicious Activity Report.
Currency transaction information provided to the Government pursuant to the Bank Secrecy Act has also been a valuable asset to the Federal Reserve's enforcement function. A Federal Reserve investigation that in large part relied on information reported pursuant to the Bank Secrecy Act, led to the conviction of Bangkok Metropolitan Bank for criminal activity related to money laundering and fraud. This foreign banking organization subsequently was ordered by the Federal Reserve to cease all operations in the United States. Similarly, Bank Secrecy Act information was used during the Federal Reserve's involvement with the recently completed Operation Casablanca investigation.
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In addition to the Federal Reserve's efforts to develop appropriate anti-money laundering and anti-fraud related policies and procedures for the domestic and foreign financial institutions that we supervise and our examination for compliance with those policies and procedures, staff of the Federal Reserve has taken an active role among Federal bank supervisors in the law enforcement community's battle to deter money laundering by providing expertise for law enforcement initiatives and training to various Government agencies.
As bank supervisors, the Federal Reserve believes that it is necessary to take reasonable and prudent steps to assure that banking organizations are not victims of, and also do not knowingly participate in, illicit activities such as money laundering or other financial crimes. For this reason, and to support our law enforcement agencies in their efforts to combat money laundering and other financial offenses, the Federal Reserve's commitment to ensuring compliance with the Bank Secrecy Act and suspicious activity reporting requirements continues to be a high bank supervisory priority. The Federal Reserve has an important role in ensuring that criminal activity does not pose a systemic threat, and, as importantly, in improving the ability of individual banking organizations in the United States and abroad, to protect themselves from illicit activities. Both the Bank Secrecy Act and suspicious activity reporting requirements are vital to the continued effort of the Federal Reserve and the Government as a whole to combat illicit activities through the financial system.
Chairman KING. Thank you, Mr. Small.
Page 25 PREV PAGE TOP OF DOC And Mr. Sciacca.
STATEMENT OF CRISTIE A. SCIACCA, ASSOCIATE DIRECTOR, DIVISION OF SUPERVISION, FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. SCIACCA. Thank you, Chairman King, Chairwoman Roukema, Ranking Member Vento, and Members of the subcommittees. I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation on the Bank Secrecy Act and the bank reporting requirements.
The FDIC insures the Nation's 10,483 banks and savings institutions. It is the primary Federal supervisor of 5,853 State-chartered banks that are not members of the Federal Reserve System. My statement first provides some background on the Bank Secrecy Act itself and the FDIC's role in its enforcement. Next I will address the question of reporting by the banking industry.
The FDIC is well aware of the sometimes competing public policy issues raised between financial privacy and combating financial crimes by statutory requirements that the banking system report suspicious activity. Our recent experience with the ''Know Your Customer'' proposal was strong evidence that the American public values its financial privacy. The public is rightfully skeptical of the Government employing efforts to attack the problem of illegal financial activity through rules that may infringe upon the privacy of all individuals. We confirmed through the ''Know Your Customer'' proposal and the rulemaking process that the public's relationship with financial institutions is based on trust, and the Government must be cautious about adopting rules that might upset that trust.
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The integrity of the Nation's banking system is also rooted in confidence. Confidence between a financial institution and its customers is what enables banks and other financial institutions to attract and retain legitimate funds from legitimate customers. Illegal activities such as money laundering, fraud, and other transactions designed to assist criminals in illegal ventures pose a serious threat to the integrity of financial institutions and, therefore, the public's confidence in the banking system. Maintaining confidence in the Nation's banking system is the mission of the FDIC.
Highly publicized cases involving money laundering demonstrate the importance of Federal supervision and bank vigilance in this area. While it is impossible to identify every transaction at an institution that is potentially illegal or involves illegally obtained money, financial institutions must take reasonable measures to identify such transactions in order to ensure their own safe and sound operations and their reputations.
In October of 1970, Congress enacted the statute commonly known as the Bank Secrecy Act, or BSA. The BSA authorized the Secretary of the Treasury to require banks to report cash transactions over $10,000 to the Department of the Treasury. In addition, the BSA requires financial institutions to keep records that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters and to implement programs and compliance procedures to counter money laundering. Vigorous enforcement of the BSA requirements, beginning in the early 1980's, coupled with the criminalization of money laundering by the Money Laundering Control Act of 1986, have resulted in the filing of a large number of Currency Transaction Reports. In 1992, the Annunzio-Wylie Money Laundering Act broadened the reporting requirements by authorizing the Secretary of the Treasury to require any financial institution and its officers, directors, employees, and agents to report suspicious transactions relevant to a possible violation of law or regulation.
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Pursuant to authority in the Federal Deposit Insurance Act and the BSA, as amended by the Annunzio-Wylie Money Laundering Act, the FDIC, along with the other Federal financial institution regulatory agencies, adopted regulations requiring banks and savings institutions to establish and maintain procedures to monitor their compliance with the BSA.
Interagency examination procedures were developed for examiners to determine bank compliance. At each safety and soundness examination, FDIC examiners review a bank's BSA program and compliance procedures. Based on our experience with State chartered non-member banks, compliance with the BSA has substantially improved in the last ten years. Many of the violations are isolated and most appear to be technical in nature. Many of the violations appear to result from a misunderstanding of the CTR reporting exemption rules.
We do not believe that filing CTRs has created an undue burden on financial institutions. Most computer systems readily identify transactions that may be subject to the reporting requirements and many systems automatically generate CTRs that are ready for filing.
The BSA is a vital component of the United States' anti-money laundering efforts. The statute and its implementing regulations work because of the necessary cooperation between the Government and financial institutions. It would be almost impossible to construct an effective system for detecting money laundering and preventing criminals from using the financial system without participation by financial institutions. For over a decade, institutions have filed reports that have been effective tools in the detection, investigation, and prosecution of illegal activity that can damage communities, ruin lives, and cause considerable financial losses to institutions. While the BSA has not completely eradicated money laundering or other financial crimes, it has been a deterrent to large-scale money laundering activity in covered financial institutions.
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The FDIC strongly supports the BSA and other Federal anti-money laundering efforts. The integrity and reputation of the United States financial sector depends upon the continuing cooperation among financial institutions, law enforcement agencies, and the Federal financial institution regulators. Over the past fifteen years, these organizations have formed a vital partnership to fight financial crime. We must continue to be vigilant and to balance the legitimate concerns of institutions and the privacy rights of law-abiding citizens with the needs of the Government to ensure continued public confidence in our Nation's banks.
Again, I appreciate the opportunity to represent the FDIC's views on these issues and would be happy to answer questions you might have.
Chairman KING. Thank you, Mr. Sciacca and all the witnesses. I have a few questions.
Secretary Johnson, at the close of your statement, you did point out the importance of privacy and secrecy. Could you give any detail as to how internal security procedures are implemented to limit the access to the database and ensure that contents are not improperly disclosed, not just by your office, but by other Federal and State users of the data?
Mr. JOHNSON. Mr. Chairman, I do not have the operational details of the systems. I can say, though, that we take significant precautions with FinCEN to ensure that the information is closely guarded, that it is secure, and the information within FinCEN is monitored in terms of access to that information by keystroke. So it is very closely monitored. I am aware of, at FinCEN, only three instances where there has been some compromise of information. Only one of those instances, to my knowledge, involved the CTR and that is in the nine years of FinCEN's existence and the millions of CTRs and SARs that have been filed. So in terms of internal compromise, my sense is that the security arrangements are fairly tight.
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Chairman KING. Thank you, Mr. Secretary.
Ms. Warren, I assume that most SARs do not result in criminal prosecution, but they are maintained in the Government's databases, I guess in perpetuity. Would Justice be amenable to expunging those reports after a certain amount of time goes by if no criminal prosecution results from them?
Ms. WARREN. Let me give you my opinion, for the value that it might be. Often it is not entered into the databases themselves. It is checked against the databases. If it is entered into any databases and maintained, I suggest that it could be held for as long as the information must be held on file. It often takes quite some time to put together these complex cases, sometimes involving many jurisdictions and international contexts. Five years might be necessary for the retention of this information and, if it had already been retained for five years, that would then be a total of ten years.
Chairman KING. Right now, there are no limitations at all, right?
Ms. WARREN. As best I know, there are no such limitations. But I will get back to the subcommittees with a firm statement about that.
Chairman KING. All right. Thank you very much.
Mr. JOHNSON. Mr. Chairman, might I add a little to that answer.
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Chairman KING. Go ahead. Sure.
Mr. JOHNSON. In terms of the databases, the various law enforcement entities do have access to different databases. The Suspicious Activity Reports are filed most times electronically and they are held at the Detroit Computing Center. And that is the locus of the Suspicious Activity Reports. In terms of timeframes, as Deputy Assistant Attorney General Warren indicated, it takes very often a great deal of time to put together these cases. In fact, Operation Casablanca is a case that took many, many years. So it is difficult to answer in the abstract whether or not there is a point in time in which the information should be expunged from the system. But that is an issue that we could explore with you, Mr. Chairman.
Chairman KING. Thank you.
And this question I would ask to Ms. Tischler, Mr. Small, and Mr. Sciacca: The $10,000 threshold, could you support or you recommend that that be increased to any amount and, if so, what? In other words, do you feel you have reached the point of diminishing returns where we have so many reports filed that they can't be properly acted upon and it would make more sense to increase the threshold?
Ms. TISCHLER. I am going to sound like Attila the Hun. My experience with using the Bank Secrecy Act information goes back so many years, I do not believe that individuals or organizations walk around normally with more than $10,000 in cash. I think that criminals do. I think that for individuals or corporations that legitimately do, in fact, deal in more than $10,000 in cash and deposits quite often hit the exemption list for BSA and are, therefore, protected and don't generate any. So if you are asking a personal opinion and not an institutional opinion, I wouldn't increase it.
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Chairman KING. Mr. Small, Mr. Sciacca.
Mr. SMALL. Mr. Chairman, in the past we have stated that, when there has been discussion about this, that it really is a law enforcement call and if law enforcement was interested in raising the threshold we could certainly support that. We don't have any objection to doing that.
I might add, Mr. Chairman, just to get back to your question on Suspicious Activity Reports for a second, one of the reasons that there has never been a purging of the system in terms of how long to keep those things is that some of the criminal statutes that reports are made on have at least a ten-year statute of limitations, so there is a very long time before an investigation may begin and when it can still be legally conducted and the prosecution can result. So there has never been a discussion about purging after a certain amount of time because of other constraints, legal constraints.
Chairman KING. All right.
Mr. SCIACCA. I would second Mr. Small's statement regarding the raising of the threshold, but I also would agree Ms. Tischler that there are very few people that I know that walk around with $10,000. There are exemptions and there are legitimate reasons to have that kind of funds and they are exempted. And there is a way to deal with it within the statute. So I do not see a problem with the $10,000 threshold, although I could probably be convinced if the law enforcement agencies felt that it would be just as effective at a higher level. We would be happy to deal with that and discuss that.
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Chairman KING. Thank you.
Mr. VENTO. Thanks, Mr. Chairman.
Mr. Johnson, there are a number of reports. One of the overriding themes here is that, while ''Know Your Customer'' has been withdrawnand I know that you are not, in a sense, as involved as some of the regulators, perhaps, were in thisthat the, in essence, the activity surrounding it still persists, in other words, the major objections to it, even though it is not, from a regulatory standpoint, being implemented, the activities which have, of course, caused some concern, some rather substantial concern, or the implied activities still persist.
And so, you know, I mean, I am concerned because it seems to me that all of you are testifying that we still need the SAR reports and find them useful and so there are a number of questions that are inspired, sort of, by that particular response. I, frankly, am on the side of saying, you know, at this point, they would have to show me that it isn't workable, that it is not necessary. And so I think you are making probably a pretty strong case.
But do you have any general response to that, or not, Mr. Johnson? Or Mary Lee Warren, do you have a response to that, generally? Maybe the regulators would be the better, you know
Page 33 PREV PAGE TOP OF DOC Mr. JOHNSON. Just very quickly, in the comments of the Members of the committees at the opening of this hearing, there was a call for the need for balance. And I think the BSA and I think with the implementation of the BSA with respect to the regulations that have been put in place, all of those were put in place after periods of comment. We have struck an appropriate balance. That doesn't mean that we are going to turn a deaf ear to those who raise privacy concerns. And there may be some issues with respect to that. But we think that, listening to those concerns, we have struck an appropriate balance. We have in place a very powerful tool to go against very powerful criminal entities and we shouldn't abandon that tool.
Ms. WARREN. I can only echo that. I believe the balance is appropriately struck between the necessary intrusion into privacy against the need to protect the public and ensure the integrity of the financial system.
Mr. VENTO. Well, yes, one of the issues here, Mr. Small and others from the regulator sideI don't know how you pronounce your name Mr. Sciacca. It doesn't look like Sciacca. I don't think that's the initial ofin any case, but what, Mr. Small and Mr. Sciacca, what type of training do we do of the individual? Do we do any type of in-service training or outreach to the financial institutions to make certain that these types of reports, since these are important reports, lengthy reports, at any given time, hundreds of thousands that are put out in a given year, and to make them useful, what type of in-service, what type of training do we do in terms of bank personnel in regard to this?
Mr. SMALL. Mr. Vento, one of the things that we doand all of the regulatory agencies do thisis we participate in a number of programs sponsored by the various banking organizations throughout the year where we give in-depth presentations on what it is we are expecting, how we are interpreting what our regulations are that are out there. And being available to answer questions.
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We also, at least at the Federal Reserve, we do training through our Reserve banks in the districts that they operate to banking organizations. And one of the things that we have been attempting to do over the years is try and focus in on what types of reports are going to be useful in terms of Suspicious Activity Reports and what types of reports do contain information that really possess little value and little assistance to us, to try and focus in on what would be useful to law enforcement and to the regulators.
Mr. VENTO. Mr. Sciacca.
Mr. SCIACCA. I would agree with Mr. Small or echo what Mr. Small said and that is that we are available and do participate in programs throughout the year. Our training is geared toward our examination staff. At the same time, that examination staff is on-site every twelve months, or every eighteen months and we do have examination procedures that we do share with the banks. The examination process is not simply the oversight process, from our perspective, it is an educational process. And we do spend time with the bankers and, at any time, we will spend time with the bankers during the examination process or otherwise.
But our own training is geared to the examiner and our examiners are encouraged to spend time with the bankers during the examination process.
Mr. VENTO. Yes, well, really that ought not to just be the responsibility of the bank regulators, but others that are interested in using this information. For instance, there is theI think it is implied in some of the testimonythat all of these reports are put in, and that there never is any feedback. It seems to me if I were sitting there making all this paperwork, and I am a banker and a small banker in Minnesota someplaceif you can imagine that, that would be something of a fantasy, but just tryand the fact was, you know, I am putting in the reports, but I am never getting any feedback from it. So I really don't know if I amin other words, you want to reinforce in a positive way that what I am doing is helpful, is being resolved, you know, so is there any feedback in terms of resolution without jeopardizing the cases and so forth that you are doing, with regards to the SAR reports or any of the reports that you require?
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Mr. JOHNSON. Sir, at the Treasury Department, we work with the Bank Secrecy Act Advisory Group. And one of the issues that is, again, underscoring the theme of actually listening to those that are regulated and listening to the public, one of the issues that has been raised is the notion of feedback. It is a project that has been undertaken by a component of the group. We aren't yet in a position to say that we have a final product and a final mechanism for feedback. But it is a concern that we have heard and it is a concern that we are moving toward addressing.
Mr. VENTO. I think it would be helpful, I mean from my standpoint, in terms of trying to encourage positive reports in terms of also trying to indicate, you know, in a sense, what are theand then, you know, there are many questions I could ask. One of the solutions here is to suggest that, well, if you put in these types of reports, you resolve it, there is no problem there, then you could inform the person who is reported upon that there was such a report made. Or, in fact, you could inform them at the time that such a report went in. Of course, I expect at that point that it would, it seems to me, have some problems in terms of the prosecution of a certain type of behavior. So that is sort of self evidently a problem. But what about the conclusion when there is nothat such a report was put in? Would either of these or any of these, regarding the episode or event, be practical?
Mr. JOHNSON. Mr. Vento, the issue of reporting back and feedback is a tough one for us. And what I would like to do is work with the committees, work with the Bank Secrecy Act Advisory Group members to come forward with a proposal because
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Mr. VENTO. Well, I don't find the answer too mysterious here. It seems to me that, on many occasions, it is not allyou don't want to do that because that would fundamentally pull the rug out from under a criminal prosecution. But I am just saying that this is being raised. It seems as though Mary Lee Warren wants to respond.
Ms. WARREN. Well, there are some times that the information in the SAR does not appear to be useful, but it may, within several years, when combined with information that we have collected over time, all of a sudden spring to importance. So it would be hard to say when it would be that you would tell the individual.
I would like to suggest that it is very helpful to have this hearing to give that kind of feedback in a public way of how important the SAR reporting is to law enforcement and that we are using it to great advantage.
Mr. VENTO. Well, thanks, Mr. Chairman.
Chairman KING. Ms. Roukema.
Chairwoman ROUKEMA. Ms. Tischler and probably the rest of the panel probably noted how I kind of chuckled when she said she didn't want to sound like Attila the Hun or be identified as Attila the Hun. I want to say your views are fine with me. I don't think of you as Attila the Hun, Ms. Tischler. I think you are more like Dick Tracey or maybe J. Edgar Hoover who did so much as head of the FBI to bring law and order to this country. That is another way of saying I am so pleased what I have heard with this panel with respect to the support for BSA. I appreciate that. That doesn't mean that we have all the answers to all the questions yet, but I think it was Mr. Johnson and/or Ms. Warren who, in one form or another said if we are serious about these crimes, we need recordkeeping and reporting regulations.
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Now, how are we going to improve on current performance? Will law enforcement come out with some new strategies? I didn't hear anyone speak to the question of the ''Know Your Customer'' rules. As I said in my introduction, this is a profound problem. I would love to have any insights or thoughts that any of you would want to make here and now. In addition, I would hope that you would in follow-up to this committee as to how we can get back to the ''Know Your Customer'' rules. It was probably appropriate to suspend them at the time. But let us not leave them out there and not address the problem in a realistic way.
Would anyone want to comment on that? On how we are going to get back to that ''Know Your Customer'' rules? No?
Why, Mr. Small?
And then I will get to you, Mr. Johnson.
Mr. SMALL. Well, I think, Madam Chairwoman, the issue is that we are still trying to resolve that issue internally with the Board to determine if there is a next step and what that next step should be. And there are issues that we are debating of substance.
Chairwoman ROUKEMA. Well, there has to be a next step. It is not if there is a next step. There has to be, isn't that correct? Or are you going to just drop it?
Page 38 PREV PAGE TOP OF DOC Mr. SMALL. Well, I think that is one of the issues that is still to be decided. And the Board hasn't made a final determination as to if there is a next step and what that next step would be, if there is going to be a next step.
I think it is clearand it is a recommendation that I have made to the members of the Boardthat, at a minimum, we need to come back with some guidance in this area if we do nothing more and that also is still being discussed.
Chairwoman ROUKEMA. Anyone else?
Mr. Johnson, would you like to comment on that?
Mr. JOHNSON. Well, with respect to the ''Know Your Customer'' rules, they were not issued by the Financial Crimes Enforcement Network, butand in my testimony, at least in my long statement, I talk about the distinction between the suspicious activity reporting regime, which has been very much a valuable tool, as emphasized by law enforcement and the ''Know Your Customer'' rules. I think from the perspective of a person who is not only very concerned about the problem of money laundering, but also one of the people that is very concerned about how we implement the various anti-money laundering programs and regulations, what we are looking toward in the next steps is trying to get the most out of the tools that we have in place and to move down that line.
Chairwoman ROUKEMA. Well, this gets back to the question that I asked of the panel the other day. You and I, in a private conversation, discussed this subject, in fact. The fact is that Treasury has been working for a number of years, and are long overdue in terms of presenting, the final rules on MSBs. It is also your stated intention of having the national money laundering strategy soon. Both of these are overdue now. Can you give us some enlightenment as to what is left to do and how soon you think you will bring these to the Hill? They are, of course, related, again, directly to the ''Know Your Customer'' rules.
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Mr. JOHNSON. The duty and I think, actually, in many respects, the privilege of putting together the national money laundering strategy, was something that was given to the Treasury Department at the end of October 1998.
Chairwoman ROUKEMA. Yes, through statutory requirement.
Mr. JOHNSON. Yes, that is right. And I think through the good offices if this committee, particularly Ms. Velazquez.
Chairwoman ROUKEMA. Yes.
Mr. JOHNSON. And we are overdue. Our report was due back on February 1 and we are working to get a report to the Committee and to the Hill and act on it in the next two to three months. With respect to the money services businesses, I believe that my partner, Assistant Secretary Bresee, testified that 45 days from her testimony last week we would report back to the committee on our status. We are working through issues of implementation and issues of resources. And I believe that we are due to get back to the committee on June 1.
Chairwoman ROUKEMA. At least a report. I was hopeful that you might say with, perhaps, final recommendations. But, in any case, does the Fed or the FDIC have any comment to make on that? You are workingyou are involved, are you not, in the FDIC? No?
Mr. SMALL. We are involved in the strategy. We are not involved in the MSB rules.
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Chairwoman ROUKEMA. I see.
Mr. SMALL. And I actually think, by statute, there is a consultation requirement for the strategy.
Chairwoman ROUKEMA. Yes, you are correct. I had forgotten that, but I believe you are correct that there is a statutory requirement. Well, we are waiting with bated breath, really. I know Treasury is very serious about it, but it is very difficult to justify the kind of time lag that we have had here. There has been no explicit report from Treasury and from others that are involved. Thank you very much.
Chairman KING. Thank you, Chairwoman Roukema.
Mr. GOODE. Thank you, Mr. Chairman. I would like to ask Mr. Johnson, or really anyone on the panel, in the last year, how many individuals have you found have violated or been investigated because they deposited more than $10,000 in cash?
Mr. JOHNSON. Sir, I don't have the preciseI don't have figures for the number of CTR prosecutions or violations, whether or not they are criminal prosecutions or administrative actions.
Mr. GOODE. Just give me a ballpark of prosecutions and violations that
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Mr. JOHNSON. I would like to get back to you on that. Any ballpark would be speculation on my part.
Mr. GOODE. Let me ask you this. It would seem to me that the sophisticated, knowledgeable money launderers are never going to run afoul of the $10,000 limit or your other BSA rules. What is your response to that?
Mr. JOHNSON. Well, the rules serve a number of functions, one of which is to develop a paper trail. The other one is to attempt to put a barrier to the first phase of the money laundering process, which is placement. With the rules in place, it is more difficult for would-be money launderers to place with impunity large quantities of money into our financial systems, so they have to go to other means, whether or not it is breaking down the deposit into much smaller amounts, which increases the costs of the transaction or smuggling the large quantities of illicit proceeds out of the country. That makes it much more expensive for them to do that.
And not all of the would-be money launderers are sophisticated. When I was a prosecutor, we used to say we would always get the defendants because they are smart. And that is the case in certain cases where they ignore the rules and it helps to develop an audit trail for us. One of the things that we do prosecutebut, again, I don't have the figuresis the actual crime of trying to avoid the money laundering requirements, that is, structuring transactions so instead of depositing $10,000 into a bank, one might see multiple deposits over a series of days or into different banks of $9,900.
Page 42 PREV PAGE TOP OF DOC Mr. GOODE. And that is a violation?
Mr. JOHNSON. That would be if we were able to make out the case of criminal intent, that would be one of the violations.
Mr. GOODE. How would you catch somebody if a money launderer had a small business like a convenience store that had a lot of cash?
Mr. JOHNSON. Well, for at least investigative approaches, I might do well to defer to Ms. Tischler, but very often, in terms of the cases, some of the techniques involve surveillance. Some of the techniques involve informant information. There are a wide variety of techniques that can be used to identify potential defendants.
Mr. GOODE. So I guess, really, what you are saying, a lot of the money launderers aren't sophisticated and they do get caught?
Mr. JOHNSON. A lot of persons who are engaged in money laundering, whether or not they are sophisticated, do take steps that trip the protections in our system. And when they do that and we are able to, through our investigators, identify them, we can take advantage of the information they generate through the Currency Transaction Reports. And even, on occasion, when they are involved in structuring, the suspicious activity reporting regime can also come into play.
Mr. GOODE. OK and you will get back to me with, one, the number of violations and, two, the number of prosecutions and, three, the number of convictions in the last year?
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Mr. JOHNSON. Yes, sir.
Mr. GOODE. OK. That is all, Mr. Chairman. I yield back.
Chairman KING. Mr. Hill.
Mr. HILL. Thank you, Mr. Chairman.
I have a question for Atilla Warren. You made the comment that this is a necessary intrusion into privacy and that you use it to great advantage. Should there be any restraints and any boundaries in terms of law enforcement's access to the information that you receive from the CTR reports and SAR reports? And, if so, where would you draw those boundaries?
Ms. WARREN. Certainly there need to be boundaries in terms of the way the material is held and maintained, if not revealed beyond law enforcement until it is part of proof at trial. So there need to be those constant restrictions to protect the individual's interest in privacy.
Mr. HILL. But as far as their banking information, do you believe that that there should be access without limit?
Ms. WARREN. No, and we are really only speaking about the SARs now that relate to individual transactions, and the information that is provided about the transaction that the financial institution has reason to know, or reason to suspect, is somehow indicative of a criminal violation is a limitation that is really quite narrowly drawn.
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Mr. HILL. So how many SARs are filed a year?
Ms. WARREN. I would have to look to FinCEN for that answer.
Mr. HILL. It is a lot.
Ms. WARREN. It is a lot.
Mr. HILL. And the number of prosecutions associated with those is relatively small?
Ms. WARREN. No. It is relatively large. They are used not just for individual prosecutions, but often they are used as one part of the proof. I believe they are used in a large percentage of our financial crimes and narcotics crimes prosecutions. Certainly in terms in the investigative stage, they are often part of the proof at trial.
Mr. HILL. But, just so I understand, is what you are saying is that, when you do prosecute someone, a SAR isthere is a high probability that a SAR will be part of the evidence against that person. But what I am looking at is the number of SARs that are filed relative to the number that are actually used in a prosecution. Is there any statistical data that the Congress could have to try to evaluate this supposed balance between the intrusion on privacy and the effectiveness of the tool?
Ms. WARREN. I don't know and I can see what we can do to look into it. But let me just give you the figures from the FBI's Financial Institutions Fraud Unit, one specific unit within the FBI that oversees their investigations across the country. And for 1998, there were 2,613 Federal convictions. 98 percent of those were either initiated or enhanced by SARs. That is a striking percentage.
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Mr. HILL. But the question is, how many SARs were filed? I mean, you would agree that the number of reports that are filed is some measure of the intrusion of privacy?
Ms. WARREN. Yes.
Mr. HILL. All right. That is the statistic that I am trying to get to.
Ms. WARREN. That is one part of what one needs to look at. The second part is what kind of information is transferred in that report to measure the intrusion of privacy.
Mr. HILL. Mr. Johnson, you made the comment that the regulations were put in place to strike a balance. How were the regulations modified to protect privacy in the process of developing the regulations?
Mr. JOHNSON. The regulations are, I believe
Mr. HILL. Specific to privacy.
Mr. JOHNSON. I believe that I have said that the regulations do strike an appropriate balance.
Page 46 PREV PAGE TOP OF DOC Mr. HILL. Right.
Mr. JOHNSON. Not, necessarily, that they were modified to strike a balance.
Mr. HILL. Well, in the drafting, obviously you tried to strike a balance between privacy and the need for this information. What arguments, what limitations, what aspects of these regulations are there for the purposes of privacy?
Mr. JOHNSON. Well, in dealing with the issue what is the balance that the regulations strike, an important lesson may be drawn from what they don't do. What they don't ask banks to do is identify, establish profiles or base lines for particular customers. What they don't ask banks to do is monitor customers' accounts on a regular basis. What we ask banks
Mr. HILL. So, they are not as comprehensive as ''Know Your Customer.''
Mr. JOHNSON. They don't go the distance of ''Know Your Customer.'' They are strongly distinguishable from the ''Know Your Customer'' proposed rules. They look at particular transactions and the banks are required to report on transactions that they know or have reason to believe are not done, say for economic reasons or rational reasons, they are very carefullyand now I am speaking about the SAR rulesthey are carefully targeted to identify particular transactions. It is very different to say I am going to, as a banker, I have to look at transactions that are, in some respects, suspect, as opposed to the Federal Government is asking me to look at all transactions that Jim Johnson engages in. I think we would all agree that that is a very, very different sort of inquiry.
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Mr. HILL. Mr. Johnsonif I could ask just one last question, Mr. Chairmanyou made reference to the BSA advocacy group as helping you establish the balance with regard to the rules and regulations, are there any privacy advocates that are represented in that advocacy group?
Mr. JOHNSON. There is the Bank Secrecy Act Advisory Group that is within Treasury and I believe there is a component within that groupI don't know if there are privacy groups, what you would define as privacy groups are represented on that componentbut there is a subgroup of the Bank Secrecy Act Advisory Group that is looking into issues of privacy.
Mr. HILL. But are any of them advocates for privacy, I mean, representing civil liberty concerns?
Mr. JOHNSON. I believe the answer is yes, and I can get back to you with the names of the individuals that are represented on that group that would be responsive to your question. Because my sense of the answer being yes may not necessarily agree with what you would view as a privacy advocate. So I think, unless we define that, we may be speaking at odds.
Mr. HILL. Thank you, Mr. Johnson.
Thank you, Mr. Chairman.
Chairman KING. Thank you, Mr. Hill.
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My colleague from New York, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. Thank you for allowing me to participate, to sit in on this subcommittee hearing.
Mr. Johnson, I wanted to take this opportunity to express to you my disappointment in terms of the work that the Department has done so far in terms of developing the national strategy on money laundering. And many questions have been placed, letters have been sent to you, and the response has not been there. So today I want to take the opportunity to ask a question that has not been answered. And I would like to know when this strategy will be reported to this committee.
And when we sat down in December in my office, I stressed to you the importance of ensuring that State and local law enforcement organizations were properly included in drafting this strategy. That is an important element of putting together this coordinated effort. I asked several specific questions about the level of outreach that your office was conducting to State and local law enforcement authorities and your explanation in the letter was not on that. In light of this, what lessons have you learned, the Department, about conducting outreach? And what areas have you identified that need improvement?
Mr. JOHNSON. A couple of quick points. One is I took to heart your strong urging in the office to make sure that we reached out to State and local authorities. And we did that throughat times through proxiesthrough the National Association of Attorneys General and others. We are and have been on a relatively short timeframe and, as you know, we haven't hit our mark in terms of producing for you the strategy that you have been supporting for you and the committee, the strategy that you have been supportive of.
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As was testified to last week, we are looking at trying to turn this around and report back to the committees the strategy in the next two to three months. There is more outreach for us to do. This is the first time in developing this strategy that, one, it is, as you know, it is a novel approach that you provided the energy and the vision behind. And it is the first time that we have had to reach out in this way to a variety of groups to develop the strategy. As our timeliness has indicated, it is not been a process without problems and not without its challenges.
But, make no mistake about it, we view the strategy as a very important tool within the law enforcement community. We view the effort behind it as very significant. And, you know, I have put as many of the resources as I could behind generating a document that I believe you would be proud of.
Ms. VELAZQUEZ. What is your timetable?
Mr. JOHNSON. We expect to have something to report back to the committees within the next two to three months.
Ms. VELAZQUEZ. When we had our meeting in December, you explained that your Department had selected the financial crime steering committee to begin developing the strategy. I explained to you that a larger group was envisioned in my legislation. Additionally, in my follow-up letter, I explained that the steering committee should only be used as a filter. And I asked you to provide me with a plan for how the agency will structure and organize this larger, more comprehensive anti-money laundering strategy group. Now that you have had several months, could you please tell me how you have gone about assembling this group?
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Mr. JOHNSON. Well, what we have done is used the personnel within the Financial Crimes Policy Steering Committee to reach out and actually conduct the outreach to various interested groups that are set forth in the statute and groups that have not been set forth in the statute. The policy committee has been, essentially, in the position of receiving this information and then personnel on my staff have been working to draft the strategy. But the steering committee has functioned as a filter to get this information and to put it into the document.
Ms. VELAZQUEZ. When will your agency have the plan for the organization and structure of the anti-money laundering strategy group?
Mr. JOHNSON. There are two issues, I think, raised by the question. One is sort of the logistics of our getting to completion. And I believe that, through the use of the smaller policy steering committee to get all of the information and synthesize the information, we have answered the logistical problem, although we are not, clearly not, complete with getting this report done.
There is a second larger issue which is very important to the report and I believe that when you see the strategy, you will see that what we want to do is establishit is not yet finished, but it is to establish around the country groups along the line that Assistant Attorney General Warren just testified about, which are bringing in groups and establishing localities, groups that would evaluate SAR data. We are looking, too, and the President put in the Fiscal Year 2001 budget, an appropriated amount that would also work toward providing grants to the high-intensity financial crimes areas. So that is part of all that we are developing.
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Ms. VELAZQUEZ. Now that you have mentioned the grant part, what efforts has the agency made to ensure that this funding is part of them?
Mr. JOHNSON. Well, the first step we took was to make sure thatto do our level best and we were successful in making sure that funding in the amount of $3 million was included in the proposed budget that has been sent up by the President. That was step one.
Step twoand this is also something that we drew in part from the counsel you mentioned you gave us in your office back in Decemberis that we have been in consultation, not only within Treasury, but with the Justice Department, about working to establish the best possible mechanism for implementing such a grant program, should those funds be appropriated for the grant program.
Ms. VELAZQUEZ. I look forward to seeing the strategy and I look forward to working with you. This is an important issue, especially for my community where money laundering brings so many crime activities and I share with you the fact that in only a 20-block radius in my district, I have over 300 wire services, casas de cambio, that you mentioned before. So this is an important issue and I am telling you that I am going to be making phone calls, I am going to be sending letters to your office, until we get this strategy reported to this committee.
Ms. Warren, one of the important elements of this strategy is thatjust one more question, because this is very important and it is the essence of the strategy that we put together, a strategy that is coordinated with all those agencies that have a stake in terms of money laundering. Have you been consulted?
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Ms. WARREN. Yes, absolutely.
Ms. VELAZQUEZ. And time has been given to you in terms of allowing comments and reaction to the strategy?
Ms. WARREN. Yes, and we have done it in writing and orally and in a series of meetings.
Ms. VELAZQUEZ. Thank you.
Thank you, Mr. Chairman.
Chairman KING. Thank you, Ms. Velazquez.
Chairman KING. Dr. Paul, you said you were going to pass until the second round?
Mr. Gonzalez? OK.
Congresswoman Roukema, do you have any?
Chairwoman ROUKEMA. No, I have been very pleased with the testimony except I will tell Ms. Velazquez that I asked some of the same questions. She and I are on the same page on that issue and I credit her for her leadership here.
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Chairman KING. As Ms. Velazquez has shown so much leadership on so many issues. Thank you.
All right, I thank the panel for their testimony. I look forward to working with you and, again, thank you for your cooperation and your assistance. You are excused. Thank you very much.
Before we introduce our second panel, I would like to, at this time, introduce into the record the statement of Congresswoman Sue Kelly who intended to be here today but cannot. And, without objection, I order her statement into the record.
Chairman KING. Now I would like to introduce our second panel and we will be finding out what the schedule for votes is going to be on the House floor. But we will certainly try to get started with this panel and go as far as we can before the votes are called.
On our panel today we have Mr. John Byrne, who is the Senior Federal Counsel of Regulatory and Trust Affairs for the American Bankers Association. We have Gregory Nojeim, who is the Legislative Counsel for the American Civil Liberties Union, which, of course, has been very outspoken on behalf of privacy rights. We have Ms. Solveig Singleton. She is Director of Information Studies for The Cato Institute and she has recently testified against the proposed ''Know Your Customer'' regulations before a House Judiciary Subcommittee hearing. And, finally, Mr. Wilmer Parker, who is a former Assistant United States Attorney with extensive experience prosecuting drug violators. I believe you worked with our colleague, Mr. Barr. That is my understanding.
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Mr. PARKER. That is correct. Yes.
Chairman KING. I will ask Mr. Byrne if he would begin his testimony.
STATEMENT OF JOHN J. BYRNE, SENIOR FEDERAL COUNSEL, REGULATORY AND TRUST AFFAIRS, AMERICAN BANKERS ASSOCIATION
Mr. BYRNE. Chairman King, Chairwoman Roukema, Members of the subcommittees, I am pleased to be here today to present the views of the ABA on the broad issues of privacy, the Bank Secrecy Act, and suspicious activity reporting requirements.
The banking industry has a long history of being beacons of privacy, no matter what information gathering requirements we have, under law or regulation. Trust is central to a bank's reputation and banks take all concerns about privacy protection issues seriously. We thank you for this opportunity to discuss issues related to the various bank requirements that have been with us in one fashion or another for close to 30 years. While the banking industry has supported Government efforts directed at money laundering prevention, we have also frequently raised concerns about the various mandates crafted to address that worthy goal.
As we stated last month at a hearing on the now-defunct ''Know Your Customer'' regulatory proposal, there is a constant dilemma faced by the banking industry: how to balance our obligations to identify and record illegal transactions while also protecting the privacy of customer financial records. In order to address the important consumer privacy concerns that have been expressed recently, we believe Congress must take the leadas these subcommittees did to have the KYC proposal withdrawnin explaining the fact that banks have the dual statutory and regulatory responsibility of fraud prevention and data protection. Without a coherent message, consumers will lose confidence in our Nation's financial sector.
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I would also note that Chairwoman Roukema has a bill that addresses the problem of bulk cash smuggling, an issue that troubles all of us. ABA has been working with the House Judiciary Committee over the years to reform the asset-forfeiture laws and we look forward to working with Congresswoman Roukema and the committee and the House Judiciary Committee in 1999 to deal with these issues.
In my statement today, I would like to briefly address three key areas: the cash reporting requirements of the Bank Secrecy Act and areas for improvement; suspicious activity reporting requirements and why they continue to be important for fraud prevention; and the fact that growing public concerns about privacy must be taken into account with any future regulatory proposal.
As previous witnesses have already pointed out, the Bank Secrecy Act was enacted: ''To require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.'' In 1972, the Bank Secrecy Act regulations required banks to file cash reports over $10,000. Congress, the agencies, and the industry believe that there was a need to change how cash transactions were filed and the 1994 Money Laundering Suppression Act, under the leadership of this committee, was passed. This law received widespread support, in part because of the congressional concern that routine CTRs are expensive for financial institutions to file, for the Treasury to process, and they impede law enforcement by cluttering Treasury's CTR database. We appreciated your efforts then, and we are pleased with the forum you are providing now to continue the debate on CTR reporting.
Since banks file millions of routine currency reports each year, the 1994 mandate to reduce those filings was indeed welcome. While this system is still relatively new, unfortunately the number of CTR filings is not dropping as dramatically as both the industry and the Government had hoped. If the filings continue to stay at needlessly high levels, the usefulness of cash reporting for law enforcement purposes will continue to be called into question. Therefore, ABA would recommend that, after a reasonable period of time, additional changes to the filing of routine CTRs should be considered, such as increasing the threshold for reporting.
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The Suspicious Activity Report, or SAR requirements and their predecessor, the criminal referral reporting regulations, have been in effect since 1984. These requirements mandate an institution's report of possible violations of Federal law to the Treasury Department after the discovery of insider abuse, any violation of Federal law, or potential money laundering activities. These forms are filed so that law enforcement can investigate and eventually prosecute individuals for committing fraud against a financial institution. SARs are not mechanisms to collect information on predictions of future illegal activity. In fact, in ABA's comment letter on the need to withdraw the ''Know Your Customer'' proposal, we stressed the fact that banks should focus on suspected crimes, not predict possible violations of law.
Madame Chairwoman, during the debate on the KYC proposal, there may have been some confusion about the SAR requirements. SAR filings are carefully crafted reports that a bank submits to FinCEN that indicate a belief that a financial crime may have occurred. SARs are not filed by front-line personnel and include no financial records with the form. It is important to stress that banks have multiple obligations to protect accountholders, shareholders, and the general safety and soundness of the institution. And SARs assist the industry to do just that. It is also no secret that fraud remains a major concern for financial institutions and SARs assist us in addressing that concern.
It remains clear that there must be a mechanism by which financial institutions can report bank fraud or we will be left without a device to assist in the prosecuting of complex financial crime. SARs are that mechanism. I would also point out the lack of similar SAR requirements on other financial services providers is bad public policy and should quickly be remedied.
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Finally, let me just briefly mention the issue of privacy. The American Bankers Association believes that we protectthe banking industry, that iscustomer privacy better than any other industry in the United States. We have long protected customer information from unauthorized access while fulfilling our mandate to report possible violations of law. We recognize, however, that there is a need for consumers and policymakers to be made aware of that fact. ABA opposed the ''Know Your Customer'' proposal, among other reasons, because the terminology used in the rulemaking clearly raised great concern with both bankers and the public about privacy. The overwhelming public view of the potential invasiveness of the proposal dominated the discussion and the agencies took the only proper course by withdrawing the proposal.
Therefore, we strongly recommend that no future proposal that covers financial information should ever proceed to a public rulemaking until the agencies have carefully considered the privacy ramifications. This is certainly a minor lesson we learned in the past six months.
Finally, we appreciate the opportunity to discuss issues related to bank reporting. We have included in our written testimony a number of other proposals to deal with the Bank Secrecy Act and we would be happy to answer any questions.
Chairwoman ROUKEMA. [presiding]. Thank you.
The next person to testify will be from the ACLU, Mr. Nojeim.
STATEMENT OF GREGORY T. NOJEIM, LEGISLATIVE COUNSEL, AMERICAN CIVIL LIBERTIES UNION
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Mr. NOJEIM. Thank you, Chairwoman Roukema, Chairman King, Ranking Members Vento and Sanders, and Members of the subcommittees, I am pleased to testify before you today on behalf of the ACLU about financial privacy and the reporting requirements under the Bank Secrecy Act. The ACLU is a nonprofit, nonpartisan organization with more than 275,000 members, dedicated to preserving the principles of freedom set for in the Bill of Rights.
Today I will explain why the suspicious activity reporting requirements of the Bank Secrecy Act should be repealed and how the overwhelming public response to the ''Know Your Customer'' bank regulations reflects broad public support for repeal. I will close by suggesting that an alternative law enforcement model, which I will call the American model, for protecting financial privacy while fighting crimes such as money laundering, should be put in place. My focus on suspicious activity reporting should not be taken to suggest that we do not have similar concerns about other reporting and recordkeeping requirements of the Bank Secrecy Act.
Congress has given the Treasury Department a virtual blank check. Banks, as a result, must report, ''any suspicious transaction relevant to a possible violation of law or regulation.'' The regulators determine what is suspicious without sufficient guidance from Congress. Congress also put banks between a rock and a soft place. It threatened the banks with substantial fines and penalties if banks failed to report suspicious activity. That is the hard place. Then it offered banks a safe harbor from civil liabilityeven if they report innocent customer activity in bad faithand it even gave a statutory assurance to the banks that customers wouldn't even know that the bank had reported their transaction to the Government.
Page 59 PREV PAGE TOP OF DOC Using these authorities and relying on this skewed incentive system, the Treasury Department has issued a hopelessly over broad regulation. It effectively requires that every $5,000 transaction that a bank has reason to suspect is unusual for a particular customer must be reported to the Government whenever the bank knows of no reasonable explanation for the transaction, based on available facts. I submit that that is extremely broad and that many transactions that aren't reported fit within that mandate.
In order to determine whether a large transaction is unusual for a particular customer, bank regulators direct banks to collect enough information about their customers to develop customer profiles. Then the banks are coerced to monitor customer transactions to determine whether large transactions are inconsistent with the customer profile. Customers who engage in such transactions are reported as suspects to the Federal Government on Suspicious Activity Reports, almost 100,000 times every year.
All of these requirements appear in the ''Know Your Customer'' section of the Bank Secrecy Act compliance manuals issued by bank regulators. The FDIC, the OCC, and the Fed all have these manuals. And had the witnesses on the previous panel not been asked, none of them would have revealed that they already inspect for ''Know Your Customer'' policies.
The Federal Reserve characterizes the adoption of ''Know Your Customer'' programs as ''imperative,'' even though they are not presently required by regulation or statute. As a result, according to the American Bankers Association, 86 percent of banks responding to a 1990 survey had voluntarily adopted such programs, under pressure from the regulators.
In December 1998, bank regulators simultaneously proposed near-uniform ''Know Your Customer'' regulations. The response of the public was overwhelmingly negative. Over 250,000 comments, almost all opposed to the regulation, were received. Bank customers said that they did not want to be profiled by their bankers, have their transactions monitored, and have their bankers report unusual transactions to the Federal Government. The proposed regulations were quickly withdrawn after the comment period closed.
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The current statutory and regulatory scheme guarantees that ''Know Your Customer'' will remain in place. ''Know Your Customer'' is inextricably entwined with suspicious activity reporting. It would be dishonest to suggest that withdrawal of the ''Know Your Customer'' regulations means that ''Know Your Customer'' has been excised from the banking industry.
The current system that we have in place to stop money laundering is surveillance based. Personal financial information about many people is reported to law enforcement through FinCEN without any hint of judicial supervision or any showing by law enforcement of probable cause, reasonable grounds to believe, or other levels of suspicion. That information is made available electronically to many law enforcement agencies and thousands of law enforcement agents. No court order, warrant, subpoena, or even written law enforcement requests showing a need for the information need be prepared.
We propose an alternative model, which I will call the American model. It is illustrated here on the poster.
It is based on principles in the Financial Privacy Act. Basically, before personal financial information moves from the bank to law enforcement and FinCEN, the principle that a subpoena, with notice to the customer or notice to a grand jury, as is the case in the Financial Privacy Act, or a warrant based on probable cause, is put in place.
A lot of people believe that the affiliate sharing is the biggest issue when it comes to financial privacy. We believe that is a big issue. But, because law enforcement has the power to deprive people of their liberty, we believe that at least as great a privacy interest is at stake when personal financial information moves from the bank to law enforcement.
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Under this model, intrusive SARs are abolished. The mandates of profiling customers; monitoring their transactions; and reporting large, unusual ones are abandoned. Substituted for them are voluntary disclosures relevant to a possible violation of law, and the reporting only of information that would enable the Government to obtain enough information to activate, not circumvent, the subpoena and warrant requirements.
And a safe harbor is afforded only disclosures made in good faith. A safe harbor, to be safe, need not extend all the way from Boston to Miami, as is the case under current law.
Members of the subcommittees, there is no doubt that law enforcement will argue that the massive invasion of privacy represented by the current system, is justified. Well, every fisherman knows that if you cast a net wide enough and as many as 100,000 times in a year, you are bound to catch a few big fish and a lot of small fry. And, as Mr. Goode pointed out, even big fish who are smart can get away. But that is not our system.
We urge you to stop leaving these matters to the same regulators who proposed ''Know Your Customer.'' In their view, ''Know Your Customer'' is an appropriate balance between privacy and law enforcement. Congress should step in aggressively to protect financial privacy. Thank you.
Chairman KING. [presiding]. Thank you, Mr. Nojeim.
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STATEMENT OF SOLVEIG SINGLETON, DIRECTOR OF INFORMATION STUDIES, THE CATO INSTITUTE
I am going to emphasize the following points. First of all, to some extent, public accountability mechanisms protecting privacy under the Bank Secrecy Act have failed in some respects. The second point is that, as an approach to crime, the Bank Secrecy Act's reporting requirements seem, by some accounts, to fail elementary cost-benefit analysis. That is, while they serve law enforcement to some extent, so would a requirement that librarians in book stores report the purchases of all subversive books and literature and, yet, that would not seem to belong in our country. And then, finally, I will touch briefly on the inconsistencies between privacy under the Bank Secrecy Act and other Federal privacy policies.
To begin, then, talking about the Bank Secrecy Act and public accountability, Greg Nojeim has mentioned the similarities between the Bank Secrecy Act and the FDIC's withdrawn ''Know Your Customer'' proposal. I also talk about this to some extent in my written testimony.
One thing that we learned in the ''Know Your Customer'' context is the importance of public accountability in developing policies that impact privacy. One key reason, I believe, that existing regulatory practices under the Bank Secrecy Act have not met with the level of public outcry that the ''Know Your Customer'' proposal did, is simply that the public is not well aware of the details of regulatory practice under the Act. Many of the details of regulatory practice under the Act, in particular, are developed in the form of informal guidelines, manuals, and in training sessions and are never put through the various procedures of the Administrative Procedure Act. I believe it is absolutely critical that whatever regulatory practices go forward in this area, that they are brought into the light of day and subject to public comment.
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Second, in terms of the Bank Secrecy Act's usefulness to law enforcement, I refer in my written testimony to former bank regulator Lawrence Lindsey's views on the failure of the Bank Secrecy Act to result in a significant number of convictions, given the number of reports filed. Essentially, his evidence suggests that, for the hundreds and hundreds of thousands of reports filed, the vast majority of them never result in any investigation and an even tinier number result in any convictions. Essentially, then, the Act's usefulness in making our streets safer seems to be highly questionable.
With respect to the necessity of the Bank Secrecy Act in maintaining the stability of the banking system, this appears to be largely imaginary. There are many banking systems throughout the world that are extremely stable and yet protect customer confidentiality far more than that of the United States. And, in particular, the Swiss banks seem to have no problem in this respect.
Finally, I think that whatever the Bank Secrecy Act's usefulness to law enforcement, there are, nevertheless, limits in the types of tools we give to law enforcement in a free country. For example, there are a number of things we could do that would be undoubtedly very useful to law enforcement. We could require the reporting of purchases of subversive books and literature. We could require the telephone company to screen all telephone calls for suspicious key words and to forward suspicious conversations to law enforcement. And, yet, clearly those activities do not belong in a free country.
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Thank you very much.
Chairman KING. Thank you very much, Ms. Singleton.
STATEMENT OF WILMER PARKER III, ESQ., FORMER ASSISTANT U.S. ATTORNEY, ORGANIZED CRIME DRUG ENFORCEMENT TASK FORCE, REGIONAL COORDINATOR FOR THE SOUTHEAST REGION AND CHIEF OF THE DRUG DIVISION OF THE NORTHERN DISTRICT OF GEORGIA
Mr. PARKER. Thank you very much, Mr. Chairman, Chairwoman Roukema, and all other Members of the subcommittees. My name is Wilmer Parker. I am presently a partner in the law firm of Kilpatrick Stockton where my practice consists of both criminal and civil litigation. Prior to my entering into private practice in May of 1997, I was a United States prosecutor for approximately nineteen years, first as a trial attorney with the Criminal Section of the Tax Division here at the U.S. Department of Justice in Washington from 1978 to 1983 and then as an Assistant United States Attorney for the Northern District of Georgia where I served on the staff of many United States attorneys, including that of the Honorable Bob Barr who is a Member of this subcommittee.
I appear here today not only as a former prosecutor familiar with the enforcement of the Bank Secrecy Act, but also as a partner in a law firm which represents many financial institutions. I have experience and insight into the law enforcement interests in the Bank Secrecy Act regime. I also have experience and insights into the financial institutions' perspectives regarding the enforcement of the Bank Secrecy Act.
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For the record, I have attached to my brief opening remarks a paper I had previously prepared as an Assistant U.S. Attorney and one which I have used many times in making presentations on the evolution of drug money laundering prosecutions beginning in the 1970's with the enforcement of the Bank Secrecy Act. I respectfully request that my prepared remarks along with this paper be received as if read into the record.
Chairman KING. Without objection.
Mr. PARKER. Generally, I would state, Mr. Chairman, that I support the current statutory and regulatory aspects of the Bank Secrecy Act, which collectively are the lynch pin to money laundering prosecutions of wealthand I parenthetically emphasize wealthderived from the underground economy, which is an untaxed and unregulated economy. This economy includes not only drug trafficking, but various frauds, tax evasion, acts of racketeering, any crime, generally speaking, motivated by greed, and requires its participants, in order to use their new-found, ill-gotten gains to surface, that is, to launder their wealth. Which generally is in the form of bank notes or cash from the underground economy to the aboveground economy.
This surfacing or placement of wealth brings the cash into contact with the financial system of the United States of America. That is, the cash is converted from dollars into an intangible property right reflected by an accounting entry of a credit or a deposit on a bank statement. Once converted, the illegal wealth may then be transported anywhere in the world at the speed of electricity via an electronic funds wire transfer from one bank account to another to another to another. From one jurisdiction to another jurisdiction, oftentimes, particularly in offshore financial centers, where bank secrecy laws preclude access to that information.
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Because the surfacing of wealth derived from specified unlawful activity via the world's financial system is so critical to effective money laundering, it is, in my opinion, an appropriate activity for the Government to scrutinize. Further, it is perfectly reasonable for the Government to require financial institutions to report suspicious activities by customers which are inconsistent with local commerce. Just like any other citizen has an obligation to report to the police activities which they believe are of a criminal nature, it is totally appropriate to require banks to file Suspicious Activity Reports.
To suggest that access to banking records by the Government would only be permissible if probable cause of criminal activity is shown is too extreme to protect the reasonable expectations of a customers' privacy. After all, all we are talking about are numbers on a statement, which, in and of themselves, are benign information. It takes human beings to put flesh to the bones, give some incriminating information that one might attach to the banking information.
Our Nation's financial system is not based on strict banking confidentiality. The financial data per se is not so sensitive that its disclosure to the Government constitutes a violation of any individual's privacy interests.
I thank the committees for its time and I will be glad to answer any of your questions.
Chairman KING. Thank you very much, Mr. Parker and I want to thank all the members of the panel. I have a few questions.
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Mr. Byrne, do you believe the Federal Government could do a better job of keeping your industry informed about the ultimate disposition of the reports filed under the Bank Secrecy Act?
Mr. BYRNE. Yes, we do, Chairman King. We have asked in the past that there be some better mechanism for feedback. While recognizing that ongoing investigations are frequently not the time or the place to explain to a bank the value of a particular suspicious report, we think some frequent report back on the types of violations we have reported, the types of information included on a suspicious report would be valuable so that we don't file information that is unnecessary. And I think the agencies are working, law enforcement is working, toward that goal, but we have been asking for it for quite a while.
Chairman KING. Thank you, Mr. Byrne.
Mr. Nojeim, you were talking about the potential danger of the information in the database. In fact, in my questioning before, I had asked the Justice Department and the Treasury Department about that also. Are you aware of any specific instances in which the data in the computer base has been leaked or used improperly?
Mr. NOJEIM. I am aware of an instance where a person's activity was reported as suspicious, their bank account closed, and they were investigated for that activity when, in fact, they were engaged in perfectly legal activity that involved moving money from one account to another. But I don't know of a case where information, for example, was leaked from FinCEN.
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Chairman KING. All right. Thank you.
Mr. NOJEIM. But I would like to address the idea that you had for the earlier panel, which was that after a certain amount of time, records maintained by FinCEN be expunged. I think that is a good idea.
There is one problem, one thing that you would need to address also. The records go to FinCEN and they are maintained electronically and law enforcement agencies all over the country get access to them. They can download the information. So that a law enforcement agency in California could take what FinCEN has and maintain it indefinitely if its recordkeeping requirements permitted it to do that. So there would have to be another mechanism put in place so that, if you want records expunged from law enforcement access, expungement applies also to records that are downloaded by the various law enforcement agencies.
Chairman KING. If I could just follow-up on that then, if this information is available to local law enforcement, what procedures are you aware of that the Federal Government follows to ensureor ensure as best they canthat that information is not abused by local law enforcement authorities?
Mr. NOJEIM. My understanding is that there is a memorandum of understanding between FinCEN and the local law enforcement agencies. We asked that those be made available to us. They weren't. We will try to seek those memoranda of understanding.
I also, judging by the descriptions that I have seen at hearings before various banking committees, it appears that when law enforcement wants to access the database, it is given complete access. It is a gateway or platform approach, I forgot what the term is. But there isn't a showing, per transaction, that law enforcement has to make before it gets access to what FinCEN has.
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Chairman KING. Thank you.
Ms. Singleton, in your prepared testimony, I think on page three, there is a sentence, ''From an international perspective, the Bank Secrecy Act brings U.S. banks into constant conflict with laws protecting financial privacy in many other countries.'' Now, are you proposing the U.S. adopt a model of banking supervision that conforms to systems in places such as the Cayman Islands or Antigua? I mean, the fact that there is a conflict isn't necessarily wrong if the countries we are in conflict with have laws that encourage drug dealing and encourage money laundering.
Ms. SINGLETON. I think it is at least important for Federal regulators to understand the reason that other countries choose to protect the financial privacy of their banking customers. In South America, for example, kidnapping is a serious problem, and so a lot of wealthy South Americans have bank accounts in which their identity is concealed where they hold their assets to prevent themselves from becoming a target of kidnapping. As a result, South American banking laws forbid banks doing business in that context from revealing the true identity of their customers. And this is frequently a problem for U.S. banks because, on the one hand they are being called upon by U.S. regulators to know who their customer is, on the other hand they are prohibited by the law of another country from doing so.
And so I don't know what the easy solution to that problem is, but I think that the assumption is often made by U.S. regulators that the laws protecting financial privacy in other countries are somehow illegitimate. And I think that assumption is very wrong.
Page 70 PREV PAGE TOP OF DOC Chairman KING. Mr. Parker, you want to comment on that?
Mr. PARKER. Well, I really didn't think the ''Know Your Customer'' regulations were a matter of discussion, although I understand from Chairwoman Roukema she wishes them to be. The fact is that it would be ill-advised for this Nation to try to pattern its laws after offshore financial sectors that deal with secrecy because, obviously, they do that so they would be able to attract the wealth-derived, generally speaking, from conduct that does notthose who engage in itdo not wish to have scrutinized. And they are constantly being used to evade the taxes of this Nation or other democracies and, obviously, to conceal and hide wealth derived from the underground economy. We need more transparency in our financial sector, not more secrecy, I would suggest.
Chairman KING. Thank you.
Chairwoman ROUKEMA. Thank you. Mr. Parker
Chairman KING. Ms. Roukema, could I just interrupt for one second. I just wanted to acknowledge Dr. Paul had to leave, but he did ask that this statement, as well as the statement by the California Bankers' Association, be made part of the record. It is so ordered.
Chairwoman ROUKEMA. Needless to say, I think that this panel understands that I am for enforcing the law and doing what we can, particularly with respect to getting a national money laundering strategy. It seems to me that the experience of Mr. Parker would be very helpful in terms of the debate. I don't know whether he and Mr. Byrne could give me a little more specificity as to how you would advise the Treasury Department and the others with respect to the ''Know Your Customer'' rules as well as the money laundering strategy.
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Mr. Parker, do you see any reason why we have not come up with such a strategy in the past? Or why Treasury has not been able to come up with MSB rules? What would be your recommendation here?
Mr. PARKER. Well, I may ask the reason. The reason, I think, lies within the internal politics and jealousies of law enforcement, to put it bluntly.
Chairwoman ROUKEMA. You mean, within the Treasury Department and the Department of Justice?
Mr. PARKER. Having left Government almost two years, I can't speak to what, specifically, the Congresswoman is addressing, that is, this proposed regulation. But it goes without saying that, during my years of experience and I am sure it has continued because it is part of the nature of law enforcement, that they are very jealous in guarding their turf. And so who agrees to what sometimes can be debated for quite some period of time. I do not know personally and certainly cannot speak to why the subcommittee has not received the report that the law mandates. I can speculate obviously, having been present here today and having heard the concerns of many Members of this subcommittee and the responses of the Government officials.
Chairwoman ROUKEMA. Well, if you could submit for the record your own recommendations based on your experience as to how we address this question with some specificity of a national money laundering strategy it would be much appreciated.
Mr. PARKER. I am humbled to be asked to do it individually. I will be glad to do it.
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[The following information was submitted at a later date by Mr. Parker:
[First, money laundering, while constituting criminal activity, is secondary to the specific crimes generating the proceeds which are subsequently laundered. Accordingly, law enforcement agencies primarily focus on the specified unlawful activity which generates the proceeds to be laundered. As a rule, principal violators are charged with money laundering offenses when readily provable. However, since large money laundering organizations are not generally part and parcel of the criminal organization which generates the funds, unless there is support from within the law enforcement agency and the prosecuting office for additional allocation of resources, leads which may be developed to support prosecution of the money laundering organization are not so developed resulting in money launderers avoiding prosecution.
[Second, based on my experience, it is problematic as to whether leads against large money laundering organizations are disseminated within any one law enforcement agency, much less among the Nation's law enforcement agencies. Of course, the creation and implementation of the Financial Crimes Enforcement Network (FinCEN) was motivated in large part to remedy this deficiency. Its success is questionable. Not, I would suggest, due to those who work at FinCEN, but rather due to petty jealousies among law enforcement agencies, including State and locals.
[Third, I believe that any effort to create a national strategy to money laundering enforcement that does not recognize the need for each judicial district to customize its priorities and resources is doomed to fail. A national policy must recognize that success in enforcing money laundering laws will only occur if based on support from local, State and Federal law enforcement officers working in a coordinated environment such as a task force. Such task forces are best supervised by the United States Attorney. The task force should review local law enforcement intelligence and SARs while coordinating their efforts with FinCEN.
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[I also offer the following comments:
[A. CTRs should be purged from Government files once they have been archived for ten years.
[B. SARs should be purged from Government files once they have been archived for three years.
[C. A response by a Government agency should be sent to a financial institution within six months of receipt of a SAR.
[D. Regarding the proposed MSB regulations the definition of ''money transmitter'' should be limited to those ''transmitters of funds'' currently covered by the BSA regulations.
[E. Proposed MSB regulations should not be applied to banks and securities broker-dealers which are already regulated by other authorities.
[F. Consistent with congressional intent, independent registration of money transmission services and the issuers of money orders and travelers checks should be limited to large sellers, i.e., businesses with gross transaction amounts of at least $500,000 per month, or $6 million per year.
[G. Before any ''stored value'' products are subject to MSB regulations, FinCEN must make a legally supportable finding that the law enforcement need for such regulation of ''stored value'' products justifies the costs and burden of compliance to the industry.]
Chairwoman ROUKEMA. Thank you.
Mr. PARKER. I am not sure I would want to recommend my ideas any better than the collective judgment of the Treasury Department or the Justice Department.
Chairwoman ROUKEMA. Well, I do think, though, it would be helpful to all of us to have the insights of someone who has been out in the field and has had the kind of experience that you have.
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Mr. Byrne, I greatly respect the ABA and if it was in your testimony, I didn't hear it. Could you tell me what your own recommendation is? You are not suggesting that we totally abandon any approach to ''Know Your Customer'' are you? You are suggesting a little caution here and a new approach to the issue. Is that not correct? Can you amplify on that, please?
Mr. BYRNE. Madam Chairwoman, I think what is clear today from this panel and others are the struggles that we are having as an industry. On the one hand, Congress rightly looks at us and says, as they did in the 1980's, ''You are paying no attention to the money coming into your banks. There is money laundering going on. We are going to pass all these new laws and regulations.'' On the other hand, in the 1990's, very logically, consumers want to know what we're doing with information; want to be told about certain information.
That balance is our responsibility and I know it has been stated by virtually everybody here, but there is not one easy answer. The short answer to ''Know Your Customer'' is I think that should be gone. I will tell you why. Suspicious activity reporting, in my humble estimation, is the way to go. We report bank frauds, check frauds, counterfeiting. There are mechanisms for banks to do that. The ''Know Your Customer'' concept is a fine concept and that is identifying new accounts, verifying one's identity, reporting suspicious activity when you see them, training employees to do those things, and making sure the systems work. Those four elements, which are very general, are necessary I also don't think anybody would quibble with the need for banks to know who they are doing business with.
But when you go down a road which uses terms such as ''profiling'' and ''monitoring'' and all the things that raise the concerns that it did, I don't think there is any way to make that regulation work. My suggestion would be that banks that do reportand they all shouldsuspicious activities articulate how those reports are filed, meaning who is responsible for filing for the bank. As I say in my testimony, tellers don't fill these forms out. These forms are computed after carefully crafted internal vetting of whether an activity is a violation of the law or not.
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And I think that should be where the debate centers, as opposed to going back to a regulation which obviously most of America felt was invasive and the potential was so draconian. So I think we need to get away from there and move toward what is our goal and that is to keep money laundering out of banks and report bank fraud when we see it.
Chairwoman ROUKEMA. Well, all right. Thank you. I appreciate that, but I don't think we are differing on this. We have to come down with some specificity. Now you were specific. You say the SARs are the way to go. I don't know if that is adequate. We also have the contingent question of the MSBs as well. And they are related.
Mr. BYRNE. I would say Chairwoman that what is troubling from our perspective is not so much the broader MSB licensing and all those other recordkeeping requirements. Financial services providers that are not banks should have equal requirements to report violations of law and why the Treasury has not accomplished that I have no way of knowing, and so I am not taking shots at them. But I think if they are going to do anything, I wouldn't worry about the MSB overview and all the regulations related to that. I would focus on suspicious activity reporting on MSBs and get that done.
Chairwoman ROUKEMA. Well, that would automatically be integrated, wouldn't it? If we really had a national money laundering strategy, all two or three of those issues would have to be integrated.
Mr. BYRNE. I would think so, yes.
Page 76 PREV PAGE TOP OF DOC Chairwoman ROUKEMA. All right. Thank you very much, Mr. Chairman.
Chairman KING. Thank you, Madam Chairwoman.
Mr. HILL. Thank you, Mr. Chairman and I want to thank the panel for being here.
Ms. Singleton, is there any sophisticated statistical analysis of the effectiveness of BSA and how many reports are filed, what it costs, how many prosecutions that results in? Are you aware of any?
Ms. SINGLETON. As far as I know, the best person to contact with respect to that is Lawrence Lindsey, who is a former bank regulator and now at the American Enterprise Institute. Now, he has had some difficulty obtaining recent statistics. I think it is just very hard, as you observed in your questions earlier, to get that information.
Mr. HILL. And, so far as you know, are there any privacy advocates represented on the BSA advisory group?
Ms. SINGLETON. I don't know. I think Greg Nojeim has some more information about that.
Page 77 PREV PAGE TOP OF DOC Mr. HILL. Mr. Nojeim.
Mr. NOJEIM. I don't know. What I was referring to in my testimony was that the statute doesn't mention privacy advocates. It talks about banks and the bank regulators and law enforcement.
Mr. BYRNE. Congressman Hill, if I could just say, I am a member of the Bank Secrecy group that is looking at privacy and there is a gentleman there from EPIC. We haven't met in quite a while, to be candid, but that subcommittee was created to look at the issues of expungement of records and the perceived and real invasions of privacy there. So there is a gentleman there. I don't have his name, but the organization he represented was EPIC.
Mr. HILL. OK. I am trying to find out where the balance ought to be. In listening to testimony and the regulators propose the ''Know Your Customer'' Act, I see law enforcement and the regulators believe we need more intrusion into privacy. Privacy advocates testifying today would say, ''No, this is far too intrusive.'' I guess I am curious what the ABA's position is. There was some criticism raised in the testimony that ABA didn't even raise the privacy issues with regard to ''Know Your Customer'' until there was public outrage with regard to that. Do you want to address that? Is that correct? Is that not correct? Do you think the banking industry has been a sufficient advocate for the privacy of its customers?
Mr. BYRNE. As I mentioned before, the balance that you have already talked about, you know, can only be understood if you are in our shoes for a bit and see that on one hand we must report fraud, and on the other hand you want us to protect the information. The specifics of ''Know Your Customer,'' are that when the proposal came out on December 7, we were undertaking a review process, as we always do. We were going to go to our bankers, getting their comments and filing those comments. And we began immediately to hear from the bankers who told us to say that privacy was a major concern. So I think it is aand I know you are not saying thisbut it is a tad unfair to suggest that we didn't look at that.
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And, in fact, we have done a lot of work in the privacy area in the past couple of years and, in fact, testified before Chairwoman Roukema's subcommittee on the privacy principles that we established back in 1997. So I think what has happened here is, on the one side, you want us to protect the safety and soundness of our institutions and, on the other hand, you rightly want to make sure that we are not letting data go out the back door and letting folks have access to information they shouldn't have.
So privacy is a big concern of ours and that is why we sent two comment letters, one saying ''Pull the regulations, this is never going to work,'' and a second more detailed letter addressing the specifics I talked about today.
Mr. HILL. So has the balance gone appropriately, in your view, now where the law is with regardand the rules and the regulationswith regard to the Bank Secrecy Act?
Mr. BYRNE. No, I actually don't think they are. I don't have any great answers on how that balance should be handled. I think this hearing, hopefully, is a first step toward dealing with what is it that the policymakers want us to do, as well as the regulators and the public, and how do we deal with all of that. We certainly can deal with the SAR issue. Expunging the SAR data doesn't trouble me. I hear law enforcement say after a certain period of time, they may even consider doing that. Maybe that would lend some comfort to individuals. But these forms, they don't go to customers and they shouldn't go to customers.
Currency Reports they know about. They know that they are filed. So I think maybe some education both on our end and the policymakers end would help the customer and the consumer understand that it is much more complicated than it has been led to believe.
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Mr. HILL. Have you made any estimate of the cost that the industry incurs for all this reporting?
Mr. BYRNE. Well, we looked back at currency reporting back in the early 1990's, and we estimated that between $3.00 to $15.00 per form is what we filed. And if you talk about 12 million or 13 million forms, then you can do the numbers. But that was based on talking to small and mid-sized and large banks that either did it in an automated fashion or simply filed these forms manually. It didn't look at overhead and training. So I think that cost would be a low estimate of what we are spending.
Mr. HILL. One of the things that concerns me is I think that the public really has no knowledge, they are not aware of all the different forms and reports that banks are required to make with regard to their activities. Do you think it would be appropriate, at least, that banks periodically inform their customers of the nature of the reports that they are required to file and what might trigger those reports, in a generic sense, so that the public is aware of your responsibilities?
Mr. BYRNE. If you are talking, Congressman, about saying that we have reporting requirements such as currency reporting, suspicious reporting, and the other things and why they are generally filed, that doesn't trouble me. If you are, however, suggesting that we have to inform a particular customer that six months ago we filed a loan fraud possibility on that person, we would be absolutely opposed to that.
Mr. HILL. Yes. One of the concerns I have is that there is a significant number of SARs, SAR reports, that are filed. And these are reports where I presume there is a pretty substantial suspicion of activity. And, specifically, with regard to fraud against the bank. It troubles me that there are such a large number of these filed and so few that are acted on, which would indicate to me that something is out of whack here in terms of the bank isan activity is being triggered in the bank to file these reports and that doesn't trigger the same kind of response with law enforcement with regard to their response. Does that trouble you any?
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Mr. BYRNE. Yes, particularly in my testimony, we talk about some of the downsides of SARs and one was also mentioned by Chairman King, and that is feedback. But, more importantly, if you are filing a suspicious report in Boston, Chicago, some major city, the U.S. Attorney in that particular city won't take a case unless it is over $100,000 or $150,000. As you know, many small banks that have frauds committed against them are never going to get to that level. So, as a result, you are going to have a lot of SARs that we are required to file and, yet, they are not acted on and we understand why. It is a resource problem. But there is a frustration level based on that and, certainly, that is something thatI don't know that there if there are any great answers for it, but that has always troubled us.
Mr. HILL. Thank you, Mr. Byrne. Thank you, Mr. Chairman for allowing me the extra time.
Chairman KING. Thank you, Mr. Hill.
Mr. BARR. Thank you, Mr. Chairman.
Mr. Parker, it is great to see you up here. I appreciate your taking the time to share your considerable expertise with the committees, both your presence here, as well as your written materials. In looking, for example, at the SAR, the instructions, which provide a pretty good synopsis of the circumstances under which they are required to be followed.
Page 81 PREV PAGE TOP OF DOC If, in fact, as to category D: ''Transactions aggregating $5,000 or more that involved potential money laundering or violations of the Bank Secrecy Act,'' and then, of course, there are three subparts there: ''Transactions involving funds derived from illegal activities,'' and so forth; two, ''The transaction is designed to evade any regulations promulgated under the Bank Secrecy Act''; or, three, ''The transaction has no business or apparent lawful purpose or is not of the sort in which the particular customer would normally be expected to engage,'' and so forth.
Would it be your position that, if item number three were removed, would that do such severe damage to the benefits as you have indicated of having SARs as a tool for law enforcement that that would gut the entire Act or would maintaining, just in that particular section, numbers one and two, you know, still provide sufficient importance to the Federal law enforcement to maintain it?
Mr. PARKER. It would not gut the Act. That subpart number three only has validity if the financial institution engages in some ''Know Your Customer'' practice. Because there is no way, under subpart three, that one can compare a transaction as being suspicious or not unless you have an identification of what a normal transaction for that customer should be. Which then would require the bank to have a knowledge base of the customer's purported legitimate commercial activity. So, to answer your question directly, it would not gut the Act.
I might add, though, as a corollary, Mr. Barr, that in the Suspicious Activity Report, this is where I believe the Government could be more beneficial to the financial institution. I am sort of putting on my financial institution hat now, if you will. They need to be more objective in defining through regulations what constitutes suspicious activity. So there is less subjectivity in an evaluation by a particular teller of whether or not a person who comes before them is engaging in suspicious activity.
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As an example, the fact that someone comes in in a tee-shirt and clothes and who appears to have, well, whatever their appearance is, it doesn't appear to that person that they have the means by which they could engage in a transaction of over $10,000 in currency. Yet, for someone such as you and I in coat and tie, we walk in and plop down $10,000. Why are we not suspicious if they are?
Mr. BARR. I probably would be.
Mr. PARKER. But, you know, that isto answer your question, though, subpart three could be removed as a basis for filing a SAR and, nonetheless, the other two components, I think, would capture suspicious activity.
Mr. BARR. Going back to your previous point, what would be the entity which, in your opinion, could best draft those tightened regulations with regard to better defining what suspicious activity really is or ought to be?
Mr. PARKER. Well, I think the entity has to come from the regulatory side of the equation with input from law enforcement. I think it is a banking issue, a safety and soundness issue, with input from law enforcement. I think, as Mr. Byrne has stated, it goes to the essence of maybe fraud being perpetrated against the bank, generally speaking.
Obviously, if the bank knows that it is handling drug money and it, nonetheless, goes forward in doing it, it is aiding and abetting in a violation of the law. So I would think that that is pretty obvious. But I would think regulators are better suited, whether it be the Fed, FDIC, whomever.
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Mr. BARR. Do you have any particular language to which you have given thought sufficient to give that to us so we could kind of look at it?
Mr. PARKER. No, sir, I was not prepared to address this kind of issue when I agreed to appear before the panel. I don't mind trying to
Mr. BARR. Welcome to Washington. If you do have some language, because you have had considerable experience in these areas, I would like to receive it.
Mr. PARKER. All right. I will be glad to submit that later on.
[The following information was submitted at a later date by Mr. Parker:
[As to Mr. Barr's request, I proposed the following modification to the current language of sub-part (iii) of sub-section (d) of the Suspicious Activity Report Instructions.
iii. The transaction has no [business or] apparent lawful purpose [or is not the sort in which the particular customer would normally be expected to engage], and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, [including the background and possible purpose of the transaction.]
[I suggest the striking of the portions identified above by brackets removes any so-called ''know your customer'' policy from the SAR instructions, yet it still requires the financial institution to report a transaction that truly is suspicious.]
Page 84 PREV PAGE TOP OF DOC Mr. BARR. Could I ask just one other question, Mr. Chairman?
Mr. Nojeim, it is also a delight to see you here today. You have tremendous experience in these areas and I appreciate that and in the areas that we have worked together and I look forward to continuing to do that. If you were faced with the following situation: that the Bank Secrecy Act will not be repealed. What would be your order of priorities to propose changes that wouldrecognizing that there is going to continue to remain some sort of Bank Secrecy Act and some legal requirements on banks to do certain reporting to Federal law enforcement officialswhat would be your recommendations as to the top areas that we should look at to tighten it up to at least address the major privacy concerns that you and others have?
Mr. NOJEIM. I would focus first on 31 U.S.C. Section 5318(g). That is the suspicious activity reporting requirement. I think that those can be repealed and this model, which I call the American model for law enforcement, which is based on the Financial Privacy Act, would be sufficient to allow banks to voluntarily report activity that they believe is criminal activity.
Mr. BARR. Thank you.
Ms. Singleton, would you agree with that in terms of prioritizing the most important way we could address these concerns?
Ms. SINGLETON. I think that is one approach. Something that I would add to it would be to limit the discretion of regulators under the Act to propose new ''Know Your Customer'' practices in the form of informal guidelines, training sessions, and so on. So to ensure that any regulatory practice that is being followed under the Act goes through public accountability proceedings under the Administrative Procedure Act. I think that restraining agency discretion to act without public hearings in this matter is extremely important.
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Mr. BARR. Thank you. Thank you very much. And thank you, Mr. Chairman.
Chairman KING. Thank you, Mr. Barr. I think it is important to state for the record that no one in this committee would ever consider you to be a suspicious character.
Mr. BARR. Well, you may be in the minority, but I appreciate that.
Chairman KING. I want to thank the panel for their testimony and for giving us their time, their expertise. It is greatly appreciated by me, and I know by Chairwoman Roukema and all of the other Members of the subcommittees. So thank you very much. The hearing stands adjourned.
[Whereupon, at 4:36 p.m., the hearing was adjourned.]