SPEAKERS CONTENTS INSERTS
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TAKING THE PROFIT OUT OF DRUG TRAFFICKING: THE BATTLE AGAINST MONEY LAUNDERING
SUBCOMMITTEE ON CRIME
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
JULY 24, 1997
Serial No. 108
Printed for the use of the Committee on the Judiciary
Page 2 PREV PAGE TOP OF DOCFor sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
STEVEN SCHIFF, New Mexico
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
SONNY BONO, California
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRISTOPHER B. CANNON, Utah
Page 3 PREV PAGE TOP OF DOCJOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
Subcommittee on Crime
BILL McCOLLUM, Florida, Chairman
STEVEN SCHIFF, New Mexico
STEPHEN E. BUYER, Indiana
STEVE CHABOT, Ohio
BOB BARR, Georgia
Page 4 PREV PAGE TOP OF DOCASA HUTCHINSON, Arkansas
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
CHARLES E. SCHUMER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
PAUL J. MCNULTY, Chief Counsel
GLENN R. SCHMITT, Counsel
DANIEL J. BRYANT, Counsel
NICOLE R. NASON, Counsel
DAVID YASSKY, Minority Counsel
C O N T E N T S
July 24, 1997
McCollum, Hon. Bill, a Representative in Congress from the State of Florida, and chairman, Subcommittee on Crime
Page 5 PREV PAGE TOP OF DOCWITNESSES
Bugliosi, Vincent, Author, T3The Phoenix Solution
Byrne, John J., Senior Counsel and Compliance Manager, Regulatory and Trust Affairs Section, Governmental Division, American Bankers Association
Hewson, Brendan T., Senior Vice President, NationsBank
Kelly, Raymond W., Under Secretary of the Treasury for Enforcement, Department of the Treasury
Saphos, Charles S., Partner, Fila & Saphos
Warren, Mary Lee, Deputy Assistant Attorney General, Criminal Division
Zeldin, Michael F., Partner, Price Waterhouse
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Byrne, John J., Senior Counsel and Compliance Manager, Regulatory and Trust Affairs Section, Governmental Division, American Bankers Association: Prepared statement
Hewson, Brendan T., Senior Vice President, NationsBank: Prepared statement
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Jackson Lee, Hon. Sheila, a Representative in Congress from the State of Texas: Prepared statement
Kelly, Raymond W., Under Secretary of the Treasury for Enforcement, Department of the Treasury: Prepared statement
Saphos, Charles S., Partner, Fila & Saphos: Prepared statement
Warren, Mary Lee, Deputy Assistant Attorney General, Criminal Division: Prepared statement
Zeldin, Michael F., Partner, Price Waterhouse: Prepared statement
TAKING THE PROFIT OUT OF DRUG TRAFFICKING: THE BATTLE AGAINST MONEY LAUNDERING
THURSDAY, JULY 24, 1997
House of Representatives,
Subcommittee on Crime,
Committee on the Judiciary,
The subcommittee met, pursuant to notice, at 10:20 a.m., in Room 2141, Rayburn House Office Building, Hon. Bill McCollum [chairman of the subcommittee] presiding.
Page 7 PREV PAGE TOP OF DOC Present: Representatives Chabot, Barr, Hutchinson, Coble, Jackson Lee, and Conyers.
Staff present: Paul J. McNulty, Chief Counsel; Daniel J. Bryant, Counsel; Kara Norris, Staff Assistant, and Daniel Yassky, Minority Counsel.
OPENING STATEMENT OF CHAIRMAN MCCOLLUM
Mr. MCCOLLUM. This hearing on the Subcommittee on Crime will come to order.
Due to the rain out there this morning, we have fewer Members here at the moment than I would like. However, if the Senators can hold hearings with the chairman alone for awhile, we can too. I have an opening statementI suspect by the time I am through that we'll have quite a few more Members here.
This morning's Crime Subcommittee convenes to examine an urgent, global problem that only grows worse and more complex by the day: money laundering. Every day, throughout the United States and around the world, narco traffickers engage in thousands of financial transactions so as to conceal their ill-gotten gain. These international criminal organizations are driven by greed, and the laundering of their proceeds is the only pathway to profit.
The magnitude of money laundering can only be grasped in relationship to the global drug problem. The illegal drug business is now estimated to generate $800 billion to $1 trillion annually; more than the entire global petrochemical industry. Such a magnitude of drug-tainted money poses a constant threat of political corruption and destabilization around the world.
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Approximately 780 metric tons of cocaine are trafficked out of South America each year, of which 640 metric tons are destined for the United States. Colombian heroin, with unprecedented purity and low prices, is showing up in a growing number of cities around the country including my own district, Orlando. Mexican drug gangs have grown so strong and sophisticated that they now rival Colombian cartels and pose what the Administrator of the DEA, Thomas Constantine, has called ''the premier law enforcement threat facing the U.S. today.''
And hand-in-hand with the growth of these sophisticated, international drug trafficking organizations has come the growth of money laundering. Today, money laundering has reached alarming and unprecedented levels on both the national and international levels. The Mexican money laundering problem has grown so bad that drug traffickers are now driving truck loads of cash to Mexico without being challenged along the 2000-mile Southwest border. It's now estimated that $6 billion to $30 billion in drug profits are laundered through Mexico annually, and it's also estimated that more than $2.5 billion in drug money is funneled back into Colombia each year; an amount equal to Colombia's annual income from coffee sales and representing about 20 percent of Colombia's total exports. Most of the drug money returns in the form of contraband goods. The booming trade is actually believed to have caused a sharp slowdown in Colombia's industrial sector.
It is now estimated by law enforcement and banking officials that as much as $500 billion, or 2 percent of the global domestic product is laundered each year. New York CityQueens, in particularare described by law enforcement as the crossroads where drugs are smuggled into the United States and cash proceeds shipped out. The law enforcement challenge in New York and throughout the world is daunting. Consider just one aspect of the problem posed by wire transfers: the world's intricate wire transfer system moves over $2 trillion a day involving more than 500,000 transactions.
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As law enforcement has sought to uncover and prosecute money laundering over the years, the methods used by drug organizations to launder their money have grown increasingly complex and exotic. They have diversified the way they do business beyond banks and money service businesses and are now targeting corporations. As we'll hear from our witnesses, a popular method of laundering money now is to purchase and resell fungible commodities such as cosmetics, electronics, furniture, and heavy equipment. Another trend is for drug organizations to launder money by creating shell corporations that go into joint ventures with legitimate companies.
Unusual money laundering cases are becoming more commonplace as the lure of such large sums of money become more and more tempting. Just last month in New York City, a rabbi was indicted for taking cash proceeds from Colombian drug traffickers and, for a 15 percent commission, running them through the bank accounts of a synagogue and a religious school. A second rabbi was indicted in the same case for laundering money by writing checks from the same accounts to businesses that were known fronts for the Colombian drug dealers. The rabbis were also indicted for providing $3.4 million from U.S. and Swiss bank accounts to buy an aircraft for the Colombian drug traffickers.
At congressional hearings in March, 1997, law enforcement officials estimated that drug cartel money launderers in New York City have been sending more than $1 billion annually to Colombia through storefront shops that sell telephone debit cards and money orders, cash checks, rent beepers, and wire money. While the average immigrant family from Colombia in New York City earns $27,000 a year before taxes, the amount of money being wired to Colombia from New York City was $1.3 billion. Since there were 25,500 Colombian families in New York City, each household would have to be sending $50,000 a year to Colombia to account for the flow of money.
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Recently, law enforcement officials report a trend of Colombian cartels investing in American-made goods such as computers, automobile parts, and even clothing made in New York's garment district. The U.S. Attorney's office for the Eastern District in New York is now discovering that a growing number of drug traffickers are contracting out their business to money brokers who buy and sell drug profits like a commodity.
Over the years, Federal, State, and local law enforcement have taken numerous steps to attack the money laundering problem. We'll hear from our witnesses today about those efforts and how successful they've been. We'll also hear some ideas about what else we might have to do to take the profit out of the drug trade. Some of these ideas might sound bold and even fanciful, but I would submit to you the following: as of July 24, 1997, the United States is not fighting the drug war to win it. Our present campaign will not lead to victory. I've chaired and participated in numerous hearings examining U.S. counter-narcotics efforts, and I am convinced that we do not have a national strategy for victory. I know that many members agree with me, and I say that we must have a smarter, tougher, and more comprehensive plan to fight the war on drugs. We have to have a strategy; we have to have an in-plan; we have to know the mark that says that we're going to win and what it is it takes to win and the resources that it takes to win.
Drug quantity is up; drug purity is up; and use among youth is up. This is unacceptable. So, I look forward to hearing from our witnesses about how to make it more difficult for international drug cartels to realize the profits from drug trafficking, and I am prepared to consider bold initiatives that may help us fight the drug war to win it.
I think the fact is that we've become a bit numb to all of this. We hear these numbers that I've just rattled off; they probably don't seem as significant as they really are. In fact, a few years ago when I first began dealing with this problem, those numbers weren't nearly as high, and we were far more alarmed than we are today. It seems to me that Americans have become somewhat complacent even though they know that crime and drugs go hand-in-hand; there's a sense of frustration that we're never going to do anything about it. The reality is that we can not afford to do nothing. We just can't afford to sit on our hands and let this epidemic continue like it has. I'm conviced that there is a way to win the war on drugs.
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There are numerous things that could be done; first, we must set the mark. I wish the drug czar and the policy office had done more up to this point to set the mark. I hope the President will provide the necessary leadership over the coming months to set a mark that says, ''Here's what it takes on the supply side, and here's what it takes on the demand side for interdiction; for money laundering; for all of the things it takes in education and otherwise.''
I've heard too many people say in the past few months that the answer to the drug problem is drug treatment. I think drug treatment is very important for the people who are addicts and the people who have problems with drugs, and it does have a need for resources to implement, but the reality is that drug treatment does not win the war on drugs. Winning the war on drugs means stopping young people from having the opportunity to get drugs. That means stopping the drugs from coming here or making them too expensive for young people to take advantage of. In other words, stopping more people from getting on them. It involves setting some goals, as I said, that are realistic and can be achieved in the short run, then saying, ''This is a victory if you achieve this goal.'' What is it? What will it take? I personally think interdicting about 80 percent of the drugs coming into this country would be a good goal, and that it could be achieved. The question's, how much resources? But first, we have to dedicate ourselves to the proposition of defining that goal and agreeing upon the fact that we're going to go about interdicting 80 percent of the drugs headed our way. Right now, I think we interdict something like 20 percent, and money laundering is very important to that. We are not achieving the goals that we need to achieve. What is that goal? What would be ''winning the war on drugs'' as far as money laundering is concerned? And what is it going to take to actually do that?
Well, I hope that today's hearing will give us an opportunity to determine some of the goals that we need to set as well as answer the questions about what it's going to take to actually achieve victory in the war on drugs.
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Mr. Hutchinson, I've made an opening statement, and would recognize you if you have anything to say.
Mr. HUTCHINSON. Mr. Chairman, I want to thank you for holding these hearings and am looking forward to the testimony. I do not have an opening statement, but I'm delighted to participate in this hearing, and look forward to the testimony of the witnesses.
Mr. MCCOLLUM. Thank you, Mr. Hutchinson.
Mr. MCCOLLUM. I'd like to introduce the witnesses for our first panel this morning. Our first witness today is Mary Lee Warren. Ms. Warren is currently the Deputy Assistant Attorney General for the Criminal Division at the U.S. Department of Justice. She's also served as the Chief of the Narcotic and Dangerous Drug Section in the Criminal Division. Prior to her time with the Justice Department, Ms. Warren spent approximately 11 years as an Assistant United States Attorney in the southern district of New York where she served as Chief of the Narcotics Unit. She has been involved in several high profile trials including United States v. Pena, involving a crack kingpin who set a citizen on fire, and United States v. Romero, involving an individual who attempted the murder of a DEA agent. We welcome you today, Ms. Warren.
Our second witness on this panel is Raymond Kelly. Mr. Kelly was sworn in as the Under Secretary of Enforcement for the Treasury Department on June 27, 1996. As Under Secretary, he has direct supervisory authority over the department's enforcement bureaus including the U.S. Customs Service, the U.S. Secret Service, The Bureau of Alcohol, Tobacco and Firearms, the Federal Law Enforcement Training Center, and the Criminal Investigation Division of the Internal Revenue Service. Prior to his service at the Treasury Department, Mr. Kelly served as Commissioner of the New York City Police Department from September, 1992 until his retirement in January, 1994 during which time he was recognized as New York State's law enforcement official of the year in 1993. Recently, he served in Haiti as Director of the International Police Monitors of the Multinational Force from October, 1994 through March, 1995. In addition to his position with the Treasury Department, Mr. Kelly is currently the U.S. Law Enforcement Representative on the Executive Committee of Interpol. I think the order of precedence says that you go first today, Mr. Kelly.
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Both of your statements will be entered into the record in full, without objection. I hear none. You may summarize or give us any portion of your testimony you wish.
STATEMENT OF RAYMOND W. KELLY, UNDER SECRETARY OF THE TREASURY FOR ENFORCEMENT, DEPARTMENT OF THE TREASURY
Mr. KELLY. Thank you very much, Mr. Chairman. I appreciate you providing me with the opportunity to be here today to speak about a subject of central concern to the Treasury Department, and that is the effort to combat drug money laundering.
The money laundering threat is critically important to Treasury, because it can undermine the integrity of U.S. financial institutions and payment systems. As Under Secretary for Enforcement, my office has oversight authority over the U.S. Secret Service, Customs Service, The Bureau of Alcohol, Tobacco and Firearms, Financial Crimes Enforcement Network, or as it's called FinCEN, and the Office of Foreign Asset Control. Treasury Enforcement also provides policy guidance to the Internal Revenue Service's Criminal Investigation Division.
These entities are responsible for significant elements of the U.S. Government's anti-money laundering program. IRS Criminal Investigations, Customs, and the Secret Service are charged with investigating money laundering in cases where the underlying criminal act lies within their jurisdiction. FinCEN is responsible for administering significant portions of the Bank Secrecy Act which requires reporting and record keeping by financial institutions to deter money laundering, and to provide a paper trail for investigators.
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As we all know, much of what we consider the crime problem affecting our Nation, particularly as it relates to narcotic trafficking, is the work of sophisticated international criminal enterprises. Money laundering is the life support system of these enterprises. The volume of elicit funds flowing through legitimate financial channels is difficult to quantify, but we know that it is large and growing. It is also increasingly international in character. Now, more than ever, a sophisticated and well financed criminal world exploits the global economy to its advantage.
So, what do we do to address the money laundering threat? First, we develop a domestic strategy that focuses on both prevention and enforcement. Second, we work to ensure that other nations are taking the necessary steps to combat money laundering.
Domestically, Treasury is uniquely positioned to attack money laundering on all fronts. Through the exercise of its regulatory authority, Treasury is promoting the prevention and detection of money laundering in financial institutions and businesses. These regulatory measures are complimented by aggressive criminal investigations aimed at dismantling money laundering systems and arresting launderers.
The best example of the comprehensive prevention and enforcement approach we are seeking to cultivate can be seen in the recent New York Geographic Targeting Order, or GTO. Through the work of a Treasury led task force, called El Dorado, it became apparent that Colombian drug traffickers were using certain money remitters in the New York City area to launder cash. The evidence demonstrated that 12 remitters alone had funneled approximately $800 million to Colombia last year. As you said, Mr. Chairman, to account for this money legitimately, each Colombian household in the New York area would have had to wire $30,000 to Colombia; an amount which exceeds the $27,000 average annual income for this community.
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To address this problem, Treasury invoked a little used statutory provision, and required 23 New York area money remitters and their agents to report identifying information on all cash remittances of $750 or more to Colombia. The results of the GTO were dramatic. Several of the targeted remitters stopped sending funds to Colombia; some went out of business. Six remitters plead guilty or have been indicted for structuring transactions to avoid the GTO. The latest case, announced just this last Tuesday, charged one of New York's largest remitters in a multimillion dollar laundering scheme.
The GTO also has forced the drug traffickers to resort to riskier methods of moving their cash. In the first 6 months since the GTO went into effect, Customs seized approximately $50 million in currency at east coast ports of entry; about a 400 percent increase over the same period the previous year.
We've been exploring ways to replicate the GTO concept on a more widespread basis. Our goal is to combine Treasury's regulatory authority with the investigative resources of the Treasury and Justice agencies to address systemic weaknesses in financial sectors and institutions. A bill recently introduced by Congresswoman Velasquez, cosponsored by Congressman Leech and Gonzalez, could promote this kind of effort. As I understand it, the bill would provide for increased Federal assistance to attack money laundering directed at financial systems. The administration is in the process of developing a position on the bill, and Treasury has some technical concerns which we hope to address. Still, the bill could provide the impetus and resources to develop more initiatives like the New York GTO.
Through innovation and regulation and enforcement, then, we are working to make U.S. channels less user friendly to criminal enterprises, but this is just half the battle. As I said, organized crime is increasingly a transnational phenomenon. The failure by other nations to adopt effective laws and enforcement policies will allow criminal organizations to simply forum shop. Important strides have been made in this area in recent years, particularly through multilateral efforts. Chief among these has been the Financial Action Task Force, or FATF. In the 8 years since its inception, FATF's membership has increased to include most of the world's major financial centers. More important, virtually all of its members have undertaken significant regulatory and legislative reforms. In addition to multilateral initiatives, we and our partners at Justice and State are working through bilateral channels to encourage governments to take the necessary steps. These efforts have begun to yield some encouraging results in places like Panama, Mexico, and the Netherlands Antilles.
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In closing, law enforcement likes to compare money laundering to a balloon: just as putting pressure on one end of the balloon will force air to the other, so too will effective enforcement measures force money launderers to seek new paths of least resistance. As a consequence, we cannot rest on our recent successes. We must be prepared to shape our response to meet an ever-evolving threat. Thank you.
[The prepared statement of Mr. Kelly follows:]
PREPARED STATEMENT OF RAYMOND W. KELLY, UNDER SECRETARY OF THE TREASURY FOR ENFORCEMENT, DEPARTMENT OF THE TREASURY
Chairman McCollum, Mr. Schumer, members of the Committee, I appreciate your providing me with the opportunity to be here today to speak about a subject of central concern to Secretary Rubin, the US Treasury Department, the US Department of Justice and Congressthe US Government's effort to combat drug money laundering.
As Under Secretary of Treasury for Enforcement, my office has oversight authority over the U.S. Secret Service, the Customs Service, the Bureau of Alcohol, Tobacco and Firearms, the Financial Crimes Enforcement Network or ''FinCEN,'' and the Office of Foreign Assets Control, or ''OFAC.''
These entities, in turn, are responsible for significant elements of the U.S. Government's anti-money laundering effort. IRSCI, Customs, the Secret Service and ATF are charged with investigating money laundering in cases where the underlying criminal act lies within their core jurisdiction. FinCEN is charged with administering the Bank Secrecy Act, which prescribes transaction reporting and record keeping requirements for financial institutions designed to insulate those institutions from money laundering, and to provide a paper trail for investigators. FinCEN also serves as the central point for collection and analysis of Bank Secrecy Act data, providing case support to law enforcement investigations. OFAC is responsible for implementing sanctions against nations determined to be a threat to the national security, economy or foreign policy of the United States, pursuant to the International Emergency Economic Powers Actor IEEPA.
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MONEY LAUNDERING GENERALLY
I will begin my remarks with a few comments about the challenges we are confronting. Then I will turn to the approach which the Treasury Department, in conjunction with the Departments of Justice, State, ONDCP and other agencies, and the financial services sector, is taking to address these challenges. Specifically, I will discuss Treasury's domestic efforts, and the initiatives we are pursuing in the international sphere.
As you all know, much of what we consider the crime problem affecting our nation and our neighborhoodsparticularly as it relates to narcotics trafficking and the myriad of associated crimesis the work of sophisticated, international criminal enterprises. Money laundering is the life support system of these enterprises. The ability to sanitize ill gotten gains permits drug trafficking and other criminal organizations to perpetuate, and live lavishly from, their illegal activity.
But while money laundering is the ''life blood'' of organized crime, it also is its ''Achilles Heel.'' The steps which criminal groups must take to give their illegal profits the appearance of legitimacy provide us with an invaluable opportunity to attack the groups themselves. The better we are at tracking dirty money, the better our chances at reaching the leadership of the drug trafficking groups. For while the drug kingpins can separate themselves from street-level sales, they cannot separate themselves from the profits those sales generate.
The money laundering problem we are facing today is increasingly international in character. The greater integration of the world economy, and the removal of barriers to the free movement of capital, have combined to create new commercial opportunities. Unfortunately, the same efficiency and convenience that the global economy affords to legitimate commerce, also make easier the job of disposing of criminal proceeds.
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Now, more than ever, drug trafficking and other criminal groups can manipulate an expanding array of tools to shield their profits, without regard to international borders. A well organized and abundantly financed criminal world can exploit weaknesses in nations' legal and regulatory systems by shifting business to and through countries with less stringent anti-money laundering controls.
Let me give you an example which illustrates the scope and complexity of money laundering today: In Miami, Colombian drug traffickers exchange their U.S. drug dollars for Colombian pesos through a Colombian currency exchanger. The currency exchanger then buys cashier's checks at U.S. banks in amounts under $10,000, avoiding currency reporting requirements. The currency exchanger then sells these dollar-denominated cashier's checks to Colombian businessmen. The Colombian businessmen use the checks to purchase goods and services in Panama, Europe and Asia. The drug trafficker has converted the drug proceedsdirty moneyinto Colombian pesosclean moneywhich can be spent as legitimate funds.
TREASURY'S RESPONSE: REGULATORY AND INVESTIGATIVE EFFORTS
So what do we do to address the money laundering threat? First, we develop a domestic counter-money laundering strategy that focuses on both prevention and enforcement. Second, we promote an aggressive international campaign to ensure that all nations are pursuing the money laundering problem with the same degree of vigilance.
Domestically, our goal is to combine effective prevention of money laundering with aggressive enforcement after the fact. Leveraging Treasury's unique regulatory authority in concert with its enforcement capabilities (and those of other agencies), we seek a comprehensive approach to the money laundering problemone that both insulates financial institutions from criminal proceeds, and enhances the prospects for identifying launderers and disrupting their schemes.
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We are accomplishing this objective in several ways. To enhance our ability to prevent money laundering, for example, we are developing more intelligent, targeted regulations for banks and other financial institutions. In the last several years, FinCEN has been engaged in an effort to strip away unnecessary and burdensome regulations while actually increasing the utility of the information provided to law enforcement. We have reduced the amount of information required by eliminating duplicative or unnecessary fields on currency transaction reportsthus reducing the time bankers devote to generating the reports and law enforcement's time to analyze them. And we are working to reduce CTR filings by one thirdor about 3 million reports. This reduction will be accomplished by streamlining the process by which banks exempt legitimate, cash-intensive business from filing reports.
In place of these costly requirements, we have introduced an invigorated system of suspicious transaction reporting. Our objective is to permit the financial sector to redirect its resources from mechanical compliance to more proactive detection methods. We seek to form an alliance with the financial services community, utilizing their expertise to identify potential criminal conduct within their midst. After all, the institutions are in the best position to understand their customers' businesses and to recognize and report suspicious activity.
We are also working to extend the Bank Secrecy Act's anti-money laundering controls to institutions which traditionally have not been covered, or which have not been covered in appropriate and effective ways. As a consequence, these institutions have proven to be at-risk for exploitation by money launderers. The evidence has demonstrated that as we have become more successful in preventing illicit funds from entering banks, the criminals have moved their money to other providers of financial services. To define the universe of these non-bank financial institutions, we have proposed rules requiring the registration of issuers and sellers of travelers checks and money orders, money transmitters and other ''money services'' businesses. To provide better protection against money laundering, we have issued proposed rules requiring certain of these institutions to report suspicious activity, and imposing a special currency reporting rule on certain outbound currency transfers.
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Let me emphasize that the overwhelming majority of the businesses affected by these new rules are engaged in legitimate and valuable commercial activity. Indeed, the industry has been generally supportive of our work. The rules are intended only to make life difficult for the money launderers and their accomplices, and to prevent the manipulation of honest businesses by criminal enterprises.
In addition to our regulatory efforts, which are geared toward preventing the placement of illicit proceeds in our nation's financial institutions, we are working through our investigative bureaus to enhance the detection of money laundering. Customs and IRSCI in particular are aggressively pursuing investigations in which the disruption of a money laundering operation, and the arrest and prosecution of the launderers, are the primary objectives. Together, the agencies have approximately 1,100 expert financial investigators and staff dedicated to these ''pure'' money laundering investigations. Last year, they conducted thousands of investigations, arresting and convicting approximately 2,000 money launderers and seizing approximately $ 314 million dollars.
Last year, IRSCI conducted 1,850 money laundering investigations, obtaining 1,265 indictments and 1,031 convictions. IRSCI seized $ 78 million in connection with money laundering cases. The Customs Service last year arrested 1,066 individuals on money laundering charges, resulting in 686 convictions. Only two days ago, Customs seized $ 1.2 million and arrested three suspects in connection with a significant money laundering investigation.
The paradigm example of the holistic, combined prevention/enforcement approach to money laundering which Treasury is seeking to cultivate can be seen in the recent New York Geographic Targeting Orders, or GTOs. Through the work of a Treasury-led task force, Operation El Dorado, it became apparent that Colombian drug traffickers were using certain money remitters in the New York City area to launder drug cash. The evidence demonstrated that 12 remitters alone had funneled approximately $800 million to Colombia last year. To account for this money legitimately, each Colombian household in the area would have had to wire $ 30,000 to Colombia each yearan amount which exceeds the $ 27,000 average annual income for this community.
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To address this problem, to address this problem, Treasury invoked a little-used statutory provision which grants the Secretary of the Treasury authority to require special reporting and record keeping by financial institutions in specific geographic areas where necessary to fulfill the purposes of the Bank Secrecy Act. The first New York GTO was adopted in August 1996. It required 12 New York area money remitters and their approximately 1600 agents to obtain and report identifying information on all cash remittances of $750 or more to Colombia. A second GTO was signed in October 1996, extending the heightened reporting requirements to 10 additional remitters and their agents. The GTOs have been extended by Treasury five more times.
The New York GTOs have had a significant impact on the flow of drug proceeds through the targeted remitters. Several of the remitters targeted under the GTOs have stopped sending funds to Colombia altogether, while many others are sending significantly lower amounts. Six remitters have been indicted or pled guilty to structuring transactions to avoid the GTOs, including an indictment handed down two days ago. Several others are under investigation.
The GTOs also forced the traffickers to resort to other, more difficult tactics to move their profits back to Colombia, thereby improving our chances of seizing more money and effecting more arrests. In the first six months since the GTOs went into effect, Customs seized approximately $50 million in currency at East Coast ports of entrya four hundred percent increase over a comparable period last yearas traffickers had to move money in bulk.
The New York GTOs represent the model for intelligent money laundering control. Beyond using traditional law enforcement techniques to address discrete instances of criminal activity, the GTOs marshaled Treasury's regulatory authority to identify and correct a weakness that had penetrated a small but important part of the money transmitter industry. This preventative effort, in turn, triggered a wave of enforcement activity, as money launderers were forced to resort to riskier means of moving their funds once the vulnerabilities in the transmitter industry had been remedied. Finally, the evidence gleaned through the New York GTO experience prompted Treasury to propose a more permanent solution to the problems it sought to address. In May, FinCEN issued a proposed regulation applying the GTO's $ 750 reporting requirement to all cash-purchased, overseas remittances by money transmitters nationwide.
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Through innovation in regulation and enforcement, then, we are working to make U.S. financial channels less user friendly to criminal enterprises. But this is just half the battle. As we have said, organized crime is increasingly a transnational phenomenon. No country's individual effortswhether in the legal, regulatory, or law enforcement arenawill be sufficient given the relative ease with which money flows across borders. A truly effective attack on the Colombian cartels, on the Russian mafia, and on the myriad groups operating in this country, requires that effective controls over the movement of their funds be implemented by all nations.
Important strides have been made in this area, particularly through multi-lateral initiatives. Chief among these has been the Financial Action Task Force, or ''FATF.'' The FATF is an independent, international group formed in 1989 by the G7 nations to cultivate the development of effective anti-money laundering controls and enhanced cooperation in investigations among its membership and around the globe. The FATF 40 Recommendations, issued originally in 1990 and updated in 1996, serve as a benchmark for governments addressing the legal, financial and regulatory aspects of money laundering. Further, the FATF has ensured that its members have taken action to comply with these measures, and has persuaded an increasing number of non-members to do so as well. The U.S. delegation to the FATF primarily consists of representatives from the Departments of Treasury, State and Justice.
In the eight years since its inception, the FATF has made significant progress. The organization's membership has expanded to include 26 nations and two regional organizations, representing the world's major financial centers. Virtually all of its members, including most notably traditional bank secrecy proponents such as Switzerland and Luxembourg, have undertaken important regulatory and legislative reforms to comply with the 40 FATF recommendations. Whereas prior to the establishment of the FATF, money laundering was a criminal offense only in the U.S. and a couple of other nations, now all FATF members have such laws in place.
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In addition, while the FATF cannot directly be linked to any money laundering cases, the organization has been instrumental in bringing about legislation which in turn has made major transnational investigations possible. For example, Operation Dinero was a 1994 IRS/DEA investigation conducted jointly with authorities in Spain, Canada and Italy which targeted an international laundering ring connected to the Cali Cartel. Dinero culminated in the arrest of 116 suspects in the participating countries, as well as the seizure of more than $90 million in cash and nine tons of cocaine. The Italian suspects arrested in connection with the investigation were arrested under an anti-money laundering law passed in the wake of, and to comply with, the FATF 40 Recommendations.
The FATF has forged an international consensus on the need for stronger counter-money laundering programs. Experience has instructed, however, that turning consensus into effective, practical measures requires specific steps appropriate to local and regional conditions, cultures and financial systems. Two regions of the worldthe Western Hemisphere and Asiaalready have begun to establish their own FATF analogues. The U.S. is actively supporting the development of these organizations.
A similar initiative designed to build upon the FATF's success in the Western Hemisphere is the Summit of the Americas. As a follow up to the 1994 Summit in Miami, Secretary Rubin convened a conference of Finance and Justice Ministers representing the 29 of the 34 democracies of the region in Buenos Aires in December 1995. The purpose of the Buenos Aires conference was to develop a coordinated, hemispheric strategy to combat money laundering. The conference produced an agreement on the basic elements of such a strategy, including the need to: criminalize the laundering of the proceeds of drug trafficking and other serious crimes; adopt reporting and record keeping regulations to protect financial institutions; take steps to enhance international cooperation in money laundering investigations; and create financial intelligence units that specialize in the collection and analysis of pertinent financial records in order to help track criminals' financial activities.
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Although it is early, the Summit process has yielded promising results. Over one third of the Summit nations have passed legislation criminalizing money laundering, or have issued anti-money laundering regulations. Many others are considering doing so. Three have established financial intelligence units. Cooperation across national lines appears to be increasing, as evidenced by the arrest of major money launderers such as Mexico's Juan Garcia Abrego and Panama's Israel Murdoch, the product of joint investigations between U.S. law enforcement agencies and their counterparts in those countries.
While multilateral initiatives are a necessary component of Treasury's international anti-money laundering strategy, bilateral initiatives are equally important. Working with our partners at the Departments of State, Justice, and the Office of National Drug Control Policy, we focus a significant amount of time and attention on individual relationships. Our goal is to generate the necessary political will to bring about needed reforms in legislation and regulation. We also seek to provide the technical expertise and training to permit new laws and rules to be implemented effectively. Finally, we work to promote aggressive enforcement of these measures both domestically and across national lines.
A primary example of the benefits of such a dialogue is the situation in Mexico. With the support and encouragement of the U.S. Government, Mexico adopted legislation criminalizing money laundering in 1996. Since then, we have been working closely with Mexican authorities to build upon the new legislation. In March of this year, the Government of Mexico undertook a significant step to insulate its financial institutions from money laundering by issuing regulations mandating currency transaction reporting, suspicious activity reporting, and customer identification by banks and financial institutions.
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Treasury, in conjunction with our colleagues from Justice and State, has been working closely with the Mexican Finance Ministry to assist in the development of these new rules. This includes the design by FinCEN of a computerized database to make the best use of such reports. The first phase of the Mexican initiativethe development of a suspicious transaction reporting systemis under way. We look forward to continuing our work with Mexican authorities on the implementation of the suspicious transaction reporting and further implementing a currency transaction reporting system, due in the beginning of 1998.
The final component of Treasury's international strategy embraces situations where cooperative efforts are simply insufficient, and where well-targeted enforcement measures will. In October, 1995, President Clinton issued an executive order invoking his powers under the International Emergency Economic Powers Act to block assets and prohibit transactions with the people and businesses associated with the Colombian Cartel. The President's order granted OFAC, working in conjunction with the Departments of State and Justice, the authority to block the assets of the traffickers and their front companies in the U.S. and to bar U.S. citizens and companies from doing business with them.
The initial list of the so-called ''Specially Designated Narcotics Traffickers'' subject to the President's directive included the four kingpins of the Cali Cartel and 94 companies doing business with them. OFAC has added over 300 persons and companies to the list. Additional names subject to the order were released earlier this year.
In pursuing this type of initiative, which is unprecedented under the IEEPA statutes, President Clinton has sent a clear message: if you participate in drug trafficking and other serious crimes, we're coming after you; if you help hide the assets of those committing such crimes, we're going to hit you just as hard.
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Of course, we hope that there will be less need for tougher measures as we proceed in our fight against money laundering and financial crimes. Constant reassessment will help us in making the necessary policy determinations. It also will help us develop threat assessments in the face of constantly changing technologies that present economic opportunity not only to the mainstream, but to the criminal element.
The emergence of new payment technologies, such as smart cards and Internet banking, may present new challenges to law enforcement authorities seeking to stem international financial crime. We must continue to monitor such developments, realizing their potential benefits for legitimate commerce. But we also must be in a position to adapt to the new systems as they mature.
Law enforcement authorities like to compare money laundering to a balloon. Just as putting pressure on one end of the balloon will force air to the other, so too will effective enforcement measures force money launderers to seek new paths of least resistance. As a consequence, we cannot rest on our recent successes. Working in a cooperative spirit with the Departments of Justice, State, and the Office of National Drug Control Policy, and with our counterparts overseas, we must be prepared to shape our response to meet an ever-evolving threat.
Mr. MCCOLLUM. Thank you, Mr. Kelly.
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STATEMENT OF MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION
Ms. WARREN. Thank you, Mr. Chairman and members of the subcommittee. Thank you for this opportunity to address you on the very important topics of the nature and extent of drug proceeds and other money laundering, and the efforts that law enforcement is taking to identify, target, and prosecute the perpetrators of these crime and to seize and forfeit the assets and instrumentalities of their crime.
Let me, today, follow and expand upon some of the themes raised by the Under Secretary. First of all, in targeting the money and how we do it. All understand that the reasons the criminals are in this businesses, particularly drug trafficking, is for the profits; that's understood. A rarely stated fact, also clear in this drug trafficking business, that at least where organized criminal activity generates its proceeds, its profits in cash, that the criminals are faced with an enormous dilemma: the sheer volume of the cash that is produced as a result of their activities. This coupled with the need of the enterprise to enter it into the financial system, create for the traffickers, a vulnerability, and for law enforcement, an opportunity to target those elicit proceeds.
To put the drug trafficker's cash burden into clearest perspective, I've provided a chart that compares the weight of the elicit drugs that must be sold to generate a specific sum of moneyfor example, $1 millionwith the weight of the currency that the criminal must then seek to return to his use.
Page 28 PREV PAGE TOP OF DOC For example, if a trafficking organization wishes to sell $1 million worth of heroin on the streets of Chicago, New York, wherever, it must produce and transport and distribute 22 pounds of heroin to do so. But once having sold the drug, the trafficking organization must contend with 256 pounds of street cash; fives, tens, and twenties. Thus, nearly 10 times the bulk of the drugs is in the cash proceeds. If it's cocaine, it's six times. Even more dramatic are the figures where a major drug trafficking organization is selling billions of dollars worth of illicit drugs, then the volume of the cash proceeds is in tonnage amounts.
Equally crucial to remember is that the international drug trafficker produces, processes, and transports his illicit products in places with only a limited U.S. law enforcement presences until the moment he brings his product into the United States. Once the illicit drugs are sold in the States, however that trafficker or his domestic or international money launderer immediately faces a U.S. law enforcement anti-money laundering regime in the form of the Bank Secrecy laws, the Federal, State, and local anti-money laundering investigators, prosecutors, regulators, undercover operation, title III interceptions, and interagency attacks such as the Geographical Targeting Order.
Thus, our basic anti-money laundering objective must be and is to identify and prevent the initial placement of that cash of the drug proceeds into our Nation's financial system. It is at this stage that the launderers of the drug proceeds are vulnerable to detection and later prosecution, and their illicit proceeds are most susceptible to identification, seizure, and forfeiture.
A primary line of attack against domestic and international drug and other money launderers has been and continues to focus on the cash placement vulnerability, and thereby to deny our financial system to money launderers. Placement into our system means the criminals must search and attempt to corrupt an array of financial sectors, and we at the Department of Justice and the Department of Treasury are committed to attacking illicit cash proceeds money laundering through a financial sector approach. We continue an individual case by case investigation and prosecution effort but are also looking from a different perspective, trying to use innovative thinking through greater effect with a financial sector approach.
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Our banks and other depository institutions are our first line of defense against the placement of illicit cash proceeds into our financial system. While exceptions still occur, they're not perfect, we have largely succeeded in barring the launderers direct access to our banks. As a result, the illicit cash proceeds money launderers seek to enter the banks indirectly through wire remitters, the casas de cambio, the vendors of traveler's checks, money orderers, and check cashers, trying to come in the side door of our banks where they have not been able to enter our banking system directly.
We view these institutions as representing discreet financial sectors and are working jointly with the Treasury Department, the Postal Inspection Service, and the Federal Regulators to identify laundering through these sectors and to deny access to our financial systems through these entry points. The most successful joint attack to date has been in the use of the Geographic Targeting Order, the GTO, that the Under Secretary spoke of. The chairman clearly understands the problem raised in the Jackson Heights areas with the amount of money that was being remitted by the Colombian households being completely incongruent to the household finances in that area.
Let me expand upon the GTO that the Under Secretary has introduced. This weapon, the Geographical Targeting Order, gives the Secretary of Treasury or his designee the authority to issue an order to financial institutions in a designated geographic area where reasonable grounds exist to find additional record keeping or reporting is necessary to enforce the money laundering laws. The order is effective for 60 days in New York. The first order has been extended enumerable times now. The law gives the Government authority to identify and target an entire financial sector in a locale where we believe and can show money laundering is occurring. Since anonymity is essential for money launderers, the additional record keeping and identification requirements and the lower threshold for reporting of cash transactions that a GTO requires, make the targeted financial sector much less desirable and practical for illicit proceeds placement in a particular area.
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The origins of this GTO go back more than 3 years to a collective initiative of the United States Attorney's Office for the eastern district of New York and the Treasury's El Dorado Task Force. They agreed, together with State and local authorities, to dedicate significant resources and personnel to the pursuit of at first lower level targets in the money remitting industry in the Jackson Heights area with the expectation that these lower level targets would lead to more high level targets and possibly, if evidence warranted, to the targeting of an entire financial sector. This interagency effort involved hundreds if not thousands of hours of painstaking review and evaluation of money remitter records and activities. A database on that industry as well as the population it served was created and analyzed. The underlying data collected from money sourcesfrom many sources and investigative means provided the support and justification necessary for the Department of Treasury to issue and renew the GTO.
If I could just highlight the important work in the course of that, that the IRS examination branch did and the IRS Criminal Investigation Division did. Their services were critical to establishing the predicate for the GTO. IRS is the only regulator in this particular arena. These were not tax revenue producing for the IRS but reinforcing of the integrity of the U.S. financial system.
If I could also highlight for this particular subcommittee the work of the U.S. Attorney's Office. This enormous project resulted in several convictions, but on a scale of the number of prosecutions that a U.S. Attorney's Office has in a particular year, they might considered quite low in number, yet, the effect of the work of thoseof the Assistant United States Attorney assigned to this matter has a staggering effect on the financial system. I will ask once more when we appear before the committee to justify our statistics on convictions at the end of the year, to consider these important efforts such as the GTO.
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Simultaneous and almost equally important with the development of the predicate for the GTO was the development of a comprehensive plan for the supporting steps to be taken once it was implemented. The day that it went into effect, an entire array of law enforcement efforts was put into play. We knew that the GTO would displace enormous quantities of drug currency into other financial sectors and that money launderers would quickly seek an outlet to avoid the targeted remitters. Millions of dollars of drug proceeds normally returned to Colombia through the money remitters would have to find another way out and would travel by bulk shipment through and out of the United States and through other outlets. Thus, we had to allocate and apply resources and personnel in advance to ensure not only that the terms of the GTO were being followed and the reporting was accurate, but that other pipelines for the illicit money were closed, and all possible follow-up actions would be taken to track and seize the drug proceeds displaced.
We coordinated and directed the implementation together in which Federal, State, and local law enforcement would be on the lookout for these funds. Increased attention on money order sales was under surveillance; stepped up enforcement actions, particularly seizures at the airports and the border; enhanced street level enforcement and surveillance of all routes known to be used for the transport out of the area, and we coordinated and monitored all money laundering cash undercover activity in the GTO area.
Targeting the illicit proceeds being placed into a specific financial sector and the cooperative interagency enforcement effort has had remarkable results. As a result of the GTO, first, the money remitters either completely stopped this business; went out of business or shut off the pipeline to Colombia of this illicit cash. Second, the seizure of illicit cash increased across the board as the Under Secretary said. Third, painstaking analysis of the reports filed under the GTO has led to continuing analysis of the financial records of the money remitters, and this has led to a number of criminal investigations and prosecutions in the eastern district of New York.
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We've also worked to support the GTO internationally. We knew from our investigations which establishments were receiving the funds in Colombia. Accordingly, the Criminal Division sent a list of those Colombian establishments through our embassy in Bogota to the Colombian banking superintendent, and asked her take all necessary inquiries, and take appropriate actions against those establishments available under Colombian law and to provide us with a report of those actions. We have learned that some efforts have been begun as a result of the list we submitted, and we will continue to monitor closely the actions taken against the remitters in Colombia. After this hearing, I'm on my way to Bogota, and will follow-up with the bank superintendent once more.
We intend to continue to supplement this list, and inform Colombia of additional remitters as we identify them. Colombia has agreed to send us a list of those remitters, and we will ensure that it is made available to all their districts so that in the United States we will know where money remissions are permitted and authorized in Colombia. Remarkably, as a result of the use of our GTO, Colombia has now instituted a $750 reporting mandate for international transactions of money by its money remitters out of the country.
By any yardstick, the GTO has been a success, and has confirmed that a collective attack on a financial sector can have outstanding results. The Under Secretary raised the proposed new regulations that are under consideration by the Treasury Department for review. Again, some of those are to make specified money service businesses, those traveler check vendors and others, subject to suspicious activity reporting; to require national registration with the Department of Treasury by various money service businesses, and to require large value cash reporting by money transmitters in excess of $750 in cash outside the United States. The Department of Justice firmly supports these proposals, and we look forward to their earliest possible implementation.
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Use of the GTO mechanism and passage of the proposed regulations are but first steps. More must and will be done to target the immense volumes of illicit currency, daily being placed into U.S. financial sectors as well as being moved physically out of the country and then, once out, brought back into the financial system of the United States. We believe that the most important lesson from the GTO is the value of consistent and close interagency cooperation at all stages of financial sector targeting; that prosecutors and investigators must work actively and together to target the appropriate sector.
In order to carry out this approach, we, the Department of Justice and the Department of Treasury, have brought together prosecutors and investigators from the principle money laundering cities of the United States, and met with them at headquarters. We have reviewed the new GTO with them; the new technologies that are available; the proposed regulations; what other countries are doing, and what we're doing with those countries bilaterally. We've learned from them in a district by district account what the threat in those districts is as they see it, and the attacks that they have made so far. Together, we have worked to brainstorm on where we go from here. This will become a regular occurrence of bringing together these professionals in investigation and prosecution of money laundering offenses.
One of the issues raised in the course of the conference was that bulk shipment of cash out of the country, largely by courier and then brought back into the United States, is an enormous problem that must be addressed. With respect to the export of the currency out of the United States, we are aware of the very limited Custom Service resources at the border to inspect all outbound individuals, conveyances, and their contents. We are working with Treasury to study and hope to find technological aids that would permit the detection of large volumes of currency. These are studies that are at their initial phases right now.
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On inbound currency, we must find ways to monitor the inbound currency, and we must work with our international partners, those who have the ability and the political will, to work on this importantin this important area. We must also work with our State authorities. Some States have been more diligent and vigorous in their oversight of money laundering and the abuse of financial sectors than others, and we must work to bolster those who have been less vigilant.
Drawing upon all the experience we have had, the Department of Justice, likewise, intends to increase the training for our prosecutors, and to educate them about the benefits of a financial sector and cash proceeds placement and movement approach to drug trafficking.
The accent today is on drug proceeds money laundering. Let me just mention that, of course, the anti-money laundering efforts are not solely in that area. We also have an accent on anti-money laundering in the white collar area. Approximately 45 percent of the cases filed, indictments filed, in the Federal courts that we review in the area of money laundering have white collar offenses as predicates. In various insurance frauds, and in frauds of our Government programs, typically involve money laundering, and typically involve an international aspect. We continue to train our prosecutors in these areas and to assist law enforcement agencies in their training efforts.
Congress has continually shown its support for our efforts in prosecuting money laundering by adding to the list of predicate crimes for money laundering statutes. For example, the addition of health care offenses and terrorism offenses as money laundering predicates will enhance the Department's efforts in these important areas.
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To further enhance Federal law enforcement's ability to combat illegal money laundering, we are working with the Department of Treasury to draft legislative proposals designed to attack the domestic and international laundering of criminal proceeds, either by criminals who commit crimes abroad and launder them in the United States or by those who commit offenses in this country and seek to launder their ill-gotten gains here or abroad. The Department of Justice and Treasury look forward to developing these proposals and working with your staff to advance them.
Have our interagency attacks on the financial side of the drug trade made a difference? I strongly believe so, and two important developments bear me out: as a result of the increased difficulty to move the proceeds out of the United States, the Colombian drug trafficking organizations more and more are distancing themselves from the money side of their operations by contracting out the laundering of the drug proceeds to independent money brokers. This contracting out process costs them money; it makes their business more expensive and more risky. The Department of Justice, it's prosecutors, investigators, and support staff, both at headquarters and in the U.S. Attorney's Office, are extremely proud of the part we have been able to play in our joint anti-money laundering endeavors, and congratulate the Department of Treasury for its use of the GTO as well as the work of FinCEN and its working relationship with the financial community in the United States.
We have seen the results of targeting the money and are committed to the same interdepartmental, interagency approach in the future. I very much appreciate your having giving me the opportunity to present the Department's view on this crucial area of money laundering enforcement, and would be pleased to answer any questions from the subcommittee at this time. Thank you, Mr. Chairman.
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[The prepared statement of Ms. Warren follows:]
PREPARED STATEMENT OF MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION
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Mr. MCCOLLUM. Thank you Miss Warren. I'll recognize myself first for 5 minutes.
I have been involved in the oversight of money laundering and in authoring a number of these statutes for a number of years. So, I am pleased to hear that the Geographical Targeting Order process is working well and that you feel you're making some impact. I am also plesed to hear that law enforcement, generally, is pursuing those things with the tools that we gave them. However, I am concerned with the gross picture, and I want to explore that briefly.
Do we have any estimate on how many drug tainted dollars leave the U.S. each year, Mr. Kelly or Ms. Warren?
Mr. KELLY. No, sir, we don't. There's a lot of estimates out there. Treasury is trying to put together an empirically based analysis to come to some number, but we simply don't. I've heard $300 billion a year as a number that's been bandied about as far as laundering is concerned, but we really have no basis to support that number at this time.
Mr. MCCOLLUM. When we talk about money laundering, we use that term pretty loosely. Do you two think of money laundering both in the sense of what goes financial institutions or some kind of intermediary to leave the countrythat's the technical crime of money laundering that we've createdas well as the cash movement, or is money laundering strictly limited in your minds to the statutory criminal aspects that we've defined it to be through using financial intermediaries?
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Mr. KELLY. I think we believe money laundering crosses the entire gamut. Virtually, every crime that's not a crime of passion is a crime of profit, and it has some element of money laundering in it. So, we look at it as a very broad, widespread
Mr. MCCOLLUM. So, if I ask the Treasury or Justice Department to come up with an estimate of how much cash leaves the United States, how much is laundered in total, would it all be encompassed in the term ''money laundering?'' I would like to know that estimate because it seems to me that we can't win the war on drugs or define what winning it is until we first determine how much money is moving out of the United States to Colombia or wherever and then measure how much of this we are actually stopping. I know that you're doing your jobs on the street, but there is the broader question of actually accomplishing the task. Right now, we don't know whether we've got success that's just a drop in the bucket or whether we've got a quarter of the money being moved out of this country really shaken up. It isn't clear to me. Is it to you?
Mr. KELLY. No, it is not, and I think one of the reasons why we're encouraged by the proposed legislation is that it calls for the Secretary of the Treasury in consultation with the Attorney General to put together a national strategy on money laundering, and I think a part of that would be to better identify the size and the scope of the issue. You're absolutely right, Mr. Chairman; we have to know or have a much better sense of what the size of the problem is so we can measure our effectiveness in this regard.
Mr. MCCOLLUM. I've got a question that relates to a suggestion that one of our next panel's witnesses has proposed. There are those who believe that if we're really going to prevail in this war on drugs, we must do something much more dramatic with the drug profits because we can't make enough impact through our traditional money laundering pursuits. There is a certain amount of common sense that says maybe that belief is true. If it is, the suggestion has been madeand I think it will be made again todaythat we might attempt to make money laundering more difficult by altering our currencies.
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I think the suggestion of changing the currency was made at one point, years ago. However, it was never attempted due to a concern about disrupting the public and the financial markets. That hasn't been done, but there's also the idea of coming up with a so-called dual currency in which the Government of the United States would issue bills and notes that are valid only inside the United States while our existing currency would still be valid only abroadas I understand the concept. The exchange process would make it much more difficult to successfully launder drug profits. Has anybody at the Treasury or Justice Department considered this concept as a way to fight this war on drugs in the money laundering area?
Mr. KELLY. I think it's an interesting concept. I know it's surfaced before. I think what has to be done as far as Treasury is concerned is that the money side of the house has to look at the ramifications of instituting a system like that. It certainly has the
Mr. MCCOLLUM. But it's not been done to date? No analysis has been done?
Mr. KELLY. No, sir, to the best of my knowledge it has not.
Mr. MCCOLLUM. All right. I do realize that it would be a pretty dramatic thing to do.
Ms. Warren, how much corruption do you see occurring within financial institutions in relation to the facilitation of money laundering? Is that widespread among the officials of those institutions?
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Ms. WARREN. We certainly have had prosecutions of those within financial institutions in the United States with the institution of the reporting requirements; entire bank managements were proceeded against criminally; less and less now in the banking sector. It is in those alternative financial sectors, like the money remitters, that we have now turned our attention to, and, yes, we find them corrupted by the traffickers. We proceed against them individually as well as in this larger sector as in the GTO approach. There are those individuals; we work to find them; we, I believe, proceed against aggressively, and will continue that way.
Mr. MCCOLLUM. I just want to pursue this avenue for another minute because it applies to Mr. Kelly and Treasury as well. We had a hearing last week about ports of entry in Florida, my home State. We heard from the unions of the longshoreman and others who said, ''This place is just totally corrupt. Everybody's paying off everybody else.'' I presume that goes for money as well as the drugs themselveslook the other way and duck. Is that practice as common as they were telling us? Nobody came in from the law enforcement community to discuss it after they had testified. Do you know, Mr. Kelly?
Mr. KELLY. Well, as far as our Custom Service is concerned, we see no systemic corruption. There are investigations ongoing; have been investigations. There was a major investigation conducted by the U.S. Attorney for the district of California concerning a whole host of corruption allegations against members of the Custom Service and the INS, and there was no true bill put forward as a result of that investigation.
Mr. MCCOLLUM. But what about the people who are handling the goods and the shippers: the loaders at the docks, the off-loaders, the private employees, the union workers themselves, the union shop bosses in those ports? Is there evidence of corruption in terms of both the handling of drugs and possibly the shipping of money out of the country?
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Mr. KELLY. The answer is yes, there is, and certain areas that you mention are vulnerable in that regard, and it is an issue of concern.
Mr. MCCOLLUM. Ms. Warren.
Mr. KELLY. Some of these organizations have been around a long time, and they're much inbred, and it's difficult to do some of those investigations, but the short answer is yes.
Ms. WARREN. Those investigations are continuing, and because those organizations continue, an enormous amount of theft continues as well. There have been major prosecutions based on those investigations, and the best I can say at the moment is there are continuing investigations of a major scale.
Mr. MCCOLLUM. Ms. Jackson Lee, you're recognized for 5 minutes.
Ms. JACKSON LEE. Thank you very much, Mr. Chairman, and needless to say this is a very important hearing, and I thank you for holding it. Because I might be delayed on the floor, and might not be able to return, let me ask if I might submit my statement into the record, and ask by unanimous consent?
Mr. MCCOLLUM. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
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PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr Chairman, I want to thank you for holding this HEARING on these two bills today. During the hearing on this bill a few months ago, I really thought this bill was heading in the direction of revising our Money Launclering statutes and stiffening penalties for those who perpetrate money laundering schemes.
However, I am concerned that this bill seeks to expand civil forfeiture laws when many Americans truly believe that our current civil asset forfeiture laws need serious reform. Mr. Chairman, H.R. 1965 the Civil Asset Forfeiture Act of 1997,'' is still before the Judiciary committee, and I think that it is way too premature to bring a civil asset forfeiture bill in disguise, before the main Civil Asset Forfeiture bill has been passed by the Full Committee.
Therefore, I will be offering several amendments today to improve this bill, or at least make it more tolerable to ensure that the civil liberties of all Americans at home and abroad are protected.
Mr. Chairman, H.R. 3745 seeks to radically expand forfeiture law, to increase the undue advantages of the Department of Treasury and Justice to wrongfully deprive innocent citizens, including corporate citizens, of their legitimate private property without adequate due process. I think the Congress should be very careful in expanding jurisdiction internationally, to make these departments the World's Police Force.
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It should also be noted Mr. Chairman that the American Bar Association, Americans for tax Reform, the Institute for Justice, the National Rifle Association, the American Civil Liberties Union, and the National Association of Criminal Defense lawyers oppose many provisions in H.R. 1965 the Civil Asset Forfeiture Act that strip away civil liberties of Americans.
I urge my colleagues to take a very careful look at this bill and join in trying to improve it. THANK-YOU MR. CHAIRMAN.
Ms. JACKSON LEE. And also I'd like to acknowledge, though I don't know the gentleman, but Brendon Hewson of NationsBank, only because NationsBank has certainly a very prominent position in the State of Texas, and particularly in Houston with Joe Mussolino at the helm, so I will look forward to reviewing his testimony, and I appreciate the American Bankers' Association presence as well.
Coming from Texasand the two witnesses, I'd appreciate it if you would respond to thisI understand that there might have been some emphasis on States like New Jersey and New York, and I'm noting that the Mexico laundering problem is extensive; estimated to be between $6 billion and $30 billion in drug profits. If you might comment on what kind of activities or what kind of problems you see in the border States as it relates to money laundering; is it different? And what do our various trade agreements, particularly NAFTA, potentially the Caribbean initiative, and any of our European trade agreements, do they have an impact on the problem, I guess, of money laundering and possibly do you see any solution as to how it can be remedied if they pose a problem? And I'd ask Mr. Kelly first, and then Ms. Warren.
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Mr. KELLY. As far as the issue of money laundering in Texas and along the Mexican border, it is a significant challenge to law enforcement to address the issue of bulk smuggling across a 2000-mile border. The Custom Service's primary obligation, of course, is to protect our borders from contraband coming in. We do run on a regular basis outbound operations, but clearly it's a resource issue, and our resources are primarily focused on preventing contraband coming into the country.
We see some hopeful signs as far as the issue of money laundering and Mexico is concerned. They have criminalized money laundering. They have convicted 13 people in 1995 and 1996 for money laundering; the first as far as we know. They have instituted regulations with the help and assistance of the Justice Department, State Department, and Treasury Department to address money laundering. They've installed currency transaction reporting requirements; suspicious transaction reporting requirements; ''Know your customer'' rules and regulations. We have primarily, through the State Department and with our FinCEN, helped install a computerized system to gather this information. It's in its infancy, but I think these are encouraging signs. The proof will be in the pudding to see how they carry this out; to see what the level of compliance is as far as Mexican financial institutions, but it's still a very major problem, no question about it.
Ms. JACKSON LEE. Do the trade agreements have any impact on enhancing or not enhancing the situation?
Mr. KELLY. The best that we can tell at this juncture, NAFTA has had no appreciable impact. The drug organizations that are involved in smuggling and money laundering have been there for some time. The approaches, the techniques that they use to smuggle money in and take money out have not changed with the NAFTA being installed. So, at this juncture, we don't see any significant differences as a result of NAFTA.
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Ms. JACKSON LEE. Thank you. Ms. Warren?
Ms. WARREN. If I could just add in terms of trying to detect those bulk shipments going out, one of our best ways, I think, is through ouras sophisticated as we can beinvestigative techniques through the Southwest Border initiative that we're working, Justice and Treasury, together, through all of the U.S. Attorney's offices along the border. We have massive court authorized wire tapping; we get some indication of what the organizations are doing; try to proceed upon that both on the movement of drug side and on the movement of money side, and have been able to provide some intelligence there, then, to the Customs and border patrol people at the border to try and help in the interception of that money; a very difficult issue and difficult for Texas.
Ms. JACKSON LEE. Is there something that you think we can do legislatively that would impact where we are today?
Ms. WARREN. We are working with Treasury on some suggested proposals, for example, adding to our money laundering predicates for violations abroad, and we would very much like to work with this subcommittee on developing those.
Ms. JACKSON LEE. Thank you.
Mr. MCCOLLUM. Thank you, Ms. Jackson Lee. I'm going to cut you right at the nub of your five minutes so that we can let Mr. Barr ask questions before we have to go vote.
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Mr. BARR. Thank you, Mr. Chairman.
Mr. MCCOLLUM. Mr. Barr, you are recognized for 5 minutes.
Mr. BARR. Did our friends at the U.S. Postal Service check with anybody in the administration before instituting this program recently, I guess, back in May called ''Dinero Seguro?''
Mr. KELLY. I'm not aware of that, sir.
Ms. WARREN. I just don't know the project by name.
Mr. BARR. Well, it seems to me that you all might want to call our friends at the Postal Service, because what they've done is they apparently have set up an arrangement whereby somebody on the U.S. side of the border can wire immediately up to $3,000 a day down to relatives in Mexico, and the Postal Service is providing that person a 3-minute free call in order to alert the receiving party on the other side that the money is coming.
I don't knowit just seems strange to me as we're trying to get a handle on cash transfers going back and forth between here and Mexico that the Postal Service is off on this lark of being warm and friendly, and making it extremely easy tofor people to line up outside of our Postal Service on the U.S. side of the border, and not only wire money immediately down to Mexico, but to provide free phone service in order for them to alert the people, and I would appreciate it, Mr. Chairman, if we could, to hear from both Treasury and Justice, and get their opinion on this service.
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Ms. WARREN. We'll certainly look into that, and provide that response back to the committee. We have found that the U.S. Postal Inspection Service has, for the most part, been exceedingly diligent in this area, and has adopted
Mr. BARR. Well, they may not even be aware of this if you all aren't.
Ms. WARREN [continuing]. For all suspicious activity review of postal order filings, and has referred those to the U.S. Attorney's office.
Mr. BARR. Well, the U.S.I mean, the postal inspectors are great folks, and I have no problem with them. I've worked with them, and they're doingthey're very good. This isn't something that's being instituted by the postal inspectors, but I would appreciate your views on this, and I am rather surprised that this wasn't cleared through the administration. I know that the Postal Service is a little bit different.
I'd like to focus on Mexico for just a moment though. Are anyis there any evidence that we have that any bank in Mexico, either Mexican banks or foreign subsidiaries of other banks in Mexico, are engaged, either as institutions or officials in those banks, engaged in money laundering?
Mr. KELLY. I would just answer, sir, that there are ongoing investigations in that area.
Page 49 PREV PAGE TOP OF DOC Mr. BARR. So, obviously, we have some evidence that that is taking place, at least sufficient to provide the predicates for investigations?
Mr. KELLY. Yes, sir.
Mr. BARR. I'm a little bit curious, though, as why there haven't been any indictments, at least going back over the last few years of any Mexican banks? Is it that difficult gettingdeveloping the cases? I know that we had some with regard to foreign banks back in the 1980's, but at recent hearingsI think in June orMay 15we had some hearings in the House Banking and Financial Services Committee on this, and in response to the question that I asked, the Assistant Secretary for Enforcement, Mr. Johnson, has written and confirmed that there have not been any indictments. Is this something that is not high priority?
Ms. WARREN. Pursuit of foreign banks that are dealing with the United States and doing so in a corrupt manner through money laundering remains a priority and has been. These are difficult cases. We pursue them. We pursue them in Mexico, and many other countries that deal with the United States, and will continue to do so. It remains a priority.
Mr. BARR. But there haven't been any indictments?
Ms. WARREN. There have been no indictments of Mexican banks in the past years, no.
Mr. BARR. Okay. With regard to the money laundering statutes, and specifically 18 USC sections 1956 and 1957, which requiresas you all are very awareproof per prosecution that the money laundering drives from a ''specified unlawful activity.'' Would Treasury and Justice be in a position to support a legislation that would modify that requirement so that that would not have to be an element; that it is derived from a ''specified unlawful activity?'' Because I know that is a roadblock to prosecutions where everybody knows that the money laundering is taking place, but it is not technically tied to a specified unlawful activity. It can be given in anticipation of it; it can be given as a bribe or what not. Would you all be in a position to support such legislative amendment?
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Mr. KELLY. I'd certainly like to look at it, but it sounds like something we would be supportive of, because we, Treasury, looks to, you might say, the pure type of money laundering investigation rather than linking it primarily to some other offense, and then have money laundering as a tail to that investigation. We try to take the other view. So, a movement in that direction, I think, would be helpful to us.
Mr. BARR. Justice?
Ms. WARREN. We would gladly review any proposal. Sometimes it is difficult to identify the specified unlawful activity. We have been able to do it in major cases. The advantage we have through the statute provided by Congress is that we need not show that they know which specified unlawful activity; we don't have to prove that part of the intent, and just being able to show the connection to drugs that we can develop on our own or some other predicate act has made that proof possible. But we will work with Treasury on the review of any proposal.
Mr. BARR. Thank you.
Mr. MCCOLLUM. We have less than 3 minutes to vote, and we're going to have to take a recess. We'll be right back.
Mr. MCCOLLUM. The Subcommittee on Crime will come to order.
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When we recessed, we were in the middle of the question period of the first panel. It's my understanding that the procedural devices are in abeyance over on the floor and they're going to roll votes on amendments, so we should have some time to continue this hearing.
Mr. Hutchinson, it was your turn to ask some questions when we recessed; you're recognized for 5 minutes.
Mr. HUTCHINSON. Thank you very much, Mr. Chairman, and I appreciate the testimony of the witnesses.
I wanted to go to the problem that we left with. About the Geographical Targeting Order, it's my understanding, Mr. Kelly, that under that procedure you are proposing a regulation to direct money order businesses to start reporting if the transaction is $750 or more? Is that correct?
Mr. KELLY. Yes, sir. What it does: it's a provision of the Bank Secrecy Act, and it gives the Secretary of the Treasury the authority to install reporting requirementsand they can be a wide range of reporting requirementson financial institutions that appear to be violating Bank Secrecy Act regulations. So, it's not just for wire transmitters.
Mr. HUTCHINSON. If the GTO is not implemented then there is no reporting requirement on money order businesses?
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Mr. KELLY. Well, we are in the process, now, there is a notice of proposed rulemakings that have been issued in April of this year that would require
Mr. HUTCHINSON. Well, I'm talking the present law, under the present circumstances.
Mr. KELLY. Under the present circumstances, if there's no GTO in effect then transfers under $10,000 would not be reported.
Mr. HUTCHINSON. And if it's $10,000 or more they have to file a CTR, a currency transaction report?
Mr. KELLY. That's correct.
Mr. HUTCHINSON. Ms. Warren, the CTR has been $10,000 or above forwell, it hasn't been reduced, has it?
Ms. WARREN. No, it's $10,000.
Mr. HUTCHINSON. It's the same. Ms. Warren, you indicated that Colombia passed a law, a regulation, that required their businesses to report transactions of $750 or more if it's being transferred internationally?
Ms. WARREN. Just the parallel to our money remitter, our GTO, for those same remitters when they send outside of the country, now they're doing it at the $750
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Mr. HUTCHINSON. It appears to me that Colombia has a more stringent requirement than the United States in regard to money order businesses.
Ms. WARREN. Well, first of all, they have fewer authorized money remitters. I think there are a total of under 25, under 30 within the country. They have, now, this sort of standing GTO for their money remitter industry, the legitimate industry. They have other problems in Colombia they need to work on, on those
Mr. HUTCHINSON. But I mean, am I correct, though, that they have a more stringent requirement for reporting financial transactions for the money order business than we do in the United States?
Ms. WARREN. They do today. Now, the Treasury has proposed regulations that would set ours at $750 across the board, and Justice supports Treasury in that move.
Mr. HUTCHINSON. Okay. So, that's a proposed regulation. Can you adopt that in a regulatory fashion without any action of Congress?
Ms. WARREN. Correct.
Mr. HUTCHINSON. Now, so we basically make the whole United States a GTO; that would be required. Now, is that a sufficient level and are you receiving any resistance from the business institutions, because, obviously, that's a regulatory burden on them?
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Ms. WARREN. I will let the Under Secretary respond to the industry part of it, because they consult regularly with industry. Just in terms of what we saw in the GTO in the New York, New Jersey area, it certainly cleaned up the industry there. Those who were doing 80 percent of their business on the illicit side by forwarding most of their money to Colombia just went out of business on that side of their house. It cleaned up that particular financial sector immediately, and I expect the same across the country. The burden on industry, I would suggest, is insignificant in terms of reporting, but Treasury consults with them on a regular basis.
Mr. HUTCHINSON. Just to elaborate on that particular problem, though, we had a money order business that I was familiar with in Arkansas that was just a small enterprise, but they started putting outlets in New York City, and all of sudden they were a huge enterprise, because they were, obviously, sending a ton of money orders to Puerto Rico and Colombia, and so I've seen the problem even from an Arkansas business standpoint.
Is the CTR level for other financial transactions, particularly banks, sufficient at a $10,000 level?
Ms. WARREN. From our perspective it seems to be, and when we notice that there is some problem in a particular area, a financial sector, together, we have the obligation of bringing that to the attention of Treasury and discussing how we could raiselower the threshold in that particular sector whether it be in the banking community for a particular geographical area or in some group of financial institutions, non-bank financial institutions.
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Mr. HUTCHINSON. One final question: I've noted in some of the papers that were prepared for us by the staff that the FBI has some resistance or reluctance about Representative Velasquez' proposed bill. Are you familiar with that, Ms. Warren?
Ms. WARREN. Well, I don't think that is an accurate statement today. We have worked with Treasury, and I think Justice and Treasury have arrived at a joint, combined proposal of how the bill might be slightly reconfigured, but Justice and Treasury stand together on that.
Mr. HUTCHINSON. In supporting it?
Ms. WARREN. Supporting it with certain changeswith certain slight changes that we think are, really, from our point of view, quite workable.
Mr. HUTCHINSON. Thank you, Mr. Chairman.
Mr. MCCOLLUM. Thank you. Mr. Coble, you are recognized for 5 minutes.
Mr. COBLE. Thank you, Mr. Chairman. Ms. Warren, Mr. Kelly, good to have you all with us. I want to get back into the GTO, but first of all, I want to make a statement, and have you all either verify or reject what I'm about to say.
It seems to me that these drug launderers are assuming very slight risk in shipping the money in bulk, and sending it home to Colombia. Let's say $100,000now, I realize $100,000 to those guys is small potatoes, but $500,000, let us say. Am I not correct about that? The chances of my having that shipment safely delivered to my family back in Colombia, are pretty good, are they not?
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Mr. KELLY. I think that's generally true, but it is becoming more difficult, but I think your statement is generally correct.
Mr. COBLE. Well, talk a little bit more, Mr. Kelly, about what's making it more difficult.
Mr. KELLY. Well, what's happened, of course, let's say with the GTO, is that we have forced the money launderers to go to bulk transfers. It does expose them more; it puts their money more at risk, and as we said with GTO, the seizures went up about 400 percent, so the possibility of it being seized has increased. Is it where we'd like it to be? No, but as you tighten up in the area of regulations and regulatory aspects, they resort back to bulk transfers of money, and wejust last month Custom's seized $5.6 million in a crossing near El Paso, Texas. So, the cost of money laundering has also increased. We're told through our intelligence sources that the commission, if you will, for laundering money was around 5 to 10 percent; now, it's up close to 25 percent, because it is more difficult, and it's greater risk now than there was in recent times.
Mr. COBLE. Well, I'm glad to hear that, but I'm still not grasping how it's becoming more difficult. Are the Custom's people just keeping a sharper look out or is there a difference in procedure?
Mr. KELLY. I think they're doing more of it; more of bulk transfers, and we are attempting to do more outbound operations.
Page 57 PREV PAGE TOP OF DOC Mr. COBLE. I got you. So, we are keeping a sharper lookout; being more thorough; more deliberate, perhaps?
Mr. KELLY. Yes, sir.
Mr. COBLE. I'm also concerned, Mr. Chairman, aboutwell, strike that; let me say it a different way. Mexico is now a more prominent player than she was
Mr. CONYERS. Mr. Chairman? Excuse the interruption to my dear friend Mr. Coble.
Mr. COBLE. Sure.
Mr. CONYERS. Mr. Chairman, I would move that the camera be removed from this room and these proceedings immediately.
Mr. MCCOLLUM. Well, Mr. Conyers, you have the right to object to this being broadcast in any way or recording devices or whatever. We've not done it; we've not previously closed that
Mr. CONYERS. I know that.
Mr. MCCOLLUM [continuing]. In the past. We're generally open.
Page 58 PREV PAGE TOP OF DOC Mr. CONYERS. And neither have I.
Mr. MCCOLLUM. Well, I understand that the gentleman is concerned with the broadcast source, but I don't personally think that we should do that.
Mr. CONYERS. Well, I want to tell you that that's the Colombian television crew from the nation of Colombia, and I don't want them taking this film back, and Ias you know the rules as well as I dowe can objecta member can object, and that's what I'm doing. I mean, I want tothis is not arbitrary. For God's sake, I, as a Chair, have always allowed cameras, but not for this and not to them.
Mr. MCCOLLUM. Well, Mr. Conyers, this is not a classified hearing in any way, and I don't understand the basis
Mr. CONYERS. Mr. Chairman, you know the rules. The rulewell, maybe you don't the rules. The rules are that you have to get unanimous consent from the members to have cameras.
Mr. MCCOLLUM. All right, I'm going to suspend for a minute to check the rules. I'm not sure if it's unanimous consent or not.
Mr. CONYERS. All right. The rule was changed in the 105th Congress. I stand corrected104th Congress. I stand corrected, Chairman McCollum.
Mr. MCCOLLUM. We're taking a look at the rule right now. We'll get back with you, Mr. Conyers. We are in abeyance. Your time is protected, Mr. Coble.
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Mr. COBLE. For that I thank you, Mr. Chairman.
Mr. MCCOLLUM. The Chair has been advised by the parliamentarian that the rule of the House adopted here in the last Congress is such that a hearing that is open to the public is open to the media. There is no closure; in fact, there's no procedure for unanimous consent or a motion or a vote, to do that. The only way the media can be excluded is if the hearing is closed to the public as a whole or if a witness is subpoenaed. We don't have a witness subpoenaed here today, so that is not in order under the current rules, Mr. Conyers, although I understand your concerns.
Mr. Coble, you may proceed.
Mr. COBLE. As I was saying, folks, I'm concerned now that Mexico is a more prominent player than she was 5 years ago, 10 years ago. It seems to me it would be even moreor less complex to transport money south of the border, would it not, to Mexico as opposed to Colombia? Am I overly simplifying it? It seems to me you drive across the border.
Mr. KELLY. Well, we do have, as I say, outbound operations. They've increased in recent times. I'm reminded that there is also operation buck stop, it's called, run by the Customs Service that are at major airports including Los Angeles, New York, and Newark. There is a renewed focus on outbound operations, however, within the resource constraints that Customs is under. There's $1.1 million that has just been made available to Customs to expand some of its outbound operations with additional computers and facilities to enhance that. We'd like to have more; we'd like to do more in that regard, but they have increased in recent times.
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Mr. COBLE. Mr. Kelly, sometime at your convenience, if you will give me a call, I want to talk in more detail about the refined Customs' procedures that have resulted in additional detection of bulk shipment; this interests me, and I'm pleased to hear that there's an improvement to that end. So, if you'll do that, perhaps, the three of us could get together at a mutually convenient time. I'd like to learn more about that.
Mr. KELLY. Yes, sir.
Mr. COBLE. Thank you. Thank you, Mr. Chairman.
Mr. MCCOLLUM. Mr. Conyers, you are recognized for 5 minutes.
Mr. CONYERS. Thank you, Mr. Chairman. First of all, I welcome the witnesses. The Under Secretary of Treasury, Mr. Kelly, was recently on a codel to Haiti where as the ex-chief of police of New York, he had trainedhelped trained, and set up the program for the training of the National Police Force of Haiti which has replaced its army. We found them to be doing quite well, and I'm very pleased to have him before the committee again, and, of course, we welcome Mrs. Warren from the Department of Justice.
Now, the problem that Chairman McCollum raises here today, perhaps, goes to the heart of one of the greatest social issues of our time: the drug consumption; the demand; the profiteering; the global nature of it; the cultural aspects of it which are almost eating our system up. As a matter fact, notwithstanding drugs statistics of abuse going down, we know that among the more vulnerable of our citizenry, drug use is going up, and notwithstanding billions of dollars of money and hours of manpower; pronouncements from a whole series of Presidents; law enforcement redoubled, what we've done to sentencing for this is almost unbelievable, and, yet, we're still confronted with a very, very insidious drug.
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And so, Chairman McCollum has wisely called this hearing to look at the profiteering aspect of it. Most people are in it for the money, and the problem that comes to my attention is the way or ways that we may be able to more carefully regulate the flow of money through our businesses, corporations, multinational activities, our banks, savings and loan systems. You see, this money is flowing through many legal conduits, and the problem is how do we interface? I mean, a zillion dollars goes into a banking system, and on the face of it, I mean, who knows, but underneath we have banks now being formed in the Caribbean, but that's what they were created for is to try and ship money; that's about all they do. If anybody ever asked them about a house loan or a loan to somebody, they wouldn't even know what you're talking about.
So, we have this huge problem in which, superficially, legal business people are engagingI mean, the president of a multinational bank and his board. I would presume at this hearing that most of them don't know that if the Under Secretary of Treasury busted them, they would say, ''Well, geez, we didn't know that the bank clerk in Guadalupe was funneling a trillion dollars a year through our bank. We had no idea.'' So, what I'm suggesting is that this is an enormous problem, and I don't knowI haven't talked with Chairman McCollum about this as to why we've never been able to really get on top of it, but maybe this hearing will be helpful in helping us do that, and so I'd like to ask unanimous consent for some additional time, Mr. Chairman so the witnesses could respond.
Mr. MCCOLLUM. Well, certainly, the witnesses can respond, Mr. Conyers.
Mr. CONYERS. Thank you.
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Mr. MCCOLLUM. You may proceed, Mr. Kelly or Ms. Warren. Do you have a response to Mr. Conyers?
Ms. WARREN. I think the member has outlined the great difficulties in this area; ones that we are grappling with. Sometimes, I think we are getting on top of how to proceed in certain of those areas, and we've presented that today. The fact that, as you mentioned, that sometimes professionals are involved: the bankers, the lawyers; we find stockbrokers involved in the United States, and need to take very stern action against them to set clear notice to the industry that we will proceed vigorously; that this is not a clean business; this is as dirty as it can be in supporting the traffickers.
Mr. CONYERS. To our committee, Ms. Warren, what is yourdo you have a program or a strategy that you can sharenot at this hearingwith this subcommittee?
Ms. WARREN. I can tell you that, together, we and the Department of Treasury and Justice are developing a strategy. We have tended to have individual strategies within areas of our components and now under our own initiative as well as with the prompting of the Velasquez bill, are looking to a more national strategy in this area, and Treasury and Justice see in it important roles for both Departments in developing that strategy.
Mr. MCCOLLUM. Mr. Kelly, do you have any comments?
Mr. KELLY. I would simply reinforce what was said by Ms. Warren. The Velasquez bill, if it goes forward, would require the Secretary of the Treasury, in consultation with the Attorney General, to put together a strategy for money laundering, and present it to the Congress on a regular basis, and I think this is a major step forward. It would also look toward establishing high risk money laundering task forces throughout the country. We are enthused and excited about the success of the GTO in New York. To a large degree, that operation has been successful, because of the resources that are in place there, the El Dorado Task Force, which consists of 140 law enforcement officials at offices from 13 different agencies. It's funded through HIDTA to a large extent. This proposal would in some way, shape or form tend to replicate that process.
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So, I think there is some hope. We see some encouraging signsyou talked about the Caribbeanwe see some encouraging signs in Netherlands Antilles, the Cayman Islands where they seem to have gotten the message. They're bringing their act together. The FATF, the Financial Action Task Force, put together by the G7 in 1989, has been expanded to now include a Caribbean Financial Action Task Force. Many of the Caribbean States along with the countries in FATF are putting together financial intelligence units that for the first time are gathering information; getting some hand on what's coming into their country. So, there are signs of progress. It's still an enormous problem; there's no question about that, but I think we're encouraged by some of these developments.
Mr. CONYERS. Thank you very much.
Mr. MCCOLLUM. Thank you, Mr. Conyers. I also want to thank this panel for coming today. I would particularly like to ask the Under Secretary of Treasury, Mr. Kelly, to take a look at this dual currency question that Mr. Bugliosi raises. If you don't have a copy of his book The Phoenix Solution,I'd urge you to get a copy and take a look at page 176 or 177. It would be a dramatically different solution. Although I don't know the workability of it, I'm still interested in exploring it as a solution. I realize it's a different section of the Treasury that has to respond.
I want to thank both of you for coming today. We appreciate it very much, Ms. Warren.
Now, we'll move to our second panel. As I'd introduce you, you may come forward.
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Appearing before the subcommittee today is Michael Zeldin, a partner in the Washington D.C. office of Price Waterhouse. Mr. Zeldin is an internationally recognized expert in investigation and prosecution of money laundering and asset forfeiture cases. From 1984 to 1992, he served in various executive positions in the Criminal Division of the U.S. Department of Justice, including Chief of the Money Laundering and Asset Forfeiture Offices and Special Counsel to the Criminal Division for money laundering matters. In that role, he was responsible to the Assistant Attorney General and the Deputy Attorney General for the implementation of money laundering policy matters, including participation in international negotiations, the development of money laundering and asset forfeiture prosecution guidelines, and the multi-district litigation. His other executive positions at the Justice Department include Director of the Money Laundering Office and Director of the Asset Forfeiture Office.
Next, the subcommittee will hear from Vincent Bugliosi. Mr. Bugliosi spent 8 years as a prosecutor for the Los Angeles District Attorney's Office, successfully prosecuting 105 of 106 felony jury trials. His most famous trial, that of Charles Manson, was the basis for his best-selling book, Helter Skelter, which many consider to be the preeminent true crime book of the century. Most recently, Mr. Bugliosi authored the book that I mentioned earlier, The Phoenix Solution, in which he provides a critique of the United States' current drug policy and offers a precise strategy for ending our country's drug epidemic, including the dual currency suggestion that I mentioned earlier. We welcome him particularly because he's flown the longest distance to be herewe really appreciate that.
Our third witness on this panel is Charles Saphos, a partner with the Maryland law firm of Fila and Saphos. Mr. Saphos joined the firm of Fila and Saphos following a successful practice as General Counsel for Interpol of the United States Central Bureau. Mr. Saphos also served as Chief of the Narcotic and Dangerous Drug Section of the Department of Justice from 1985 until 1991. In this capacity, he contributed to the development of the U.S. domestic and international policy concerning money laundering and narcotics investigation and prosecution. He also supervised U.S. prosecutive efforts against money laundering and narcotics violators. Prior to his time at the Justice Department, Mr. Saphos was a Federal prosecutor in Miami and Atlanta where he worked with a member of this subcommittee, Mr. Barr. While in Miami, he was the chief of Operation Greenback, a multiagency task force which investigated and prosecuted narcotics money laundering offenses.
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I would like to ask, Mr. Zeldin, if you could present your testimony to us first, then we'll go in the order I introduced. I would say for the record that any written statements you have, without objection, will be entered into the record in total. You may certainly summarize.
STATEMENT OF MICHAEL F. ZELDIN, PARTNER, PRICE WATERHOUSE
Mr. ZELDIN. Thank you, Mr. Chairman. What I'd like to do this morning is go through a few specific
Mr. COBLE. Mr. Chairman, if Mr. Zeldin could pull the mike a little closer to him, that wouldthank you.
Mr. MCCOLLUM. Thank you, Mr. Coble.
Mr. ZELDIN. Mr. Chairman, what I'd like to do this morning, if I can, is to go through a few specific ideas for suggested changes to reinvigorate in some instances and to de-emphasize in other areas aspects of our money laundering laws that this committee has jurisdiction over. I will not speak in terms of the macro problem that the first panel addressed unless the committee's pleasure is that I do. My testimony, which I've submitted in writing, exhaustively, if not exhaustingly, goes through the manner in which monies are laundered and the legal regime calculated to thwart money laundering and so I though I'd deal with the specific legislative proposals that I think this committee could implement, if that's okay with the Chairman.
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Mr. MCCOLLUM. Perfectly fine with me, and please summarize because although the thoroughness of your written statement is appreciated for its importance, I wouldn't want you to read it all today. I'm sure you don't intend to.
Mr. ZELDIN. I don't think I have the energy to either.
The point, I think, to begin with is that the U.S. money laundering regime, the legal regime, is a very sophisticated and very complex body of law. It requires banks and other trades and businesses to employ an army of people to stay current with it. Likewise, the putative defendant, the person who is thinking about becoming a money launderer, is faced with a staggering array of consequences should he choose that path; from imprisonment to total divestiture of all profits and proceeds, and facilitating properties that may be uncovered.
Now, the problem with money laundering as a legal regime is that when the laws were first passed, our primary focus was on domestic-based money launderers. The problem has become much more internationalized now, and the laws in certain measure haven't kept pace. There are a couple of suggestions that I'd like to go over this morning.
First, is that of foreign-based money laundering for financial institutions operating outside of the United States. Under the present legal regime the statutory definitions of financial institutions do not encompass foreign financial institutions. This means, the government cannot utilize the third element of the financial transaction definition in the money laundering statute to target financial institutions that are operating outside of the United States. It's a simple legislative fix to improve this. All that is necessary is to broaden the definitionof ''financial institution'' found in 1956(C)(6) to include foreign financial institutions and the problem will be solved I think it's one that we should endeavor to undertake.
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Second, one of the problems that we have internationally is in the area of bank secrecy and piercing bank secrecy. While there are many more mutual legal assistance treaties in effect now than there have ever been, and the government still has the ancient letters rogatory process available to it, there are still circumstances where bank secrecy laws prevent the United States from gaining access to documents. The problem that that presents sometimes, in especially money laundering forfeiture cases and sometimes in substantive money laundering cases, is that prosecutors forced to prove a case or defend a claim cannot get access to records. The Supreme Court has countenanced back in 1988 a mechanism by which you can force an individual to make a waiver, they call them Ghidoni waivers, where you can force an individual to make a waiver, and the Fifth Amendment is not violated by it. It seems to me that a simple fix and something which would vastly help prosecutors around the country in money laundering forfeiture cases, particularly, is to enact a new provision captioned 18 USC section 986, to force a claimant to waive bank secrecy, and allow the documents to be brought here or face dismissal of their claim. It seems to me that if claimants are standing behind bank secrecy as a shield to the production of these records; that if they don't allow the records to be brought in, that they should forfeit their claim, and I think that that can be easily accomplished.
Additionally, something which was raised in questioning, the predicate crimes of 1956and there is a discussion, and I know Chuck will discuss itwhether or not these SUAs, the specified unlawful activity crimes, should be eliminated all together from the statute making it a little less cumbersome. But until and unless that is done, there are still specified unlawful activity crimes that could be added to this list which would facilitate the prosecution of money launderers especially those operating outside of the United States, and I think that several come to mind that are simple: one is, it seems to me that you could add to the list of specified unlawful activity crimes, all those crimes under which the United States in under an obligation to extradite or prosecute offenders, and secondly, and, perhaps, what triggers it in some measure, is the allegations that we've been all reading about with respect to Raul Salinas is the possibility of bringing money laundering charges based upon the proceeds of crimes that victimize foreign governmental entities; crimes of public corruption that have a nexus with the United States including, for example, bribery of a public official or theft or embezzlement of public funds by or for the benefit of a public official. We see, I think, all too many times where people who leave countries having plundered their national treasuries, the monies in part end up in the United States, and we lack the means by which to prosecute that under our money laundering laws, and I think amending 1956(C)(7) to allow for that is a simple and obvious fix.
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Now, moving into the way in which money is laundered, we've heard conversation before about how launderers, like the pressure on a balloon, move to the weak points in the process. Where we are, in my estimation, in the weak point in this process is with laundering based in trades and businesses. Banks, financial institutions, in large measure have, for quite a long time, gotten the message, if you will, and have implemented very rigorous anti-money laundering compliance systems. The American Bankers' Association has been out front in educating its members about this and, frankly, domestic banks in the United States are no longer the problem. If, perhaps, ever they were, they are no longer the problem now.
Where the problem lies, in my estimation, is with trade and business-based money laundering; launderers who ply their means through purchasing of durable goods and cosmetics and consumer durables, as the Chairman said in his opening statement. While this is going on, and while trades and businesses are obligated under 26 U.S. Code, Section 6050(i), to report currency transactions and in excess of $10,000 involving cash and in certain instances, monetary instruments, they have not been filing these form 8300's, the CTR equivalent, in the same numbers that the bankers have. If you look at the way it has worked when the bankers started back in the eighties with these things, there were a few hundred thousand of these CTRs filed. Now, in 1996, the last year we had statistics, they're up to 12 million CTRs. If you look at the numbers of 8300 filings, it doesn't anywhere reflect that amount of cash. Now, there may be differences between the industries, but it seems to me that what we have in trade and business money laundering is lax enforcement of the 8300 form reporting obligations.
Why is that? I'm not sure exactly why that is. You can speculate, but one of the obvious things to me is that form 8300 is just not being enforced. There's no educational component to it like the American Bankers' has done with their banks. There's no industry group that's calculating an effort to educate people, and it seems to me we've come to the point in time where form 8300 should be moved out of title 26 and into title 31, the Bank Secrecy Act. Now, I'm fully aware that this committee's jurisdiction extends to title 18 offenses, and I appreciate the complications of dealing with other statutory provisions of which you have no jurisdiction, but just as the members of the Department of Justice and Treasury have an obligation to work together, if you will, to combat the scourge of drug trafficking and money laundering, Congress has the obligation to work in concert and ensure that Ways and Means who I believe has jurisdiction over title 26, comes to some terms with this committee so that we can get rigorous enforcement of trades and business money laundering, because otherwise, we're just not going to dent that problem, because it is in some measure the weak underbelly of the system.
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I say in my written statement, and I believe it's true, that in some measure you can make a compelling argument that what we need in money laundering is less; we have a lot. And I'd like to just spend my remaining few minutesbecause I know we're running late, and the committee asked that our comments be limited in timeto a couple of additional points.
First, is money laundering sentencing. Money laundering sentencing, now, is an enormous problem in the white-collar crime area. In the narcotics area, of which we've been talking primarily, it's not a problem. The sentencing there for the underlying drug trafficking or the secondary money laundering of the drug proceeds allows for very stiff penalties. In the context of white-collar crimes, petty embezzlements and so on, what we are finding is that the sentences between the underlying crime and the money laundering charge that is often added to it is very disparate, and reeks an unfairness on the system; a system that the sentencing guidelines were designed to overcome, and, indeed, the sentencing commission has proposed in the last two amendment cycles changes to the sentencing guidelines to allow for greater equality between the two, and has not been able to get it through Congress. The last time it was up here, it got tied up with the crack cocaine sentencing guidelines, and died a slow death on the vine. I think it's time now to look again at this question of money laundering sentences, and bring some equity and equivalencies between underlying predicate crime and the secondary act of money laundering.
Related to this, is this notion of asset forfeiture, because what drives the money laundering sentencing situation, oftentimes, is the desire of prosecutorswell-intentioned desire of prosecutorsto divest criminal organizations of their ill-gotten gain, and the way they do that is through asset forfeiture. Most title 18 offenses do not have direct forfeiture provisions available to them. So, if I, for example, want to prosecute a ring of people that have engaged in wire or mail fraud, and I want to divest them of their profits, I need to charge them with laundering the proceeds of the wire fraud in order to forfeit it, because there isn't direct forfeiture for the crime of mail fraud. In some circumstances this allows for good justice, and other circumstances means that the person who engages in a petty Medicaid fraud is going to be charged with money laundering in order to get at the forfeiture. In those cases, defendants are going to serve sentences that are vastly disproportionate to the types of sentences that they would get were they just charged with the predicate. How do you deal with that? It's a simple way to solve that which is, to put forfeiture provisions directly in all title 18 offenses. You could write omnibus provisions or you could just add it on to each proceeds generating crime that as to any crime that generates proceeds, forfeiture is an available remedy. That way, you do not have to go into the money laundering statutes. You don't have to clog the system up with these cockamamie money laundering cases that are just designed to get at the asset forfeiture provisions that do not exist presently. It's something that the committee has jurisdiction over and is an easy fix.
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Finally, three quick things: back in 1992, the Annunzio-Wylle anti-money laundering law was enacted. It was enacted in certain measure to correct problems that were perceived to exist in the system that the BCCI bank caper highlighted. One provision that was passed which is 12 U.S. Code, section 983, is the revocation of bank charters for conviction of money laundering.
Mr. MCCOLLUM. Mr. Zeldin, I didn't want to do it, but I'm going to have to interrupt you. We're going to have to go complete this vote because we've only got a couple of minutes left. So, we'll be in recess. We'll be right back.
Mr. ZELDIN. Thank you.
Mr. MCCOLLUM [presiding]. The Subcommittee on Crime will come to order. I apologize for these interruptions, folks. They are now telling us that we may have votes periodically, so I am not going to wait for other Members to come back.
Mr. Zeldin, if you would proceed. We cut you off in the middle of your testimony.
Mr. ZELDIN. Thank you, Mr. Chairman.
I was getting to the Annunzio-Wiley bill of 1992, but before I did that I wanted to mention one thing which I neglected to mention when I was talking about trades and businesses. One of the things that we talked about just before you broke was the movement of 26 United States Code Section 6050(i) into the Bank Secrecy Act which would help enforcement of it. One of the other problems in the trades and businesses area is that there is not direct forfeiture provisions for violations of 26 United States Code Section 6050(i). It's not within title 18 jurisdiction. Title 18, section 981 and section 982, provides for forfeiture of section 1956 and section 1957 and for the Bank Secrecy Act, but not for 6050(i) prosecutions.
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So, while you work out with your fellow committee members and other committee members whether you can move this, one of the things that you could easily do is provide for forfeiture of proceeds of profits and other properties in section 6050(i) violations by incorporating reference to it in title 18, section 981. So that would be a first step and something within the committee's legislative jurisdiction.
Back to Annunzio-Wiley. The Annunzio-Wiley bill of 1992 provided for the possibility of charter revocations of banks that were convicted of money laundering. There hasn't been, to my knowledgeand John Byrne who will testify in the following panel could tell me whether I'm wrongbut there has not been a bank that has lost its charter as a consequence of this. Nonetheless, the possibility of charter revocation remains an enormous sword over the head of bankers, and I think that in some measure it is a counter-productive one in that it coerces the type of plea agreements that I don't think that prosecutors should be proud of. Which is to say that banks, faced with the possibilities of charter revocations, really have no choice but to agree to some settlement of a claim even if they feel that they have a proper defense to itbecause if they lose, the risks are just too enormous. And I would suggest that this committee considerand perhaps a commission or study through the Bank Secrecy Act advisory committee that the Treasury hasand study whether or not there should be evaluation of modifications to the charter revocation provisions of title 12, section 93.
Related to that is the question of criminal safe harbor for banks. And I should qualify my statements. I'm using the term ''banks'' as we know them to be domestic banks, not non-banking financial institutions, but just banks because I think that the banks have it, if you will, and I don't think that they should be treated in the same way as other non-bank financial institutions which remain a much larger problem. But banks, under Annunzio-Wiley have what is called ''civil safe harbor.'' That is, if they report suspicious activity and they are sued by the customer for reporting it, they are safe from civil liability on the basis of that referral. And law enforcement depends upon those suspicious-activity referrals more and more. And what they lack now is ''criminal safe harbor.''
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That is to say that if you make a suspicious-activity referral to the government and you continue to do business with that customer, because you don't know that you shouldn't because the standards of what is suspicious are so low that they are not essentially probable cause of criminal wrong doing, but something that you think that the government might want to investigate. If you continue to do business with that customer and it turns out down the line that that customer is somebody that the government is interested in and is, say, a money launderer, you risk, as a financial institution, the prospect of being criminally prosecuted not withstanding the fact that you made a referral and that you did your best.
For a long time, when I was at the Justice Department, I thought that there should be no criminal safe harbor provisions because I didn't think that the domestic banking institutions were ready for that sort of luxury, if you will. I think that they are ready for that, and I think that it would be helpful to the government's enforcement efforts if there were criminal safe harbor provisions for banks. There should be standardsthe banks must have designated anti-money-laundering compliance programs in effect, they must promptly identify, investigate, and report suspicious activity, and they must cooperate with law enforcement. You can set up the standards, but if they have done all that, I think that criminal safe harbor is what they are entitled to, and which would be, in the long run, helpful to law enforcement.
Which leads me to my final point, which is currency transaction reporting. And it seems to me that the heart of government's enforcement in the Bank Secrecy Act area has been these currency transaction reports, the bank form for transactions in excess of $10,000. The government received, in 1996, 12 million of these things. I can't, for the life of me, imagine what they are doing with these 12 million forms. I don't know that they have generated, proactively, any cases off of them. They are expensive for the banks to file. They are expensive for the government to store and maintain. It seems to me to be appropriate that the government be asked to study the question and report back to the committee as to the continuing viability of currency transaction reports for specified classes of banks. Again, non-bank financial institutions, they are more problematic, should keep their reporting regime in place. But as to banks, I am not sure that the vitality of these provisions remain valid any longer with the growing emphasis on suspicious activity reporting and know your customer regulations which are forthcoming by the bank regulatory agencies. We may have come to a point in time where what would be helpful to law enforcement would be to have less of the CTR's which seem to be more useless than useful and more active suspicious reporting by banks. This might allow the government to get the type of intelligence it needs so that it can do the proactive cases that we think should be prosecuted.
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That concludes my comments, Mr. Chairman.
[The prepared statement of Mr. Zeldin follows:]
PREPARED STATEMENT OF MICHAEL F. ZELDIN, PARTNER, PRICE WATERHOUSE
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Mr. MCCOLLUM. Thank you very much, Mr. Zeldin. It was very comprehensive, and we appreciate it.
Mr. Bugliosi, welcome. As I said, you have come a long waywe appreciate it and look forward to your testimony.
STATEMENT OF VINCENT BUGLIOSI, AUTHOR, THE PHOENIX SOLUTION
Mr. BUGLIOSI. I want to say that I am very honored, Chairman McCollum, that you and members of the subcommittee have invited me to appear before you today and on such an important subject, the drug crisis in America, which I perceive to be the most serious internal crisis this Nation has faced since the Civil War. A crisis that is not just destroying the metaphorical moral fabric of our Nation, but with the thousands upon thousands of drug-related deaths and murders as well as the incalculable human suffering, illness, and lost productivity, one that is, in every sense of the word, knifing the tendons of this nation's physical fabric.
Before I get into the heart of my main proposal, Mr. Chairman, today, I would like to first make some prefatory observations about the nature and history of this Nation's drug problem, which, at least in my mind, justifies the need for this proposal. There is no sense talking about my proposal unless I can first demonstrate that there is a need for it.
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I first decided to divert my attention to the drug problem from other projects and endeavors of mine back in 1989 when a Gallup poll showed that 63 percent of the American people believed that drugs were ''the most important problem facing this country today.'' My original intention was to write a series of articles on the problem, but being an obsessive person, one thing led to another, and I ended up devoting 2 years to writing ''Drugs in America: The Case for Victory'' that was published in 1991. It was updated and republishedthat's the copy that you saw''The Phoenix Solution: Getting Serious About Winning America's Drug War.''
From the time that I submitted the last draft of the book to the publisher in January 1996 until now, over one-and-a-half years later, I have not focused my attention at all on the drug problem. Being a private citizen who is not employed by any State or Federal agency fighting drugs, I had left the drug problem to return to my other responsibilities and personal commitments of mine. Does that mean I am not current on what is going on with this Nation's drug problem? No, not at all. In fact, I'm very, very confident that I could go to another planet for 10 years, come back, and appear before you as I am today, and nothing substantive would have changed.
In the original 1991 edition of my book, I prophesied, and it was the easy prophecy in the world, that if the proposals that I set forth in my book, or similarly revolutionary ones, were not implemented, absolutely nothing significant would change in the years ahead. Only the participants in the drug-war gameand that's really all it is, albeit it is a deadly game, but it's a gameonly the participants and the numbers would change. The problem and the headlines would remain the same. And in the 5 years between 1991 and the re-publication of the book in 1996, as I would sure would happen, I was positive, the headlines, like those from many, many years before, reflect this sad reality. The following are just a few among the thousands of never-ending headlines generated year-in and year-out without fail by the so-called war on drugs.
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1991these are just representative headlines, Mr. Chairman''U.S.A.'s Illegal Drug Bill-$40 billion,'' ''Andean Anti-Drug Plan Called a Failure,'' ''Official Says U.S. is Losing Drug War,'' ''Cocaine Traffickers Diversify with Heroin.''
1992, ''Doubts Raised on U.S.-Andean War on Drugs,'' ''Bush, Latin American Leaders Announce Anti-Drug Initiative,'' ''U.S. Report Cites Gains in War on Cocaine, Plays Down Setbacks,'' ''Panama is Free, but Drug Trade Thrives,'' ''Four Years of Bush's Drug War, New Funds but an Old Strategy,'' ''Coca Fields in Bolivia, The United States Tries in Vain to Fight Cocaine at Its Source.''
1993, ''Drug Strategy Shifts Away From Interdiction,'' ''New Bosses Taken Over Cocaine Traffick,'' ''War on Drugs Shifting its Focus to Hard-Core Addicts,'' ''U.S. Losing Drug War at the Border.''
1994, ''Illicit Drug Use by Youths Shows Marked Increase,'' ''Anti-Drug Effort Shifts Toward Treatment,'' ''Drug-Dealing Arrests Increase 47 Percent at Schools,'' ''U.S. Halts Flights in Andes' Drug War Despite Protests.''
1995, ''Tons of Cocaine Reaching Mexico in Old Jets,'' ''New Assault on Drugs, Old Debate on Tactics,'' ''Border Inspections Ease and Drug Seizures Plunge,'' ''U.S. Says Columbia Refuses to Cooperate on Drug War,'' ''Mexico Vows to Wage War on Drug Smuggling Syndicate,'' ''Defying U.S. Threat, Bolivia Plants More Coca.''
Page 79 PREV PAGE TOP OF DOC And the game goes on. Can any of us be naive enough to believe that the overall thrust of these headlines will read any differently in the ensuing years if we continue to refuse to do what has to be done to end this scourge? Each presidential administration, as you know, Mr. Chairman, declares its own war on drugs. Blue-ribbon committees are appointed. We have new get-tough legislation. There are police sweeps and crackdowns on users and pushers, etcetera, etcetera. But the drug crisis goes on. Nothing ever changes.
We tend to think of the drug problem and our war on drugs as a modern-day phenomenon, but in writing my book, I discovered that it is not new at all. It goes way back to the 1920's, even the ''war'' metaphor. The war metaphor goes way, way backas early as July 21, 1929, that's the year that the stockmarket crashed. A New York Times headlines read ''Waging the War Upon Narcotics.'' That's almost 70 years ago.
I was amazed to find in my research statements and observations about the drug problem decades and decades ago which are virtually interchangeable with those of today. Just two examples among many. Lewis Rupple, Deputy Commissioner of the then Bureau of Narcotics wrote in the May 1934 edition of Current History, ''The Federal Government is confronted with a titanic and apparently endless job in fighting dope pedalling,'' and referred to ''the long and bitter fight against the illicit drug trade.''
Listen to this. The February 2, 1939 edition of the New York Times reported that ''Forty U.S. Treasury Agents invaded the San Juan Hills section yesterday and arrested twelve narcotics dealers. Before descending on the scores of tenement houses, the agents blocked exits by placing their automobiles across the thoroughfare. Garland Williams, the supervising agent, said that for more than 25 years, San Juan Hill has resisted every effort by law-enforcement agencies to clean it up. In recent years, seven policemen have been killed, and in the past 2 years, more than 200 arrests have been made. But the narcotic trade has gone on unimpaired.''
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Now, doesn't that sound familiar to all of us? That was 1939, New York City. Listen to what Robert Silbering, special narcotics prosecutor for the same city, New York City, told me in 1996, over a half century later. ''In no way is the war on drugs being won. In fact, all we're doing is fighting a battle of containment, holding the line. We've been reduced to trying to take back streets and apartment houses''the Times article in 1939 used the term ''tenement houses''''in the major cities of the Nation.''
If there is one thing that struck me perhaps above all else when I focused in on the drug problem in America is that this Nation is not serious at all about solving the drug crisis, about ending it. That's not to say that our presidential administrations don't want to solve the problem. Of course they do. But they are not willing to cross the street in the rain without an umbrella to do so.
The Persian Gulf War showed what this Nation does when we are serious about something. Within just a few months, we mobilized an incredible military force of 500,000 men and women. We persuaded 27 mations to join in the anti-Iraqi coalition. And all of this was to solve a perceived probleman increase in domestic gasoline priceswhich, in terms of relative importance, shouldn't even be discussed in the same breath as this Nation's drug problem.
In my judgment, for whatever it is worth, there is only one reason why America still has a severe drug problem, and that simply is the fact that this Nation is not serious about solving it and never has been. There is little doubt in my mind, however, that if this Nation's electorate starting voting Presidents out of office because of their failure to eliminate the problem, we'd very, very quickly see new, bold, dramatic, revolutionary and successful steps taken to end the crisis. But since the drug problem is erroneously perceived to be incapable of solution and has become an accepted staple in our society, as immutable as taxes and the aging process, each Presidential Administration continues to get by with mere posturing as opposed to taking remedial action. Nothing smacks more of posturing and mere symbolism than our continued use of the war metaphor to characterize our fight against the drug curse. The fight, of course, bears no resemblance whatsoever to a real war.
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For instance, at the 1992 Drug Summit in San Antonio, Texas, President Bush asked, not demanded, but asked the presidents of Peru, Bolivia, and Colombiathe three nations responsible for most of the cocaine reaching this countryhe asked them to make an effort to reduce the production of cocaine in their respective countries by 50 percent within the next 10 years. And the Latin leaders, mind you, refused to make such a commitment. Now can anyone imagine this same President asking Sadaam Hussein if he would remove 50 percent of his troops from Kuwait within the next 10 years? Make no mistake about it, the drug war is nothing but a never-ending game between the parties to the so-called war with each side responding to the moves of the opposition.
The only dynamic that distinguishes the drug-war game from, let's say, NBA basketball competition, is that, although the drug traffickers may ostensibly fall a point behind here and there, they invariably, as opposed to NBA basketball competition, they invariably end up on top. Now the reason that I say that is because the objective of the traffickers is to get their narcotics into this country for sale. The objective of law enforcement, of course, is to prevent this. Yet every single year without exception, and despite record seizures, the traffickers get all the narcotics into this country that they need to satisfy the demand of this Nation's buyers, and then some. Every year.
In my book, I discuss in considerable depth the means this Nation has used in the past and continues to use to this very day to fight the drug curse. I'm talking about law enforcement, of course, eradication, interdiction, education, treatment. While each one should continue to be employed and has its place, if the objective is to end this crisis, that objective cannot be achieved by continued reliance on these means. Since we have conclusive, irrefutable proof that these methods, like law enforcement and the eradication of the coca crop, have not worked for decades in solving the problemthey have been almost completely impotentwhy would any rational person think that they would suddenly start working now? President Clinton, in a different context, defined insanity as doing the same thing over and over again and expecting a different result. In other words, if it rains long and hard enough, maybe the rain will stop being wet.
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Let's just very briefly discuss interdiction, very briefly. In testimony before the Senate and House Armed Services Committee on Drug Interdiction on June 15, 1988, U.S. Air Force General Robert T. Herres, Vice Chairman of the Joint Chiefs of Staff, said that ''even a massive dedication of our military capabilities to the interdiction mission as our department's highest priority would not suffice to halt the flow of illegal drugs into this country. The adversary just has too many options at its disposal. There is no practical way that the Armed Forces of the United States can seal our borders.''
To put the situation into a realistic perspective, if we couldn't interdict the Ho Chi Minh Traila path for Communist supplies, as you know, to South Vietnam, which is only about 50-60 feet widehow can we possibly expect to cut off the flow of drugs into this country over a southern border which alone occupies close to 4,000 miles, and one that, unlike the Ho Chi Minh trail, involves not just the land but the air above?
Although the interdiction effort has been a vigorous and reasonably coordinated one and seizures are high, the seizures are almost meaningless since it is estimated that for every seizure of a narcotic shipment coming in by plane, boat, car, etcetera at least ten others will get through. The traffickers recognize that the seizures, at least at their present levels, for what they really are, simply a necessary cost of doing business. And as you know, the United States General Accounting Office's March 14, 1997 report to this Congress says, ''Over the past 10 years, U.S. agencies involved in counter-narcotics efforts have attempted to reduce the supply and availability of illegal drugs in the United States. Although these efforts have achieved some successes, we've found that the flow of cocaine, heroin, and other illegal drugs into the United States continues and the availability of drugs has not been reduced.''
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One footnote to interdiction. In my opinion it gives the drug traffickers more problems than anything else we do. And in the absenceand let's italicize the word ''absence''in the absence of new and revolutionary measures to win the drug war, I think that our interdiction efforts should be substantially increased.
Getting into my drug proposalwhat I said has been a very brief predicate for what I have to say now. Throughout the years, there has been a spirited division of opinion among those fighting the drug war as to what is the real ''source'' of the drug problem. But when we hear talk about going to the source to solve the problem, it has to be a source against which we have a reasonable probability of success. True, in one sense, the user is the source of the problem. If we could stop the user from using drugs, then obviously we wouldn't have our current drug problem. But we cannot do so. True, in another sense, the coca fields and the cocaine laboratories are the source of the problem, because if we could stop cocaine cultivation or destroy all the cocaine laboratories, obviously we wouldn't have our current problem. But we cannot do so.
I view these sources as being secondary or derivative sources, and consequently our efforts to solve the problem will be misdirected until we fix our primary gaze elsewhere. Facts are stubborn little devils. And since we have all the facts and evidencehow about 70 years of facts and evidencethat even the most inveterate skeptic would ever need that we cannot stop this Nation's voracious demand for drugs, nor keep the supply of drugs from entering our porous borders, there appears to be, at least to me, only one conceptual way to solve the drug crisis. And it is directed toward the true, seminal source of the drug problem, and the only source that can be defeated, the drug lords who start the whole process and make it all happen. This whole process by which the coca plant is grown for illicit purposes, processed into cocaine powder and smuggled into the United States, obviously just doesn't ''happen.'' Coca crops don't have feet of their own. Coca laboratories don't have hands of their own. There are people, several peoplenot that many, the Medellin Cartel in the late 1980's, only three were at the top, Pablo Escobar, Rodriguez Gacha, and who was the other fellow, Jorje Ochoa, and of course the Cali Cartel, the Rodriguez brothers, that the chairman knows well aboutthere are several people at the top of the pyramid who make all of these things happen. And if these people decide that they don't want to do it anymore, it is not going to happen. It's as simple as that.
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Now the question is, how do we make them not want to do it anymore? That's what the two proposals in my drug book are all about, only one of which we'll be talking about here today.
The premise of my two proposals is a simple one. Either we are serious about solving this crisis or we are not. If we are serious, then since the problem is a severe one, equally severe, revolutionary measures have to be taken to eliminate it. If we are not serious, then we should at least have the decency to admit that we are not serious and stop this nauseating drug-war rhetoric. Stop all the posturing.
My first solution to the drug problem is the military approach, not primarily for interdiction purposes but for the arrest and apprehension of the drug lords. And if convicted, the imposition of the death penalty. This is the proposal that I will not be talking about here today except to point out that for well over a century, this Nation has been operating under the assumption that under the post-reconstruction-era statute of posse comitatus that this Nation is prohibited from using the military to enforce civilian law. I explained in the book why in my research and in my opinion that this assumption is erroneous and why, under Article 2, Section 3, of the United States Constitution, the President actually has a constitutional duty to employ the military to solve this Nation's drug problem.
My second solution to the crisishalf of which I have been asked to talk about todayis a far less muscular approach. This approach takes cognizance of the fact that the Colombian drug lords, in fact all drug lords, have one and only one motive, and of course that is the profit motive. And if they can't get their money out of this country, they are not going to send their narcotics into the country.
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Although the drug lords employ many sophisticated ways to get their money from drug sales out of this country, it is believed that over 90 percent of the money reaches them in one of two ways. The money, in its currency form, is smuggled out of this country in the same way that drugs are smuggled in, i.e., plane, boat, car, human courier. Or, the money is deposited in an American bank and wire-transferred out.
What if these two ways were shut off in the United States like water from a faucet? Since, as I have said, and the chairman knows, the drug lords, are in the last analysis, businessmen who have only one motive, the profit motive, simple logic would dictate that they would go elsewhere or find some other way to make a living.
Although the relative percentages are always shifting, it is believed that at the present time well over 50 percent of American drug-profit monies are smuggled out of this country in their currency form, most of the remaining money wire-transferred out.
I can only conceive of one methodthat's the method that you read about in the bookI can only conceive of one method, and one method only, to stop the first way that drug money leaves this countrythe smuggling of the currency outand that's by the utilization of two separate U.S. currencies, internal and an external currency. The present U.S. currency would be the only U.S. currency that would remain legal tender outside the United States but would no longer have any value domestically. In due time, obviously, this external currency would dry up as it was repatriated by foreign banks for credit to their U.S. dollar accounts, so therefore, the supply of this external currency would have to be periodically replenished, at least to the extent of providing U.S. tourists travelling abroad with American dollars.
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With respect to that portion of our existing currency that is presently in this country, all of it would have to be exchanged for a new currency. This new currency would be printed up, of course, by the Bureau of Engraving and Printing here in Washington. A different color or shade of green, a different size, and it would only have value within this country's borders. Therefore it would be useless to smuggle this currency from domestic drug sales out of this country because once it left the geographical perimeters of this country it would no longer have any value.
This one measure, the utilization of two currencies, would automatically eliminate over 50 percent of the way foreign drug lords get their money. It has to be noted, however, that a dual currency alone will not completely prevent the drug lords from getting their money. They'll still have the wire-transfer option.
So, to prevent the drug lords from getting their money out of this country, their illicit wire-transfers will also have to be interdicted. However, today, I have only been asked to present the dual-currency part of the solution, but during the question-and-answer period ifI was about to say the ''court''if the chairman will give me five, six, maybe 7 minutes, I would like to discuss my proposals for how to interdict the wire transfer of drug monies out of this country.
Getting back, very briefly, to dual currencies. I have been informed by experts in international finance and foreign exchange at the Bank of America in Los Angeles, that a dual currency would be workable and would not be disruptive. And if this subcommittee feels that there is any merit to the dual-currency proposal, I will put you in touch with someone from the Bank of America in Los Angeles who I am sure would be willing to come before you and explain the many intricacies and complexities and ramifications of such a proposal.
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Although this is my proposal, the mechanics of how to implement it will have to be left to people who are experts in and knowledgeable about international finance. I am not such a person. When it comes to finance, I am markedly deficient. It is not one of my strong suits. I don't even prepare my own income tax return.
But when I took this proposal to people who are experts in international finance at the Bank of America, as I have indicated, they told me that the proposal would be workable.
What about the first step in the processAmericans exchanging their existing currency for a new one? It is neither an unprecedented problem, nor, as far as I can determine, a particularly onerous or monumental one. For example, as a part of the German Re-unification process, in June 1990, East Germans exchanged all of their Ostmarks for Deutsche Marks. And a currency exchange on a far greater scale than what I am recommending here is scheduled to commence, as you probably know, on January 1, 1999 in Europe. The 15-nation European Union, consisting of all the major nations of Europe, signed a treaty in Maastricht in the Netherlands in 1992 providing that the citizens of the Union will exchange their 15 national currencies for a single currency in 1999 called the Euro. That is not to stop the drug problem but for economic purposes.
Wrapping up these opening remarks, in my mind, in all candor, there is a much greater likelihood that the Chicago Cubs will win this year's World Series than that this proposal of mine, which is drastic and revolutionary, will be adopted and implemented. Why? Because, as I said earlier, Mr. Chairman, this Nation is not serious about solving this drug problem and never has been. And I've probably already gone over my allotted time of 15 minutes, and I apologize to the subcommittee for that.
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Mr. MCCOLLUM. Thank you very much, Mr. Bugliosi. That is a very dramatic and good presentation.
Mr. Saphos, I'm going to recognize you.
Due to some time constraints on the next panel, I'm going to suggest, with the indulgence of my colleagues, that when we return from the next vote here in another 10 minutes or so, Mr. Hewson and Mr. Byrne join this panel. I understand that Mr. Hewson has to leave at 1:15 to catch a plane.
Mr. Saphos, you have been waiting patiently. Please proceed.
STATEMENT OF CHARLES S. SAPHOS, PARTNER, FILA & SAPHOS
Mr. SAPHOS. Thank you, Mr. Chairman. I'll be brief.
Mr. Chairman, my prepared testimony, perhaps for the fifteenth time today, lists the topology of money laundering in the United States and the challenges we're facing. That is nothing new for this committee. So, if I could sir, I'll just move on to some suggestions that I have made there for some alterations in the current scheme. The suggestions have to do with statutory reform, oversight in narcotics and the narcotics money laundering area, and the international collection of evidence.
Page 89 PREV PAGE TOP OF DOC First of all, sir, and perhaps most controversially, I have suggested that in the money laundering control statute, which is 18 United States Code, section 1956 and section 1957, we do away with one of the larger prosecuted burdens which hinders investigations and prosecutions of money laundering in the United States.
Sir, as you have heard at great length today, the complexity of narcotics trade where a single cartel can amass virtually tons of bills in the United States when that international industry needs Deutsche marks to buy acetone, needs pesos to pay compacinos in Columbia, needs inte to pay their field workers in Peru, what they don't need are tons of dollars and twenty dollar bills in the United States, so they hire professional money-laundering enterprises. Those money-laundering enterprises, sir, operated by professionals, have no knowledge, nor do they care of the source or origin of the money they launder. What they realize is they are doing a criminal act by concealing the source and origin or the destination of the money, and the ownership of the money, and they realize that their client who is willing to pay them a premium in order to conceal their identity and the source and origin of the money, is violating a law. They don't know, nor do they care, which one. And in our conversations in an undercover capacity with them, when we try to bring the topic of the source and origin of the money, they look rather shocked and embarrassed by the whole thing. In electronic monitoring of their conversations, we find that it is infrequent or never that they ever discuss the source and origin of the money.
Therefore, the requirement in the current statute, that beyond everything else, beyond proving the criminal intent of the defendant, beyond proving that the defendant did his or her conduct willfully and voluntarily, we must also prove beyond a reasonable doubt that the money that the defendant took did in fact come from one of the specified unlawful activities. This is burdensome and unreasonable given the realities of the situation. So, therefore, I would suggest that Congress considering striking that requirement from the statute.
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I would also endorse Mr. Zeldin's suggestion to consider moving from title 26, section 6050(i) to the Bank Secrecy Act, title 31.
Sir, 27 years ago, this Congress passed a statute which requires banks and travellers to report financial transactions in excess of $10,000. And I would suggest, not because Mr. Byrne is here from the American Bankers Association, but because it is true, that system has worked out better than any other system in the world for examining and controlling money laundering among that industry, the banking industry.
Where we are not succeeding nearly as well is controlling money laundering among trades and businesses which do a huge volume of business in currency. For instance, in the La Mina investigation we uncovered a ring of alleged bouillon dealers, who during the 18 months that we watched them were able to launder $1.2 billion in United States currency, mostly from the streets of New York and Los Angeles.
This Congress, 13 years ago, passed a statute which was going to start the process of examining that and would require that all trades and businesses who do a currency transaction or series of related currency transactions totaling $10,000 report those transaction. That requirement looks just like the requirement that the Congress imposed on banks. However, as I understand it by an error in the editor of the United States Code, it was placed in title 26 rather than in the banking statute. As a consequence, that report is now a tax return. Being a tax return, no one can look at it. Being a tax return, instead of for the bank to fail to file the report and being a felony, being a tax return it is a misdemeanor. In fact it is an information return, and I'm told by my friends in the Internal Revenue Service, that they almost never prosecute if they are to file a misdemeanor, if they fail to file an information return. Therefore, trades and businesses in the United States dealing with an immense amount of currency are fair game and are being utilized quite extensively as all of the prior witnesses have told you.
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To add to that, as Mr. Zeldin pointed out, there was no forfeiture allowed for the proceeds of the money which is thereby laundered.
I would add that most of my good ideas originated on Mr. Zeldin's desk, just like this one when he was my deputy for a period of 4 years.
Mr. ZELDIN. Just the contrary, Mr. Chairman.
Mr. SAPHOS. The second area in which I would like to discuss is oversight of the area of money laundering. I am concerned, as should be Congress, that we and the American population are not seeing the results of our efforts, of law enforcement efforts concerning money laundering. It is fairly typical of national law enforcement efforts against the drug industry in total, that we do not understand who is responsible for what in money laundering. We do not understand what resources we are going to give to those agencies. We do not understand how we are measuring their product, nor do we understand how well they did in measuring up to our expectations. Instead we occasionally ask for a national strategy which looks like a year book of what I did last summer, and my plans are doing more of that next summer rather than a true analysis of what resources have been devoted to an effort and how successful that effort has been with those resources.
Therefore, I would recommend to you, your endorsement, sir, of any effort by Congress including the current bill, to demand from law enforcement a realistic strategy which actually talks about resources, actually talks about performance, and actually talks about measures, and actually talks about the roles of the different competing agencies which is a continuing problem in the area of law enforcement, anti-narcotics law enforcement, and money laundering. No one knows who is in charge. No one knows who is supposed to do what. And everyone acts like it is their own, private little turf domain.
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For instance, sir, the reports that we talked about, the currency transaction reports and the reports on currency and monetary instrument movement, are owned by Treasury. One would think that within the spirit that Congress meant when they passed the legislation, those reports to be used generally by all law enforcement, State, Federal, as well as Treasury, for the purpose of generating an investigation into narcotics traffickers and money launderers. But it is not true. Those reports are only made available to Treasury agencies except if the other agency has targeted an enterprise or individual and makes written requests for access to those reports. Therefore, the other agencies, the police department in New York City, can't use those reports to generate an investigation into narcotics trafficking and into money laundering. They must already have the investigation and targeted the enterprise before they can acquire the reports. Was it exactly what Congress meant when they gave Treasury that authority?
The last point that I would like to bring up, sir, concerns the collection of evidence. But in fact, it concerns the United States's relations and the relations of the United States diplomatic efforts abroad. We have seen many, many efforts to try to enlist international cooperation in our domestic war on drugs. Not the least of which was the 1988 United Nations Convention against the Illicit Trafficking in Narcotics and Psycotrophic Substancesa document that both Mr. Zeldin and I worked on negotiating.
One of the parts of that effort is that it mandates criminalizing narcotics money laundering by all participating countries. Your honor, I would''your honor,'' excuse me. I suffer from the same trait as Mr. Bugliosi. I have been in court far more times than I have been in Congress. My apologies.
Page 93 PREV PAGE TOP OF DOC I would suggest that the international efforts under the U.N. convention have been modest at best, and notwithstanding claimed successes of the financial action task force and otherwise. Therefore, I would suggest that it is up to Congress to take aggressive action. One of the problem in United States law enforcement investigation and prosecution is that we cannot collect evidence concerning financial transactions abroad. That is, if the narcotics traffickers successfully moves money out of the United States by wire transfer or by currency, documenting what happens to it in the doorway of a bank abroad is almost non-existent.
Mr. MCCOLLUM. Mr. Saphos, I'm going to have to stop you in mid-sentence. We are running down to 3 minutes.
While we're gone on this break, Mr. Hewson and Mr. Byrne, if you would come up, we'll have a place for you here and we will get your testimony in before you have to go. We do have to go vote again, I promise to run right back. Sorry.
Mr. MCCOLLUM [presiding]. The subcommittee will come to order.
Mr. Saphos, you may complete your testimony.
Mr. SAPHOS. Thank you, sir. I'll complete it with brevity, I hope.
The collection of evidence problem that we cannot get financial documents from abroad is one that requires drastic action, and I would suggest that Congress pass a statute that looks like this: If you choose to do business in the United States, that is a foreign financial institution essentially does business in dollars. They are required to do business in the United States because they have corresponding accounts here. So, if you choose to do business in dollars, then you must produce, in the United States, books and records that would be identical to those books and records which must be produced by a United States financial institution in the United States. Now, that leaves the financial institution with a choice of law. If you wish to keep the anonymity of your depositors and you wish to keep secret their massive transactions, then fine. Don't do business in United States' dollars. If you elect to do business in United States dollars, if you elect to handle the wealth of this country, then you bring yourself under the jurisdiction of this Congress, and this Congress is going to demand that you collect and maintain the same types of books and records that we demand of United States financial institutions.
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In an aside, I would suggest that that would also rather level the international banking playing field as well. We're making serious demands upon the collection of informationfor the collection of information on United States's banking institutions. They're doing a great job, and they are probably suffering competitively in the marketplace because of that. So why don't we level that playing field and just demand that everybody else who does business in dollars collects the same type of and shares with us under appropriate judicial order, the same type of documents.
I would also suggest, sir, that the efforts that we have abroad not only are being hampered by the difficulty of the collection of evidence, but they are being hampered by official corruption abroad. And I would suggest to you that an expectation of this Congress, that United States law enforcement and United States diplomatic efforts acknowledge the corruption problem and build into our mechanisms for exchange a device to address and punish corruption would be a great step. We're beyond the cold war now. We're beyond the point where we can't say to our allies, ''We've got a serious corruption problem,'' for fear that we're going to drive them into the Soviet camp. So it is about time that we got down to the nitty-gritty and started talking about serious problems that are hampering our lives in the United States.
Mr. Chairman, corruption in the banking industry or corruption in law enforcement in our neighboring countries is causing poison to enter the streets of the United States and it is a domestic problem. Therefore, I would suggest that any mechanism that we enjoy with a foreign country, when we enter into a bilateral treaty for the exchange of information, when we enter into an aid program, that we express therein our expectations concerning the type of corruption which will frustrate that goal and the punishments for corruption which does.
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Thank you very much. I probably madetaken too much time, and made enough enemies as it is.
[The prepared statement of Mr. Saphos follows:]
PREPARED STATEMENT OF CHARLES S. SAPHOS, PARTNER, FILA & SAPHOS
Mr. Chairman, thank you for the opportunity to testify before this Committee today. I was asked to testify before this Committee because of the Committee's concern about the increase in the national and world wide narcotics trafficking and associated money laundering. My association with this Committee goes back to before 1986 when this Committee worked hard to draft and pass the Money Laundering Control Act of 1986 now codified as Title 18 United States Code Sections 1956 and 1957. As that time, I was the Chief of Narcotic and Dangerous Drug Section of the Criminal Division of the Department of Justice and was charged with the responsibility of coordinating all money laundering cases in United States Courts. It is more than unfortunate that the situation regarding the drug trade, criminal money laundering and the United States national security has grown more serious in the past eleven (11) years. I intend to share the reason for my concerns later in this testimony.
To begin with, however, it might be beneficial to discuss the typology of money laundering and the domestic and international drug trade and the impact they have on the United States. As you know, insomuch as this Committee has been the traditional repository of information concerning sophisticated money laundering techniques and enforcement efforts, there have been two (2) types of money laundering usually encountered by law enforcement. The first type of money laundering which is the traditional money laundering are those efforts by domestic United States criminals to hide the source and origin of their wealth. Traditional money laundering has focused on creating methods for making expenditures here in the United States to support the lifestyle of the domestic criminals appear to be from legitimate or at least undetectable sources. Most often, traditional money laundering involved the use of networks of domestic accountants or lawyers who for the benefit of the domestic criminal open off shore corporate accounts in bank secrecy locations into which they would deposit the criminal's money. After the criminal's money was deposited in a off shore location under the name of a corporation, the shareholders of which are anonymous, then the violator felt free to repatriate that money to the United States often alleging that the money was received by him as the proceeds of a loan to him or to his United States business entities from the foreign corporation. Thereafter, the United States criminal not only had the benefit of anonymity but also was not required to declare the proceeds of the loan as income and could, in fact, take a tax deduction for the interest which he paid on the loan that he never had after the receipt of monies which were his to begin with.
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The second form of money laundering which we have been encountering and investigating since the early 1980s is the movement of the gross proceeds of narcotics trafficking in the United States to points outside of the United States. This laundering is for the benefit of the trans-national cartels and the cartel leaders who reside outside of the United States and require that money for their purposes be moved out of the United States and in a form usable by them. As this Committee is well aware, the drug trade in the United States generates multi-billions of dollars in gross proceeds annually. A substantial portion, some estimate as high as thirty (30%) percent, of those gross proceeds are the property of trans-national cartels who are responsible for the cultivation, production, importation and wholesale distribution of much of the narcotics within the United States. Those trans-national criminal organizations are big international businesses. Like any multi-national business, they have complex financial needs. These complex financial needs are not satisfied by the accumulation of substantial amounts of street dollars in the United States. After a cocaine importer from Colombia successfully brings in a crop of cocoa leaves, he converts that crop to cocaine base. Next, he imports it to Colombia where he further converts the base to cocaine hydrochloride. Next, he smuggles it into the United States where his subordinates transport it in wholesale volumes to distribution points through the country and sell it largely on consignment to domestic traffickers who subsequently pay for their shipments in cash. Payment is usually in twenty ($20.00) dollar bills. The cocaine baron then has mountains of United States currency in small denominations accumulated here in the United States by his employees. The cocaine baron has sophisticated needs for Deutsche Marks to purchase acetone to be shipped out of Bremen for his conversion laboratories. He needs Inti to pay camposinos in Peru, and he needs untraceable dollar instruments to purchase aircraft in the United States. For this reason, he relies upon the professional international money launderer who, for six (6%) percent or more, will transform mountains of United States currency in small bills into wire transfers of Pesos into the accounts of the drug baron in Colombia.
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Once a professional trans-national money launderer has possession of the currency in the United States, this Committee has seen the hundreds of ways used by the money launderer to transport, conceal, and sell this money to willing or unwilling customers who need the dollar instruments and are willing to give the money launderer the Pesos the money launderer needs to repay the drug baron. For many years, we saw the money launderers using United States banks with impunity. Relying on the innocence, greed, or corruptibility of United States financial institutions, the money launderers were transporting suitcases, shopping bags, and cardboard boxes full of money through the front doors of the bank. They were standing in line to deposit the money into United States accounts with assurance that their conduct would probably not be reported to the United States law enforcement.
After several years of aggressive law enforcement, regulatory activity, and an awaking consciousness by the United States banks, this type of conduct has significantly diminished and has nearly disappeared.
For a short time after the bank doors were closed to them, the money launderers were relying upon methods of structuring their transactions to avoid the currency transaction reporting requirements. This conduct was generally known in enforcement circles as ''smurfing'', a name which had been coined by my then five (5) year old son, Christopher. As the Committee is well aware, ''smurfing'' is extremely expensive in terms of manpower and security and very cumbersome and slow as a means of converting multi-millions of dollars in cash. The technique has been largely abandoned by the multi-national cartels except as a way of converting the monies needed for domestic overhead expenses for that portion of the enterprise needing dollars in the United States for their operations. Consequently, two (2) forms of transactions became and remain the vogue. The first transaction requires the smuggling of substantial amounts of currency out of the United States for the deposit in off shore banks. Forms of concealment of the currency are inventive and continue to evolve. Most recently, one substantial seizure by United States Customs involved currency concealed in hidden roof panels in a truck crossing the Southwest border of the United States into Mexico. Prior to that, we have seen instances of money packed in compressors, industrial vacuums, truck brake drums, new tires, and on one occasion, sealed Monopoly boxes. Because the United States is one of the few nations in the world that does not regulate or inspect outbound passengers and pays little regulatory attention to outbound commercial shipments, then the chances of a smuggler's apprehension by law enforcement remains slight. I was present in 1984 when Ramon Milian Rodriguez was stopped while flying his Lear jet from Fort Lauderdale, Florida to Panama City, Panama in which he had over Seven Million ($7,000,000.00) Dollars in United States currency. Milian had not bothered to conceal the money at all.
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The second emerging method of placing currency accumulated in the United States is to rely on non-bank institutions and businesses to conceal the currency among large currency transactions done by those businesses. Thus, in the La Mina investigation we uncovered a ring of launderers operating a string of gold billion businesses who had laundered as much as $1.2 Billion Dollars by concealing the currency among the receipts moving each day in the world-wide gold market. Once the currency, disguised as the proceeds of legitimate commence, enters the stream of commerce, it moves internationally with little scrutiny.
To the many problems and challenges associated with criminal money laundering, we must add a new dimension. Today, we see enormous wealth which has been successfully laundered in the hands of despicable criminals who are demonstrating their will and capacity to subvert whole countries. Recent news articles regarding Cambodia and Colombia demonstrate the vulnerability of many fragile economies and systems.
Members of the Committee, I would strongly suggest that if we do not effectively improve and use all of our law enforcement tools to seize drug profits, we may well be subjecting ourselves to greater international tyranny by the narcotics barons. As this Committee is all too well aware, efforts towards democratization and privatization in the emerging countries of the world have presented private enterprise with astounding new opportunities for investment. Unfortunately, these same opportunities are available to organized criminals. The potential of narcotics traffickers purchasing a newly privatized key industry of an emerging democracy and thereby holding that republic as a political and economic captive is a very real and present danger in international relations. I would strongly suggest to the Committee that efforts to harmonize enforcement world-wide by sharing data concerning currency transactions and criminal conduct should be combined with a system whereby nations which are entrusting their key institutions to private individuals should be able to rely upon the help of other nations of the world to ensure that their investors and institutions are free from corruption and criminal taint. As an example, our bank regulatory authorities in the United States should feel assured that through Interpol or other appropriate international cooperative mechanisms they can obtain investigative assistance to examine the background of individuals from foreign countries who are attempting to procure financial institutions in the United States. Similarly, if the government of Poland is considering selling all of its electrical production capabilities to a United States enterprise, they should be confident that United States authorities will assist them in providing truthful background information concerning the United States entity which is purchasing that key industry.
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Mr. Chairman, despite the improvements made by the criminals and their laundering techniques, we have yet to see corresponding improvements in United States efforts. The situation is the same as it was eleven (11) years ago and I dare say, twenty-one (21) years ago in the United States enforcement community. We have an archaic regulatory structure, insufficient resources, and a division of authority and responsibility among turf-conscience, infighting agencies that frustrates, almost totally, the effective use of our limited resources. Let me give a few illustrations.
In 1984, the Congress passed a statute which was later codified as Section 6050I of Title 26, United States Code. That Section was intended to compliment the reporting requirements made of travelers and banks under ''Bank Secrecy Act.'' 6050I requires the trades and businesses which have a currency transaction or series of currency transactions of $10,000.00 or more file a report called a form 8300. I am confident that Congress, like the law enforcement community, expected that the report would be made and maintained in conjunction with the Currency Transaction Reports (CTRs) and Currency and Monetary Instrument Reports (CMIRs) in a central databank available to all law enforcement for the purpose of generating leads and investigations. This is not true. Due to, what was explained to me as an error by the Editor of the United States Code, that statute was codified in the Internal Revenue Section of the Code. Therefore, the reports are subject to the requirements of confidentiality to which we subject our personal income tax returns.
The requirement of confidentiality means that we are unable to mix and match the form 8300 information with the CTRs and CMIRs to target criminals and criminal enterprises. This mistake occurred thirteen (13) years ago and has not yet been corrected. The most recent effort of partial correction came this past year when Congress amended 26 USC, Section 6103 by adding sub-paragraph l(15) which gave state and federal law enforcement authorities access to form 8300 under the same conditions as they give access to the bank secrecy reports. This is not a solution. The Treasury agencies have treated the bank secrecy reports as their private turf and have purposely not made them generally available to other law enforcement agencies in the field for purposes of targeting criminal enterprises. In essence, if a DEA agent wants to track a narcotics money launderer and needs CTR, CMIR, or Form 8300 information, he cannot use that data to determine the identity of the money launderer. He can only obtain that information after he has through other investigative techniques determined that the subject is a money launderer and thereafter, request reporting information from Treasury. I do not believe this is what Congress intended.
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I believe the Congress intended that we would have a databank of reports which would detail currency movement. It was intended that we could use as an investigative starting point the substantial surplus of currency in the Federal Reserve in San Antonio, Texas, for instance. By using the reports and regressive analysis, we should be able to start from the fact that there is a substantial surplus and track that surplus to individual financial institutions. Using form 8300s, we should even go beyond the financial institutions to individual depositors who have excess currency. The investigative access to this information is extremely important. As this Committee is fully aware, the practice prevailing among domestic money launderers is to no longer use legitimate financial institutions for the placement of their massive amount of currency, but to among other things, use businesses which deal in large amounts of currencies such as the gold bullion businesses uncovered in La Mina investigation.
Earlier, Mr. Chairman, I discussed the money laundering typology in which there are immense amounts of cash, usually in small bills which must be introduced into the chain of commerce in order to facilitate the trafficking business. The need to convert mountains of cash to deposits either here or abroad is the point of the greatest vulnerability of the trafficker. We should be using the vulnerability as a fulcrum point upon which to launch coordinated investigations, prosecutions and seizures here and abroad. Apparently, this is not happening. One can only suggest that the United States' failure to take advantage of the vulnerabilities of the traffickers is, in part, because of the lack of coordination between the United States agencies, and in large part, because of the lack of coordination between United States agencies and their counterparts aboard. The reasons for the lack of coordination are many. I am certain that this Committee has heard volumes of explanations.
Page 101 PREV PAGE TOP OF DOC I would suggest that this a time for strong leadership on our national front which will require that cooperative, non-corrupt law enforcement efforts internationally will become and will remain the cornerstone of the United States international relations. Secondly, strong leadership will require that we domestically account for our law enforcement and regulatory resources. We must give our agencies a clear mission and expect standards of performance to which we hold those agencies in return for the assets which we give them. I regret that I do not see that aggressive leadership in the law enforcement area, least of all in the area of narcotics money laundering investigation and prosecution.
In conclusion, may I suggest to this Committee that some of the following steps might be appropriate. First, Congress should carefully examine the statutory and regulatory framework concerning financial reports required by Congress. Are those reports adequate to trace the gross movements of monies all the way from the vendor to the national financial institution? Can we investigate surpluses in the national institutions to determine whether that money came from criminal sources? Secondly, the regulatory and statutory structure needs to be examined to determine whether our regulations and statutes permit all of our law enforcement resources to take advantage of the reports required by the law. Third, Congress must determine that sufficient law enforcement action is being taken to requiring that all reports dictated by law are indeed being filed. You will remember the intense scrutiny under which I and other prosecutors put our national banking system. After great expense and expenditure of energy by all involved, not the least of which were the banks, the institutions are in large part aggressively complying with the laws. My present clients, some of which are financial institutions, are demanding that we give other businesses which may be involved in narcotics money laundering, the same intense scrutiny that we gave to banks.
Page 102 PREV PAGE TOP OF DOC It is a fact that the United States law, while it makes the failure of a bank to file a currency transaction a very serious felony, makes the failure to file the analogous report by a trade or business a misdemeanor. In fact, this report is termed an ''information return'' by the Internal Revenue Service. It is my understanding that misdemeanor prosecutions for failure to file these information returns are rare, if not nonexistent.
Next, I would suggest that the Congress express its expectation to the Executive Branch that strong leadership is expected in coordinating our enforcement efforts and avoiding petty, unproductive turf wars.
In addition, Congress should increase its dialogue with the foreign affairs community and express Congress' expectation that international law enforcement cooperation to address international narcotics trafficking is at the forefront of our expectations in international relations. As a subset of those expectations, it should be Congress' demand that our partners participate in corruption free, aggressive sharing of information and coordination of investigations.
In line with our other international efforts, I suggest that Congress critically examine our efforts to obtain information and evidence of off shore criminal money laundering. I suspect that such an examination will show that our efforts at collecting information and evidence are far less profitable than our needs. Therefore, I would suggest that we take advantage of three vulnerabilities the traffickers and launderers all exhibit. The drug trade at some point or other needs United States dollars. All United States dollar accounts are cleared in the United States. The Congress has the power to regulate the interstate and international movement of dollars. Therefore, I suggest a system of laws which require that if a bank does business in the United States which to all intents means doing business in United States dollars, then that bank must provide to United States authorities upon appropriate demand all books, records and other information as would be required of a United States bank in a similar situation. If the bank does not now collect such information, it must do so and produce it upon demand or forego doing business, such as having a corresponding account in the United States.
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I would also suggest that the Committee might critically examine the Money Laundering Control Act of 1986. The statutes then passed have changed little since 1986. There are several possibilities for improving the statute. The statute could be improved by modifying the requirement to prove that the funds laundered were derived from a specified unlawful activity. At present, the offense of money laundering is unnecessarily obtuse and burdensome for the prosecutor and difficult for the jury to understand. The government must prove that the Defendant knew that the property involved in the criminal transaction represented the proceeds of some form of unlawful activity and that the Defendant purposely conducted or attempted to conduct a financial transaction and that the money which was involved in the transaction was, beyond a reasonable doubt, the proceeds of a specified unlawful activity. This raises a couple of problematic issues.
One issue is that the money must have been already derived from a prior unlawful activity. Therefore, if the money is brought into the United States for the purpose of purchasing an aircraft which will later be used to smuggle drugs, although the transaction is designed to promote an unlawful activity and although the transaction may well be structured in such a way to conceal the identity of the principals, it is not money laundering. That is because the money was not derived from a prior unlawful activity. Therefore, one adjustment to the statute would be that the money be either criminally derived or intended to further a criminal enterprise or criminal activity.
A second fix to the statute would be to abandon the requirement of proof beyond a reasonable doubt that the funds involved in the transaction were, in fact, derived from a specified unlawful activity. In the real world, professional money launderers do not inquire into nor discuss the source and origin of the money brought to them by their clients. The only thing material to them is that the clients are willing to pay a substantial amount of money to maintain their anonymity regarding these transactions. Thus, whether the money was derived from or intended to addict every child under twelve (12) in Des Moines to heroine or blow up the federal building in Oshkosh is immaterial to the money launderer and in many instances, he is unaware of the source or ultimate use of the money.
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In the undercover conversations, United States agents typically try to address the source of the money with the bad guys. The crooks look extremely surprised and express a supreme disinterest in the source of the money. The only thing important to them is that they are willing to pay or receive a substantial commission to have the money laundered.
In conclusion, I would like to suggest that it is adequate to show that the Defendant know that the funds are derived from or intended to further some form of unlawful conduct, as well as the other elements of the offense other than the specified unlawful activity.
Lastly, I salute this Committee for its examination of this area of the law. I regretfully note that more can be done and greater supervision can be exercised. In this light, I applaud every effort by this Committee to determine whether the citizens of this country are being adequately protected and whether the government is using all of its powers and resources to their fullest and best effect.
Charles Saphos joined the firm of Fila & Saphos following a successful practice as the General Counsel for Interpol United States National Central Bureau, Chief of the Narcotic and Dangerous Drugs Section of the United States Department of Justice and as a Federal Prosecutor in Miami, Florida and Atlanta, Georgia.
From 1991 until 1996, Mr. Saphos was General Counsel for Interpol United States National Central Bureau. As General Counsel, Mr. Saphos participated in the formulation of United States policy concerning International criminal law and law enforcement. Mr. Saphos sat on numerous international committees and commissions to further cooperation in criminal law enforcement and to improve efforts to combat terrorism, organized crime, and narcotics trafficking worldwide.
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Mr. Saphos served as Chief of the Narcotic and Dangerous Drugs Section of the United States Department of Justice from 1985 and 1991. As Chief, Mr. Saphos contributed to the development of United States domestic and international policy concerning money laundering and narcotics investigation and prosecution, as well as supervised United States prosecutive efforts against money laundering and narcotics violators. Among other duties, Mr. Saphos was the Chief Representative of the United States Department of Justice in drafting, negotiating and ratifying the 1988 United Nations Convention Against the Illicit Traffic of Drugs and Psychotropic Substances.
Mr. Saphos works as an advisor and consultant to governmental authorities, multi-national corporations, and private individuals. He lectures and publishes in the area of narcotics policy, money laundering regulation, international criminal cooperation, and criminal law.*
Prior to joining the Narcotic and Dangerous Drugs Section of the Department of Justice, Mr. Saphos was a Federal Prosecutor in Atlanta, Georgia and Miami, Florida. While a Federal Prosecutor in Miami, Mr. Saphos was the Chief of Operation Greenback, a multi-agency task force which was the premier effort at investigating and prosecuting narcotics money laundering offenses.
Mr. Saphos is a frequent lecturer at Jesus College, Cambridge, England, the Brookings Institution, the Federal Bureau of Investigation Academy, the American Bankers Association, and numerous other professional and academic institutions. He appears in Whose Who in American Law, is married to the former Carmen English who is an attorney and Emmy award winning journalist and has five children from ages 2 to 18 years.
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''The committee was chaired by Chuck Saphos, the former Greenback Chief, who by this time had become the head of Justice Department's Narcotics Section. Tough, aggressive, and a vigorous prosecutor, Saphos was the ideal person to knock heads and to push forward with the investigation.''
The Money Launderers, by Robert E. Powis, pg. 159
1992, Probus Publishing Company
*His most recent publication is ''Something is Rotten In the State of Affairs Between Nations: The Difficulties of Establishing the Rule of International Criminal Law Because of Public Corruption'', 19 Fordham International Law Journal 5, 1947 (June 1996).
Mr. MCCOLLUM. You did just fine, Mr. Saphos. We really appreciate your testimony.
Mr. Byrne, with your indulgence, I'm going to simply introduce Mr. Hewson and let him give his testimony due to the time constraints on him. Then, I'll introduce you.
Mr. Hewson is a Senior Vice President with NationsBank. He was appointed with the responsibility for the prevention of international money laundering and the prevention and detection of international fraud for the bank worldwide. Prior to his appointment, he was an officer with the Company Fraud Department of New Scotland Yard London. In recent years, he has lectured on the subjects of money laundering and international fraud to international financial institutions, national and international law enforcement agencies, and national and international government's departments and agencies.
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Mr. Hewson, your testimony will be entered into the record in whole, and you may summarize any portion of it.
Welcome. Am I correct that you are on a pretty tight time schedule as I've been advised?
Mr. HEWSON. Mr. Chairman, I am. And I am most grateful to you for your indulgence today on that matter.
STATEMENT OF BRENDAN T. HEWSON, SENIOR VICE PRESIDENT, NATIONSBANK
Mr. HEWSON. Mr. Chairman, thank you very much for your kind invitation to attend before you and your colleagues today.
If I can deal with this in shortmoney laundering is actually a description for the legitimization of criminal funds, by ''washing'' those monies through various enterprises and organizations. Each operation removes a layer of the taint or criminal staining from those funds.
Now there appears to be a general belief that the untold millions of dollars in criminal-originated funds actually derive from criminal activity. Let us be clear that this money already exists in its proper form. It's only when the product or derivative of the criminal act is converted to a negotiable medium that the money or the value of the money converts from clean to criminal. Thus generated or manufactured by the criminal, which it is not, he converts his ill-gotten gains by despoiling clean or proper cash.
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By its definition, money laundering is the concealment of the true ownership of illegally obtained assets or income either in cash or the value of cash whilst retaining control over that income or asset. The enormity of funds generated by international organized crime can only be guessed. It follows, therefore, that the facilitation of the money laundering process is invariably done by professionals. These professionals can be attorneys, accountants, bankers, other fiduciaries, brokers, dealers, or any person whose business deals in the retention, movement, transfer, or investment of monies.
Well, how does the process work? Simply by opening a bank account or having a professional representative open a client account or form a company represented by nominees or bearer shares in a jurisdiction not widely recognized for its regulatory strengths.
There are a number of fundamental issues that must be recognized. Fraud is the disease of the 20th century and money laundering is its scourge, certainly for financial and professional institutions.
Behind every money-laundering operation there has to be a fraud perpetrated in order to establish the operation. That deception, Mr. Chairman, can be as simple as the presentation of a bogus business card or forged letter heading or the misuse of the genuine articles of either species. Sadly, it is now necessary to verify every act or introduction, and this means that the word of the professional and establishment figure can no longer be accepted. It is important that the enforcement and regulatory emphasis shift from large currency reporting to include suspicious-activity reporting in order to detect and deter money launderers. The establishment of Know-Your-Customer practices and guidelines are key to the prevention of professional and financial institutions having their services misused as money-laundering conduits.
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The fight against money launderers is an ongoing, never ending, and exhausting struggle. Whether the criminal funds or their value are the derivation of drugs trafficking or international organized crime; fraud, extortion, robbery, terrorism, or smuggling, just to name a few, the strangling of the cash supply, rather like the stopping of the blood supply, will kill or seriously incapacitate that beast. One must not assume that the launderer is out to make a profit from his laundering operations. Indeed, by making a loss on investments, trades, or other such transactions, he is less likely to draw attention to himself.
Trading on the markets is another way to disguise criminal funds. Money deposited from one source to cover trades or margin payments, and at the other end, checks can be issued, or wire transfers made in settlement of those trades. The receiver of those payments is, of course, under the control of the criminal.
The fight against the money launderers is multi-faceted. In the first instance, the role of the police or other law enforcement agency, whoever it may be, must be in the vanguard in the fight against the criminal. They must liaise and share information with each other. Often criminal gangs can be identified by the attempts they make to penetrate, misuse and steal from financial or other institutions. These attempts, Mr. Chairman, are frequently recognized. Law enforcement agencies must be encouraged to pursue these attempts, and the prosecutors supported in pursuing these people to conviction. It is not encouraging to have to believe that only successful criminal operations where major losses are incurred will be actively pursued. Very often the attempt is a trial run preparatory to an attack on another operation or organization. In being thwarted, criminals learn and hone their expertise in order to be successful in their main attempt, comfortable in the knowledge that their practices will be paid no heed by the authorities. The primary focus of all in this matter should be prevention not detection.
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Financial institutions and other professional organizations and bodies also have a responsibility. For them their role may be seen as dual.
Firstly, they have the commercial requirements to protect their investors, customers, shareholders, and employees from damage or loss to their organization by suffering severe reputational damage because they did not take care or indeed did not care who their customers were.
Secondly, there is the socio-moral responsibility to protect its environment and those who reside therein from the criminal and his harmful and deadly activities. The bank or professional body needs to have its own insurance or protection. This has been described as conducting Due Diligence on potential customers whether they be borrowers or investors. Training must be given to associates of all levels whether they be bankers, brokers, traders, or administrators on understanding the requirements for Due Diligence which includes, amongst others, recognizing what may be suspicious the ability to properly identify contracting parties and beneficial owners; understanding and recognizing activities that could constitute a warning or a red flag; and the great value of keeping records. Above all, they must be made aware of their individual responsibilities under the law and the consequences should they overlook or ignore these requirements whether by negligence or naivete.
It is essential that the true identity and beneficial ownership of accounts is established. Knowing the nature of a customer's business and what constitutes reasonable account activity are not only good for business but good to protect that business. Knowing the source of funds is essential in identifying transfers that may be disingenuous.
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And in conclusion, Mr. Chairman, the fight against money launderers is a fight against all crime, not just narcotics and those who in their professional capacity knowingly represent the criminal. This is not a battle to protect the fabric of our economy and society, it is a full-scale war. As in all wars different methods are used to destroy, deter or to undermine the enemy. They do not have to be joint. Indeed their strength is in their individuality. All require one fundamental ingredient, the support of their legislature and their government.
And if I may close with a quotation that I believe identifies the thrust of my presentation to you, Mr. Chairman; PREVENTION. It is this, ''Timely dispersments to prepare for danger frequently prevent much greater dispersements to repel it.'' These are excellent words from a gentleman by the name of George Washington. He was actually referring to a small local difficulty that he had at that time with some people called the British.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hewson follows:]
PREPARED STATEMENT OF BRENDAN T. HEWSON, SENIOR VICE PRESIDENT, NATIONSBANK
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Mr. MCCOLLUM. Thank you, Mr. Hewson. Do you literally have to race out of here, or do we have time for Mr. Byrne to give his testimony before we question the panel?
Mr. HEWSON. I'm prepared to take some questions, Mr. Chairman, but I do have to depart.
Mr. MCCOLLUM. If you do, then I have one question directed just to you.
Page 113 PREV PAGE TOP OF DOC Since you deal in international banking, I was curious about your reaction to Mr. Saphos's concerns that perhaps we should impose a requirement on foreign banks that if they are going to do business with the United States' currency, they have to provide the same openness and records to us, our law enforcement community, and our public as American banks are required to do. What do you think?
Mr. HEWSON. Well, if I could address it from our training initiative and the format with which we deal with it in our overseas operations, everybody is made aware of their requirements under the United States's law.
There arefor example, in the United Kingdom, the powers there for investigators to obtain banking records through the crown court.
Of course, if I am answering your question correctly, it is rather difficult when you look at the multi-jurisdictional nature here of applying one country's legislation to another. Again, the use of the mutual legal assistance treaties can be very beneficial here. There must be cooperation.
Mr. MCCOLLUM. Suppose that we said that you can't do business in our country if you don't provide exactly the same open records? The Swiss might not like that, I suppose.
But you don't have anything further.
I don't want to dominate here. Mr. Conyers, do you have any questions just for Mr. Hewson? We'll finish with the other panelist if you don't. He needs to escape.
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Mr. CONYERS. Merely to thank him and all the witnesses for their very significant contribution.
Mr. MCCOLLUM. Well, I would thank you then, Mr. Hewson. If you need to go, you may.
I'm going to introduce Mr. Byrne and let him give his testimony. Then we'll ask questions of the entire group that is here.
Mr. HEWSON. Thank you Mr. Chairman.
Mr. MCCOLLUM. Thank you very much.
John Byrne is Senior Counsel and Compliance Manager in the regulatory and trust affairs section of the American Bankers Association in the governmental division. He is responsible for ABA's legislative efforts on money laundering, asset forfeiture, computer security, white-collar crime, environmental liability and privacy issues. That's a pretty big plate, Mr. Byrne.
Mr. Byrne has been a member of the Treasury Department's Bank Secrecy Act Advisory Board since its inception, co-chair of the American Bar Association's money-laundering subcommittee, and the American Bankers Association's annual money laundering enforcement seminar. He has also written extensively on money laundering and is a frequent contributor and advisor to several publications including ''Money Laundering Law Report.''
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Mr. Byrne was the first private-sector recipient of the director's medal for exceptional service for the Treasury Department's Crimes Enforcement Network. And I might add that I recall having worked with you in past years on this subject. You have been long and diligent, and I appreciate your patience and the indulgence of all the members of the panel.
Your testimony will be entered into the record in whole. You may feel free to summarize, Mr. Byrne.
STATEMENT OF JOHN J. BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, REGULATORY AND TRUST AFFAIRS SECTION, GOVERNMENTAL DIVISION, AMERICAN BANKERS ASSOCIATION
Mr. BYRNE. Thank you, Mr. Chairman and members of the committee.
I think the value of sitting through the entire day of testimony is that I think I can talk about the things said this morning that I agree with and some that I would expand upon. And I'll just take a couple of moments to talk about some of the recommendations that we have.
Obviously, like Michael Zeldin's testimony, ours is fairly detailed, but I want to focus on a couple of points. And I guess the overall view that I would like to present to the committee is that I'm probably a little more hopeful than some of the previous witnesses and some of the members. Working on this issue as long as you have, Mr. Chairman, since the mid-1980's, you and I know that the government, no matter who is in charge of the Administration, know that the government agents who are working on this issue are trying. They may not be succeeding everywhere that we'd like them to be, but I really believe that whether it's Internal Revenue or the Department of Justice or Customs or FINCEN that their efforts are in good faith trying to grapple with this issue. While we have not solved much of the large amount of money that we think is being laundered, I think that some efforts in our industry, because probably of the less-than-adequate records that the banking industry had in the mid-1980's, that's changed a little bit. So I would like to just tell the committee that from the banker's perspective, we really think that the deterrence efforts are ongoing, they are successful to some degree, but we really believe that with somemaybe minor tinkeringsome changes around the edges, we can really, I think, go forward, and I would like to explain some of what I'm referencing.
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The first is, I think, one of the items that was alluded to before that deals with the partnership that bankers and others have had with the government.
The Money Laundering Suppression Act that was enacted in 1994 was enacted because the former chairman of the banking committee, Mr. Gonzelez, and the ranking member at that time, Mr. McCollum, both believed that there was a lot of routine information that was being gathered by banks and submitted to the government. It probably was not as effective as the suspicious reporting procedures, the more focused information that I think we are hearing today and makes more sense.
So the Suppression Act was passed, and one of the charges was to change at least the focus of the currency transaction report so that the 12 million forms that we had in 1996 would go down, to some workable number that perhaps the government could utilize. Let's get a better focus on suspicious reports. So through the enactment of the Suppression Act, FINCEN has begun the process of reducing the size of the currency reporting form, further streamlining the entire cash-reporting system. It is not done yet. It is not complete. But some of what Mr. Zeldin referenced earlier is beginning to happen. So I wanted to at least let the committee know that I think the government shares the private-sector view that a lot of routine data is probably not the way to go as we approach the next century. Better training and more focused information is preferable to that.
The partnership that I referenced can be seen in what you said, Mr. Chairman, in terms of my background. I am one of the members of the Department of Treasury's bank secrecy act advisory board. This is a group of 30 individual that represent everything from casinos to check cashers to money transmitters as well as the various law enforcement agencies. We meet approximately four times a year under the guidance of FINCEN as well as the Treasury Under Secretary, Ray Kelly. And we have candid discussions of what are the new topologies in money laundering; what are the various laws and regulations that are problematic at best and maybe burdensome at worse. And those discussions, I believe, have resulted in reductions in regulatory burden, but more importantly, the network of law enforcement has been expanded.
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We've talked today about the international arena. The Financial Action Task Force serves as a forum for ideas and recommendations on how to eliminate money-laundering activities, not only in our country but abroad. That effort has to be expanded because in our view the bankers in the United States can do only so much. If there are countries out there that are not part of FATF or not involved, don't have strong laws, don't provide the information that Mr. Saphos mentioned, then a lot of what we do will never completely prevent money laundering. And so FATF is a good place to have those exchanges that may not be the answer for countries that are not involved with that organization. But it is something to look at and is certainly a model, at least a strategic model, that should be considered.
We all must support the need for increased international cooperation. And one other point, FATF has recently given the United States an outstanding rating for anti-money-laundering activities, and we believe that the private-sector as well as Congress should be proud of the work of our public servants in this difficult area. Again, not a perfect record, but if you look at the FATF report, they list a whole litany of things that our government has accomplished.
And probably one of the major things that they've accomplished, because we have been a little bit involved in that, they've gone overseas to other countries to say, ''Here's what we think that you need to do to help prevent the laundering of money.'' We're not saying that our system is perfect or that drugs aren't a big problem in our country, but we go over there and suggest, ''What are ways of working together?'' I think that FATF and some of the other efforts that I've seen that the Department of Justice and others undertake to go overseas and talk to our counterparts and talk to our bank regulators and banking counterparts, and I've been part of some of those meetings, are very beneficial. Obviously it is a big world out there and we're never going to solve everything. But those efforts probably don't get the attention that they deserve.
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Everyone else this morning has given you topologies and trends, so ours that we've seen are in the testimony, so I won't go over that. But I want to spend a couple of moments on an issue that is starting to get some attention, and I think that this committee as well as other should focus on this.
We've seen a rise in possible illegal transactions in certain financial institutions that are not regulated by Federal banking agencies. As with any general statement, it must be emphasized that many non-bank financial institutions are working toward developing improved compliance systems. But the amount and frequency of Federal examinations will often dictate the seriousness by which those institutions take anti-money-laundering deterrents.
Congress should continue to provide oversight in this area and not be swayed by critics who claim that extension of the money-laundering laws to those entities will unduly harm the economy. In fact, Mr. Chairman, Mr. Saphos said in his written testimony and mentioned it in his oral statement that the Form 8300 companies, the trades or businesses, it's very difficult for our industry to accept the fact that if we fail to file a CTR that could potentially be a felonyespecially, obviously if there was an intent therethat there is no corollary for trades and businesses. Car dealers, restaurant owners, others that deal in large amounts of cash, because of the quirk in how the statute was crafted don't have those same penalties. And when you go back to a banker down in Florida or outside in Michigan somewhere and say, ''You can face these penalties, but your competition across the street does not.'' It is a difficult thing for the banking industry to swallow. So we do support some attempt to maybe work with the other committees that have jurisdiction to make those changes.
Page 119 PREV PAGE TOP OF DOC I've also included in the testimony, and I won't go over it now, some examples of the partnership that I mentioned before with the law enforcement. In Oklahoma, in Florida, California, and some other states, there are these task forces set up between bankers and law enforcement to network and share information. And some of the examples where information that we have provided has resulted in convictions and at minimum started investigations are also included. I really think again that these are things that probably don't get the publicity that they deserve and we are attempting to correct that. I have also included as an attachment to my written testimony an article written by the Internal Revenue's criminal division where CID Director Dennis Crawford goes through some scenarios where bankers have worked with law enforcement and convictions have resulted. Again, we're not solving the problem, but we're working the best way that we can to try to deal with this problem.
Brendon mentioned the know-your-customer issue. I will say to you that we are anticipating a regulation issued either by the Federal Reserve or with the other agencies at some point in 1997. The banking industry supports the macro concept of know-your-customer. Certainly we believe that we have to have identifying and verification of identifying requirements at banks for new account holders. We must report suspicious activity. We must train our employees to detect all these things. And if a know-your-customer requirement includes all of those, then the industry should be able to handle that without much of a problem.
If on the other hand, the government decides to mandate certain commercial-monitoring software and that type of thing, that would be a little more difficult. And we're working to make sure that at least the discussion on this occurs at the Bank Secrecy Advisory Group and with the government so that they don't go down that road at least at this point.
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Finally, relating to know-your-customer, again, because we want to see that level playing field, we believe that non-bank financial institutions should have the same requirement to identify their customers, to verify that identity and to report suspicious activity when they see that. We think that is only fair, and we'd like to see that emphasized, and certainly your committee could provide oversight in that area.
Finally, two points that I want to make. One, again, dealing with something that we talked about briefly this morning, and that is electronic commerce. With the advent of smart cards and cyberspace financial services, I think that the government and the industry has to be prepared with not only how valuable these new products are, but what are the potentials for money-laundering activities and other fraudulent activities by these new products that normally should be seen as a positive. We have to have a somewhat jaundiced eye to make sure that they are not being used for illegal purposes.
A recent report that I've just received a copy of from the National Association of Attorneys General has pointed out that ''if there are widely accepted alternatives to the banking system, criminal activity could exist undetected, undiscovered and unchecked.'' So I would just urge this committee and the other members of the Banking Committee to really look at electronic commerce from a positive standpoint but remember that there are law enforcement concerns. I would much rather see requirements be placed on these new products today than 5 years down the line when you have to make substantial costly changes.
So in that vein, I think that FINCEN should be commended for proposing that issuers of stored-value cards register with the Department of Treasury. We hardly feel that that is burdensome. It is a simple registration requirement. So we do not share the view of critics who say that this proposal could kill that emerging industry.
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And the last point, Mr. Chairman. I have two proposals. One, I support what Michael Zeldin brought up in terms of the issue of a criminal safe harbor. While there are no clear cases that suggest that this is a major issue for us, it does present a compliance quandary, and I would suggest that we would be happy to work with the committee and the Department of Justice to see if we couldn't craft a workable solution to that problem.
And finally, we have attached for your consideration, another proposed change to the law. This deals with the current inability, once a banker has been dismissed from a bank for admitting that they have in fact embezzled or stolen money, but weren't prosecuted because the thresholds were too high and a United States Attorney wouldn't take the case. What happens today is that the banker leaves our institution and goes down the street to another institution, and we are unable to tell that other institution that this person has confessed or admitted to a crime.
Now because of the quirks in some of the various laws, we end up passing our problems down to the institution down the street. And in reality, it is not a competition issue. It doesn't help any of us.
There are about 12 state laws that allow some form of providing that information, and our proposal is attached to the testimony for your consideration. It is something that security officers have mentioned to us for many years, and we thought that this would be an opportune time to bring that up here.
So in a nutshell, that is where we stand today. And I again would like to emphasis that we are hopeful. We really believe that everybody is trying. It's just that if there are different strategies we want to be part of those. And we think that eventually we can get our hands around this.
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[The prepared statement of Mr. Byrne follows:]
PREPARED STATEMENT OF JOHN J. BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, REGULATORY AND TRUST AFFAIRS SECTION, GOVERNMENTAL DIVISION, AMERICAN BANKERS ASSOCIATION
Good Morning Mr. Chairman and members of the Subcommittee, I am John Byrne, Senior Counsel of the American Bankers Association (ABA) and a member of the Treasury Department's Bank Secrecy Act Advisory Board. The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membershipwhich includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banksmakes ABA the largest banking trade association in the country. I have been asked to discuss money laundering trends both domestically and internationally and how our industry is coping with this difficult issue. We welcome this opportunity to outline for the Committee the banking industry's efforts in deterring all types of financial fraud. ABA believes that the industry response to this problem has been strong and our ongoing efforts successful.
The industry is working diligently with our government counterparts to ensure that the financial community has all the appropriate tools to combat all types of money laundering and bank fraud. The ABA is committed to that result, and we have created educational mechanisms so that our members are prepared for financial crimes and know best how to respond to that problem.(see footnote 1)
Page 123 PREV PAGE TOP OF DOCMONEY LAUNDERINGTHE U.S. RESPONSE
The ABA has long supported the efforts of the Congress and the U.S. Government in their drive to address money laundering activity throughout the world.(see footnote 2) ABA was pleased to be actively involved in working toward enactment of the Money Laundering Suppression Act of 1994 (P.L. 103325), which was enacted to improve the regulatory process covering the Bank Secrecy Act. Due to that legislation and the implementing regulations, FinCEN has successfully reduced the size of the Currency Transaction Report (CTR) and is close to further streamlining the entire cash reporting process.(see footnote 3) If the government stays on track, all of these initiatives will assist the industry and the government in their efforts to stop money laundering by refocusing efforts from routine reporting to suspicious transaction reporting. FinCEN deserves much of the acclaim for spearheading the regulatory burden reduction process that has benefited both bankers and law enforcement.
ABA would like to reemphasize the partnership developed in the past several years between the government and the banking industry. This alliance needs to be highlighted because the same relationship is not common in foreign countries. The lack of private-public sector teamwork internationally needs to change if the goal is improved (and more effective) vigilance on the part of the banking industry. Specifically, the UnderSecretary for Enforcement at the Department of Treasury initiated, and the Director of FinCEN carried out, the formation of a Bank Secrecy Act Advisory Board comprised of private and public sector representatives to meet on a regular basis and discuss trends in money laundering, as well as the current regulatory structure and what changes are necessary to streamline and improve the system. Over thirty individuals meet and engage in candid discussions which, we believe, have resulted in an improved regulatory system. This ''forum'' was duplicated at a January, 1996 meeting in Paris with international representatives prior to a regularly scheduled Financial Action Task Force (FATF) meeting and should be the goal for all nations.
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In the international arena, the Financial Action Task Force serves as a forum for ideas and recommendations on how to eliminate money laundering activities not only in the FATF countries but with other countries throughout the world. FATF is to be commended for its dedication to this worthy goal, and it is imperative that the private sector lend its expertise and energy to increasing the obstacles for narcotics traffickers and other criminals who illegally use our financial institutions to move their ill-gotten gains. ABA has supported these efforts, but, as we previously mentioned, the record of our international banking counterparts has been mixed, at best.
The ABA stands ready to continue its decade-long involvement in educating bankers and other private sector representatives on the need for compliance and vigilance with money laundering laws and activities. We have worked with FATF and its members so that one day we can all trumpet the end of money laundering in financial institutions everywhere. All must support the need for increased international cooperation. It should also be pointed out, Mr. Chairman, that FATF has recently given the United States an ''outstanding'' rating for anti-money laundering activities. The private sector, as well as Congress, should be proud of the work of our government in this difficult area.
A. TRENDS IN MONEY LAUNDERING
To understand money laundering activities in the United States, one must realize that the U.S. financial industry is extremely varied, with institutions ranging from small community banks to large international financial service providers. Thus, the experiences will differ widely as to what is attempted by criminals who attempt to use our institutions for illegal purposes. Much of what we have seen in the past several years, in the aggregate, has been continued attempts to evade the cash reporting requirements (i.e. through structured transactions), the creation of ''front'' companies designed solely to move the proceeds of illegal activities and complicated investment schemes. In addition to those well-known activities, domestic financial institutions are wary about transactions with certain countries that are considered drug havens by U.S. and international authorities. While we do not avoid business with these countries, bankers are trained to do extensive research on banking transaction activities in these countries.
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We have also seen a rise in possible illegal transactions in certain financial institutions that are not regulated by federal banking agencies. As with any general statement, it must be emphasized that many ''non-bank'' financial institutions are working toward developing improved compliance systems, but the amount and frequency of federal examinations will often dictate the seriousness by with which those institutions take anti-money laundering deterrence responsibilities. We are confident that most other financial service providers share our support for improved compliance. Congress should continue providing oversight in this area and not be swayed by critics who claim unfair extension of the money laundering laws to those entities.(see footnote 4)
Any new trends in money laundering, Mr. Chairman, must, by definition, be monitored by law enforcement and state and federal bank regulators since those entities are much better equipped than bankers to discover new forms of criminal activities and to distribute this information to all concerned parties. The U.S. government has been working toward an improved ''alliance'' with the private sector to share information on new trends and schemes, and we are optimistic that the sharing of critical information will continue. The ABA has offered its services in this regard, and we urge our counterparts both in the U.S. and abroad to do the same.(see footnote 5)
While there are many examples of banker cooperation with the government in the money laundering arena, I would like to offer some examples of these efforts. The level of success in deterring money laundering achieved by the models of industry-government cooperation in such places as Oklahoma speak for themselves. The following are money laundering schemes uncovered by the joint efforts of Oklahoma bankers and law enforcement agents as reported by the Internal Revenue Service and the U.S. Attorney's Office in Oklahoma:
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A financial institution reported suspicious activities by a group of individuals who were opening new accounts. As a result, a major cocaine distribution organization was uncovered. This organization had deposited in excess of ten million dollars in Swiss banks. The investigation resulted in the following seizures: a $375,000 home in Oklahoma City; $1,000,000 in cash in an Oklahoma City bank; an airplane located in Tucson, Arizona, valued at $5,000,000; and in Reno, Nevada, automobiles valued at $100,000, and gold and jewelry from a safe deposit box valued at approximately $3,000,000.
A financial institution employee contacted the Financial Task Force in Oklahoma concerning a new account holder who was receiving wire transfers from California and then withdrawing the money in currency (approximately $50,000 each wire). This information uncovered a theft ring which had stolen almost four million dollars in microchips from a business in Oklahoma City.
Three financial institutions independently reported suspicious transactions concerning the purchase of one or two cashier's checks in amounts of $3,000 to $4,000 with currency. This lead initiated an investigation which uncovered an international heroin organization which had laundered in excess of one million dollars through Oklahoma City banks in less than twenty-three days. The individuals who purchased the cashier's checks, known as smurfs, went to as many as twenty banks in one day acquiring cashier's checks. Law enforcement seized over 26 pounds of heroin valued at twenty million dollars in Oklahoma City.
The Oklahoma model of partnership (which has been duplicated in California, Arizona and Florida among many other locations) strengthens both the banking industry and the government and is made possible only through the efforts of dedicated public servants that work closely and well with our industry. These stories, Mr. Chairman, often go unreported, and the ABA is attempting to change that. [See article from ABA's Security and Fraud Newsletter (Attachment A).]
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Finally, we would be remiss if our association did not commend the various federal agencies for their efforts to train foreign law enforcement, regulators, and bank officials on current detection and prevention efforts. ABA has participated (as have several major U.S. institution bank officials) in a global attempt to share information and offer advice on how to craft effective fraud deterrence programs. The United States Customs Service, the Federal Reserve Board, FinCEN, various U.S. Attorney offices, as well as many others have developed seminars, conferences and other forums to train our international counterparts in the critical area of fraud prevention and detection. The programs do not stress the U.S. regulatory and legal model as the answer to worldwide money laundering, but create an opportunity for information exchanges that greatly assist all participants. This area of support gets little recognition, and that needs to be remedied.
Another area that we have been asked to cover concerns what countermeasures U.S. financial institutions have developed in order both to comply with our regulatory responsibilities and to develop an appropriate proactive response to money laundering. While the U.S. does not now have a regulation in place (although one is expected in 1997), the ABA has long supported the concept of formalizing a ''Know Your Customer'' policy. In 1990, the ABA surveyed its membership to determine the extent to which institutions already had policies that could be construed as Know Your Customer procedures. At that time, over 86% of the respondents had KYC procedures of some type.(see footnote 6) The task force also developed recommendations in this area.
Page 128 PREV PAGE TOP OF DOCABA's Money Laundering Task Force, and the industry in general, recommend that financial institutions base their regulatory compliance on KYC. This means activities such as verifying the business of a new account holder and reporting activity in an account that is disproportionate to that customer's known business. Immediate reaction to unusual transaction activity should be the goal for all banking institutions. Identification procedures beyond the regulatory minimum should be considered to include situations such as verifying whether a document for identification that is seemingly altered is genuine. With these several concepts in play, individuals will find it increasingly difficult to deliberately utilize a financial institution for illegal purposes.
Financial institutions already have a well known KYC standard that does ensure compliance with both the Money Laundering Control Act and the Bank Secrecy Act. While we may not always agree as to what constitutes KYC, it is important that this concept be advanced within the industry.
Much of the banking industry's ''countermeasures'' will stem from a solid Know Your Customer procedure. The Task Force also concluded that, in a KYC policy, establishment of a tiered monitoring system of certain accounts and activities may be appropriate. ABA stresses that if there are no ''red flags'' or other indications of unusual behavior then monitoring need not take place. If, based on government and industry warning signs, there is an indication of illegal activity the bank would be required to conduct more research or analysis to determine if there is a problem.(see footnote 7) It must be emphasized that the risk level associated with a well-known and respected corporation differs from that of some other entity. In addition, risks will vary along bank-product lines. ABA has advocated that any final rules permit such differentiation. As long as the government allows flexibility in handling customer monitoring, a KYC policy that includes this requirement could, and will receive, solid support from our industry. On the other hand, any attempt to mandate that certain types of commercial monitoring systems be created will be met with active resistance from our industry. A KYC policy must take into account our diverse industry and the fact that some banks may have a ''better'' method of compliance than the government.(see footnote 8) Finally, as the Federal Reserve Board and the other banking agencies work toward a KYC regulation, it must be reemphasized that all non-banks should have KYC requirements.
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Money Laundering Activities/Bank Secrecy Act
Both federal and state law prohibit the laundering of money. Money is laundered to hide the criminal activity associated with it, including the crimes by which it is generated, e.g., drug trafficking, tax avoidance, counterfeiting, etc. Employees need to ''know their customer,'' and be alert to the dangers to the bank should it, even unwittingly, become involved in receiving or laundering proceeds of crimes. Regulators require banks to report any known or suspected criminal activity, such as the laundering of monetary instruments or structuring of transactions to evade Bank Secrecy Act reporting requirements. Employees should contact their Regional Security Department immediately in the event any known or suspected criminal activity or transaction comes to their attention.
In conjunction with the proposed ''KYC'' regulations, I've heard that banks will be expected to develop individual customer profiles (usual banking patterns) and monitor transactions that fall outside of the profile. I am concerned about the systems issues and also the resources necessary to track and report suspicious activity, when necessary. Given the emphasis on expense reduction and efficiency ratios, management will find this a hard pill to swallow if it is enacted.
C. OTHER ISSUES
In November 1995, ABA's Executive Vice President, Don Ogilvie wrote to FATF President, Ronald K. Noble, in response to a request to review long standing FATF recommendations on creating effective money laundering enforcement programs. I will summarize several key points that we made at that time.
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First, many of the FATF recommendations (i.e. passage of laws criminalizing money laundering, reporting of suspicious transactions and due diligence) have been implemented in U.S. banks and in place for many years. The ABA remains committed to the need for policies requiring non-banks as well as banks to keep certain records and identify customer transactions. We believe that our industry has an excellent record of emphasizing account-opening procedures in employee training programs as outlined in several FATF recommendations. We have also pointed out the need to streamline, and in some instances eliminate, reports and records on routine transactions, and the federal agencies responding to the Congress have already begun that process. Therefore, while we support having several of the U.S. Bank Secrecy Act laws being placed on all financial institutions throughout the world, changes and modifications to those laws are also necessary.
We also stressed that recommendations addressing the reporting of suspicious transactions and other ''Know Your Customer'' procedures are important requirements for all institutions to assist in money laundering deterrence, but that financial institutions must be protected from civil and criminal liability for fulfilling their responsibility to detect and report unusual or potentially criminal violations as well as closing accounts of individuals who have acted contrary to law and regulation.
Mr. Chairman, U.S banks already have civil liability protection from individuals bringing suit against an institution for suspicious transaction reporting. ABA is also concerned about criminal liability for money laundering offenses that may be inappropriately assessed against an institution. We ask that the Committee consider a proposal to protect bankers that have continued to do business with an individual that has been suspected of money laundering, if we have been asked by law enforcement to keep that suspect account open for investigatory purposes. While there is no case law that have found banks liable for this particular action, we feel that clarity in this area is needed. We would be happy to work with the Justice Department and other appropriate agencies to work on this still troubling issue.
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Finally, with the advent of smart cards, banking on the internet and other ''cyberspace'' financial services, Mr. Chairman, both the government and the industry must be prepared to address these tremendous new technologies as potential vehicles for money laundering. This must be done before, not after, they become commonplace. A recent report prepared by the National Association of Attorney's General (NAAG) pointed out that ''[i]f there are widely accepted alternatives to the banking system criminal activity could exist undetected, undiscovered and unchecked.'' In addition, ABA's Payment Systems Task Force in 1996 concluded that the banking industry should ''establish a formal partnership with the appropriate government agency or agencies that are charged with oversight of all elements of electronic banking.'' This is necessary to ensure that ''any new legal responsibilities created in response to changes in technology be considered only after balancing law enforcement and economic concerns.''
Consistent with the ABA policy (also established by the PSTF) that non-bank players in electronic commerce be covered by laws such as the Bank Secrecy Act, FinCEN has proposed that, among other things, issuers of ''stored value cards'' register with the Treasury Department.
FinCEN should be commended for stating that it will not ''stifle innovation'' in electronic commerce. We do not share the views of critics that state that the ''registration'' part of this proposal will adversely affect the commercial viability of those products or would ''kill the industry.'' FinCEN's public meetings on this issue is certainly the correct approach to determine what is the most appropriate method to handle these emerging technologies. This is just another excellent example of government reaching out to affected industries to get needed information.
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As we all grapple with global financial crimes and how best to address fraud, our Association reiterates that one must consider the level of resources available to law enforcement in the United States. Due to the lack of funds in many agencies, frauds committed under certain thresholds (i.e. $100,000 in New York City) are simply not prosecuted by U.S. Attorneys or investigated by law enforcement. Therefore large scale frauds, committed over time, may go unreviewed because of the dearth of manpower hours that can be dedicated to such offenses. While this is not a criticism of law enforcement, it is nonetheless frustrating and harms financial institutions in their goal of ensuring the safety and soundness of their industry. In fact, one of the major changes to the new suspicious activity report was to substantially raise thresholds for reporting frauds.(see footnote 9) This was done because many small dollar frauds simply cannot be handled by the government.
ABA recognizes that the battle for appropriations encompasses many competing interests, but the ever-dwindling amounts given to combat fraud are disappointing. Simply statedour partners in the government need more tools to solve financial crimes. We continue to advocate the increase of law enforcement resources.
Finally, bank security officers continue to complain about the inability of institutions to prevent corrupt employees from moving from bank to bank after committing and admitting to a crime against the institution. ABA urges this Committee to consider the proposal we have placed as an appendix to this testimony as a solution to this problem (Attachment B).
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The American Bankers Association has long advocated adherence to Know Your Customer principles as a means to deter fraud and protect the banking industry. Those concepts can work in the area of money laundering as well as for other financial crimes. We humbly recommend that our international counterparts consider the same principles because organized criminal groups can only succeed if vigilance is poor or non-existent. By working together, financial institutions and law enforcement can craft workable, flexible and reasonable regulations that will deter criminals from using our banking system to launder the proceeds of illegal activities. This can, and does work in the United States and should be replicated abroad.
Thank you for this opportunity and I would be happy to answer any questions.
LIABILITY PROTECTION FOR DISCLOSURE OF EMPLOYEE MISCONDUCT
Amendment to 31 U.S.C. 5318
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Section 5318 (g) of title 31 (Reporting of suspicious Transactions) is amended in subsection (3) (Liability for disclosure) by adding the following (in brackets):
Any financial institution that makes a disclosure of any possible violation of law or regulation [to the appropriate government agency, or in response to a request from another financial institution provides a written employment reference] or a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution, shall not be liable to any person under any law or regulation of any state or political subdivision thereof, for such disclosure or for the failure to notify the person involved in the transaction or any other person of such disclosure.
[The civil liability immunity applies to the financial institution unless the institution acted with malice or reckless disregard for the truth].
Insider abuse and bank fraud have been the focus of industry and governmental concern for many years. With the losses reaching billions of dollars, banks have stepped up their efforts to report possible crimes, improve investigative techniques and to create fraud deterrence programs. Congress has increased the penalties for fraud and for hiring individuals that have been convicted of crimes against financial institutions. In addition, financial institutions are required to report possible violations of law on a ''Suspicious Activity Report'' or SAR to the federal government.
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Unfortunately, not all reports are investigated due to limited government resources so crooked employees often go unpunished. In addition, financial institutions cannot inform another institution that an employee was terminated for theft or embezzlement for fear of lawsuits. Several states (11 with one pending) have remedied this situation by granting liability protection to employers who respond to requests for employee work records including advising of ''any involvement in a theft, embezzlement, misappropriation, or other defalcation by the subject for which the request for reference is made.'' [See, 82111.5 of the Colorado Statutes]
In order to protect an individual from misuse of this protection, the amendment also grants the liability protection only if the institution does not act with malice or reckless disregard for the truth. Financial institutions need this liability protection to improve the tools at their disposal for ensuring the safety and soundness of our financial industry.
Mr. MCCOLLUM. Thank you very much, Mr. Byrne. We certainly appreciate the immediate suggestions for legislation. In fact, I am sure that this committee, working with the other appropriate committees, is going to craft legislation to fill the gaps as much as we can this year.
I'm going to recognize myself for 5 minutes and then my colleagues who are here.
A couple of quick questions first. I'd like to explore the question raised by Mr. Saphos about access to the CTRs. I am interested in what logistical problems anybody foresees or what pragmatic problems might exist if the NYPD, for example, had access to these CTRs in a general exploratory manner. Do you foresee any? In other words, the Treasury Department has the CTRs in their domain; I'm sure that they don't want anybody just coming down to their offices or looking it up on the computer. I'm not even sure how they are stored. Do you know?
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Mr. SAPHOS. Yes, sir. Treasury has a computer databank of all currency transaction reports on all currency and monetary instruments reports ever filed. That information is available on the Treasury electronic communications system, the TEC system. It is available by personal computer in virtually every IRS and Custom's office in the United States. That's the only place that it's available.
What I would suggest is that if you are a bona fide law enforcement agency, that is if your Governor says you are, and you want to pay for the computer line, then you have access to this system. That's what Congress wanted. It said for regulatory and law enforcement purposes. It didn't say for Treasury purposes.
Mr. MCCOLLUM. Mr. Byrne, do you think that bankers would have any problem with all law enforcement agencies having access to CTRs?
Mr. BYRNE. Well, as it stands now, at least this is my understanding, that FINCEN has crafted some agreements with various state regulators. So banking agencies at the local levels have some access.
As long as there are some protections obviously in terms of the information, I assume those agreements would have that, no we don't have any
Mr. MCCOLLUM. The point that Mr. Saphos was making earlierI don't know if you picked up on itwas that we apparently have to have an ongoing investigation into a matter as opposed to simply going in and exploring CTRs to look for things that might be suspicious. Only Treasury allows its own agents to look for just generally suspicious stuff. I think that's what he wants is general access to the CTRs so that if some law enforcement agency wants to spend the time, it can go plowing around looking for it.
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Mr. BYRNE. You know, I suppose that that is not a problem from a conceptual viewpoint, but FINCEN was created to be a database to do some of that. That's a government issue, I think, that kind of have to grapple with. From our perspective, no that wouldn't be a problem.
Mr. MCCOLLUM. Okay.
Mr. Bugliosi, I want to ask you about the dual currency in terms of whether or not you think a black market could develop both domestically and internationally where the currencies would be sold for a lower price than their face value. Have you thought about that? Does that present a problem?
Mr. BUGLIOSI. I've given some thought to that, Mr. Chairman. I think that up until 1993 or around that point, the Russian Ruble was being sold on the black market for 10 percent of its value, 10 percent of its value only.
Who would the purchasers be of American internal dollars? I can't think of who they would be except perhaps foreign tourists. But foreign tourists, like American tourists, by and large are law-abiding people, and they would be purchasing these internal dollars at a tremendous discount.
Congress could pass a law making it against the law to bring internal dollars into this country. So any foreign tourist coming into this country would know that they would be subject to search by Customs and that they would have to possibly spend several years in prison and be blacklisted for ever more for everif they ever tried to enter this country again. I can't think of who the purchasers of the internal dollars would be on the black market except foreign tourists, and I think that would be extremely minimal.
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Mr. MCCOLLUM. What about the idea of a tourist coming to a bank and trying to exchange the currency for foreign currency?
Mr. BUGLIOSI. You are talking about the drug traffickers in this country
Mr. MCCOLLUM. Yes, right.
Mr. BUGLIOSI [continuing]. Exchanging the drug dollars for foreign money?
Mr. MCCOLLUM. Right.
Mr. BUGLIOSI. I think, Mr. Chairman, that any circumvention by the drug traffickers of the proposed monetary structure that I just mentioned to be so inherently onerous and create such a vexatious obstacle that the attempt on any significant scale perhaps would not even be made.
But let's take your scenario and play it out and see where we end up.
Number one, the reason that I believe the traffickers wouldn't even attempt to do what you are saying by going to a bank in this country, posing as a tourist, and trying to purchase with their drug dollars foreign currency is that they smuggle currency out of this country in boxes, in very, very large containers.
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Let me just read to you one example. ''On July 24, 1990, at a home in Sylmar, California, United States Customs agents seized $17,864,000 in drug proceeds already packed in 38 cardboard U-Haul boxes for shipment to Columbia.''
So they deal literally in billions of dollars. I think that the figure I hear now is that $40-50 billion are spent by Americans to purchase illicit drugs. These drug lordsnot drug lords, but these drug traffickers in this country would literally have to purchase at a bank millions and millions of dollars to make it effective what they are doing. And the problem, the problem they would have, of course, is that if they attempted to purchase any amount of money, any quantity of money larger than would comfortably fit in their wallet, they would immediately become suspect. I don't think that they would get into these penny-ante increments.
But let's assume, just for the sake of argument, that the traffickers could somehow negotiate this tremendous hurdleand I do not think they could do it, they would not be able to purchase enough foreign currency. Congress could simply solve the problem by enacting legislation providing that American banks and foreign currency brokers could not at their present location sell to purchasers of foreign currency. They would have to purchase the foreign currency at a currency exchange unit of theirs at the airport after the purchaser has already bought a ticket to a foreign destination and passed through security.
Now if that's not enough, and I think it would be, we could put a limit on the amount of foreign currency that could be purchased in this country, particularly by private persons. We should also add that if we're really serious about solving this drug problemand I'm convinced that we're notwe could require any person or business entity wanting to purchase foreign currency to get a permit to do it. They would have to go to a permit office of the government, and the applicant would have to satisfy the permit office that they have a legitimate reason for this foreign currency.
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In Jamaicaas I understand it, when I finished with my book in late 1995 and early 1996Jamaica was doing this up until 1993. They had the precise thing. If you wanted to buy foreign currency you had to go to a permit office. Since that time, they apparently have relaxed their policy on the acquisition of foreign money. But up until 1993, Jamaica had that.
And I understand that even today, India is very, very similar to this. Only authorized people are able to purchase American dollars. And then when they do so, they have to go to a designated branch of the Reserve Bank of India.
So I think that that is an excellent, perceptive question. But I think that it would be so inherently onerous that they would just say that it is just too much trouble.
Mr. MCCOLLUM. Do any of the other panelists wish to comment on Mr. Bugliosi's dual currency suggestions and the pragmatics of it? Mr. Zeldin.
Mr. ZELDIN. I have a few thoughts. We've been working our way backwards from the last comments.
Firstly, if there were this onerous regimefirstly, I'm not sure who wants to live in this country with that sort of regimebut if there is this onerous regime of purchasing currency just as there is in some countries, this currency control stuff, you create a black market for this currency.
Page 141 PREV PAGE TOP OF DOC The people who would buy this money beyond the tourists that he said would come here are legitimate businessmen who are now buying dollars in the parallel markets in countries where they cannot lawfully remove from their countries a certain amount of money. And that's the exact black market problem that we have, the parallel currency market that we have right now.
So it doesn't solve that problem. In fact if you look at the way foodstamps are bought and sold illicitly, that is in essence a second source of currency. It is a different color and it can only be used for certain things, but it is sold for something less than one hundred cents on the dollar, and it is bartered all around the world in the same way that the external/internal currency would be bought.
Third, we've heard that most of the new schemes for money laundering involves the use of trade based money laundering whereby you buy goods, export goods, sell goods, have cash out of the country. This system would do nothing to interfere with that. In fact it might promote it. And as we've heard from the commentators over the past few panels, it's there where we have the greatest problems of enforcement in these trades and businesses to comply with money-laundering laws. They are not like the bankers. They are not regulated. They don't have a central authority like the American Bankers Association trying to educate and train. And they are not subject to the same overlay of laws. And so if you are forcing this money into them, then you may be doing yourself more harm than good.
It may be an idea that has some facial appeal. I think that as a practical matter, you are not going to do anything to solve the problem with it.
Page 142 PREV PAGE TOP OF DOC Mr. MCCOLLUM. Anybody else want to comment on dual currency? Mr. Byrne.
Mr. BYRNE. Mr. Chairman, I would just say that I've been around too long to know that you don't try to shoot down an idea entirely, but I do remember that this came up probably ten or twelve years ago when the former Secretary of Treasury, Mr. Regan, I think, proposed different colored currency. I think that there were some studies at the time about what kind of economic impacts there might be. So it might be worth looking back at those or having the current Treasury do the same thing. But we certainly should look at different items.
I think that Michael made some good points. And I'm certainly going to go back to my banks and the Bank of America and suggest is this a workable operational issue. We might as well look at it, but we need to look at it beyond law enforcement. It seems to me that the economic potential there is something, and I don't think that we all know it at this point.
Mr. MCCOLLUM. Well, I would concurthat is the reason that I am raising it. Mr. Bugliosi makes one overriding point: we're not winning the war on drugs. As much as I support and want to improve the laws we currently haveeach of you are as deeply involved as I have been in those so-called war effortshe is right, it really isn't a war. It isn't being run like one. I don't know that the dual currency is the answer, but we've got to do something differentsomething bigger and bolderif we're going to effectively fight the drug epidemic.
Mr. Saphos, do you want to make a comment on dual currency?
Page 143 PREV PAGE TOP OF DOC Mr. SAPHOS. Only consistent with that which you have already made, sir, that I think that indeed it is the time for exciting and bold ideas to turn this really into combat against narcotics trafficking rather than the war on words that we may have had thus far.
I also, however, feel that there are practical problems with some aspects of Mr. Bugliosi's idea. I am old enough to remember WW Vietnam where we did have two currencies. We had military payment scrip and we were forbidden to have greenbacks in Vietnam. The reason for that was the substantial black market in greenbacks which were being used for two purposesto further the benefit of the enemyit sounds very familiar doesn't it sirand the other one was the more prevalent one and that was that Vietnamese civilians wished to keep their savings in a form which was inflation free and somewhat secure, and they found the United States dollar in currency form satisfied their needs more than anything else that was available.
One of the studies that I have heard is I believe that there are more than four times more dollars in circulation worldwide than there are in the United States, and that may well be because of this perceived needs in other countries.
I'm afraid that this solution may do little to curb that need that small people have, that the common people have in other needs to secure their savings, and it may create a very, very substantial black market like we saw in Vietnam for that purpose.
However, like everyone else here, I think that it is an idea that merits further study, further consideration, as do all dramatic ideas that may have promise to get a handle on this huge problem.
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Mr. MCCOLLUM. Thank you, Mr. Saphos.
Mr. Conyers, you are recognized for 5 minutes.
Mr. CONYERS. Thank you.
Chairman McCollum, this may be the most important hearing that has been held in this room in quite awhile. I don't think that this subject is deeply understood by all of our colleagues. So I commend you for the hearings. I'd like that published in as many places as we can find to offset other comments I've made about
Mr. MCCOLLUM. I graciously accept, sir. I thank you.
Mr. CONYERS. And I say this sincerely.
I also want to commend each one of the witnesses who have appeared before us today. Their contributions are extraordinarily important in terms of what we are trying to accomplish here, and I thank you very much.
Mr. MCCOLLUM. Thank you, Mr. Conyers.
Mr. Barr, do you have any questions?
Mr. BARR. Yes.
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Mr. MCCOLLUM. You are recognized for 5 minutes.
Mr. BARR. Thank you, Mr. Chairman.
I do want to commend you for these hearings and particularly this panel. I think that we have a very, very learned panel here with tremendous experience in a lot of different areas, and I appreciate getting testimony both written and verbal that is more than just platitudes and there is no hidden political agenda that colors how they respond to questions. So I think that this is the sort of panel that is very, very helpful in focusing on specific problems, and money laundering is a very, very specific problem. It is one that this panel, as I have said, has tremendous experience in handling and trying to come to grips with and prosecuting and is in a unique position really to provide some solutions to us.
I do have couple of questions. One comment, though. Mr. Bugliosi, you mentioned earlier something about the Andean countries, or the cocaine producing countries not agreeing to a 50 percent reduction. That I think is somewhat old information.
Peru, I know, is very committed to that. Just, I think, in the last year, which is the first year of their ''shoot down'' policy, we have witnessed, I believe the figure is an 18 percent drop of coca production in Peru just in that first year. And in speaking with the government officials in Peru directly on a congressional delegation trip that we had down there, they are very committed to reducing within 5 years coca production in Peru by 50 percent and by 100 percent 10 years after that. So I think that they at least seem to be very committed.
Page 146 PREV PAGE TOP OF DOC Some of the other countries and their national police are very, very committed to fighting the war against drugs. We certainly know that there are political problems that continues to hamper their ability, but they are very, very strongly committed to that as well.
So I think that there are some bright signs with regard to the cocaine-producing countries down there.
Mr. Saphos, I appreciate your sticking around, and I also appreciate your being here for the earlier panel. Because of the shortness of time, I really didn't have the chance to discuss with the DOJ official their very, very tepid response to the opening that I thought they would take advantage of to encourage us to take a look at the money-laundering statute and make it more effective.
They did mentionthe Justice witness did mention something thatmaybe I misheard her, but it didn't quite strike me as accurate, and perhaps you could pleasewhat is the burden on the government in prosecuting under the money-laundering statutes with regard to establishing the knowledge on the part of a defendantI mean it is essential is it not that the defendant knew that the money was the proceeds of illegal activity?
Mr. SAPHOS. Yes, sir.
The requirement is that the government must prove beyond a reasonable doubt that the defendant believed that the money was the product of an unlawful activity. Beyond that the defendantthe government must also show beyond a reasonable doubt that the defendant intentionally and purposefully did the conduct, that is did the transaction. And that the transaction was for the purpose of either concealing the ownership, concealing the source, or concealing the entire criminal enterprise, as I recall.
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What the last element, though, and the one about which I am arguing, is that beyond having done that, the government must then show beyond a reasonable doubt that the money did in fact come from one of the laundry-listed specified unlawful activities.
Mr. BARR. Did I misinterpret what the Department of Justice official was saying earlier, or do they not understand what they money-laundering statute burdens levy on the government are?
Mr. SAPHOS. I'm certain that Ms. Warren understands the burdens. She's been a practioner as a prosecutor, an excellent prosecutor, for a number of years.
It may well be, sir, that in the experience of the Department of Justice, that money-laundering investigations are generally an aside to a separate investigation into a different criminal conduct. Therefore, the Department of Justice first investigates the bank robbery then investigates the money laundering of the money that came from the bank robbery. So they have already gained that evidence.
When Congress passed the money-laundering act, they wished law enforcement criminal money laundering as a separate and distinct enterprise and a separate and distinct offense. The way that the Department of Justice agencies have traditionally addressed is not as a separate offense but as a corollary to the criminal conduct which they are already investigating.
Department of Treasury does it differently. They start with the financial transaction and work backwards from there.
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I would suggest to you that the change that I am proposing would be a greater impetus to investigators to actually investigate the transaction, that criminal conduct, the secret transaction to hide money that is coming into the United States for the purpose of blowing up a Federal building.
Mr. BARR. There were also, I think, in your written testimony also very, very good examples of money coming in to be used to bribe certain persons or officials that would not now be reachable as part of a money-laundering investigation and prosecution.
Mr. SAPHOS. Yes, sir. There are two problems.
One is that the list of specified unlawful activities might do with a degree of examination to determine whether certain foreign crimes and domestic crimes which are addressed to corruption are covered by the money-laundering statute.
And the second thing is the statute needs to be looked at to see whether it adequately covers money which is intended to violate the law as opposed to money which has come from a prior violation of the law.
I would suggest that both of those things should offend the American public, and both of those things should be addressed by our laws.
Once again, doing away with the list of specified unlawful activities would be a step in that direction.
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Mr. BARR. Okay.
Mr. Chairman, could I ask unanimous consent for a couple of additional minutes.
Mr. MCCOLLUM. Sure, and I think that Mr. Zeldin wanted to comment on one of your questions anyway.
Mr. BARR. That was one of the reasons.
I know that both Mr. Zeldin and Mr. Saphos have provided some very excellent ideas here, some very specific ones, and I wondered if you could take just a moment, Mr. Zeldin, to let me have benefit of your views on this matter.
Mr. ZELDIN. Just one response to your question in response to Ms. Warren.
I think that what Ms. Warren said was the government has successfully prosecuted a number of very large and significant money-laundering cases notwithstanding the burden of proving the specified unlawful activity basis for the money. But they would be interested in reviewing the possibility of eliminating that component of the statute. So the statute would read essentially that if a person had knowledge of the source of the money as being illegal and with knowledge and intent they engage in a financial transaction with the intent to conceal or the intent to promote they would commit a crime, and eliminate the secondary burden of the government to prove the specific crime the money came from. I think they would be interested in reviewing that as an option. I think what she was trying to say was that they have done it, they can continue to do it, but they would be interested in exploring further Mr. Saphos's suggestion.
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That's how I understood her understood her answer.
Mr. BARR. Okay, well, good. I'll go back, and I know we'll be in touch with them also, because I do intend to explore drafting specific legislation to address these issues that we are talking about.
Mr. Bugliosi, I think that you mentioned going after the top drug lords who have traditionally have been small in number for the major cartels. The problem of course is that as soon as you get rid of one, another one steps in, or maybe the nature of the cartel organization changes. Which do you see happening now with the demise of the specific figures for the Medellin and Cali cartels over the last several years because of our action and particularly the commitment of the Colombian military and policy to eradicate these people.
How do you see the nature of the cartels? Do we have cartels now or do we have a lot of smaller organizations that are perhaps more disorganized and maybe perhaps more dangerous in certain ways?
Mr. BUGLIOSI. Before I answer your question, Congressman, I would like to very briefly respond to Mr. Zeldin who has been one of the representatives of our government fighting, supposedly fighting money laundering in this country for quite awhile.
He very cavalierly dismissed my suggestion, and I would ask
Mr. BARR. I really prefer to get to my question first, and then if you have some
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Mr. BUGLIOSI. Well, I'd likeall right.
His dismissal is very superficial and I would like to respond.
Mr. BARR. Mr. Chairman
Mr. MCCOLLUM. I will give Mr. Bugliosi the opportunity to fully respond to Mr. Zeldin.
Mr. BARR. Yes, I mean I don't mind that, I just
Mr. MCCOLLUM. In fact, I will put it on the chairman's time.
Mr. BUGLIOSI. But on the record, I hate superficial dismissal of very serious things. Because, while you and I are talking right now, some mother is getting a phone call that her son or daughter is found in a gutter
Mr. BARR. I know that. I know that. But if
Mr. BUGLIOSI. This type of superficial dismissal of a serious proposal is something I don't like to hear.
Mr. BARR. Well, that's fine
Page 152 PREV PAGE TOP OF DOC Mr. MCCOLLUM. Excuse me. As chairman, let me get order here for a second and say that Mr. Barr of all people can appreciate the aggressive and defensive position, but if the witness would answer Mr. Barr's question, then I will give you time to answer the others.
Mr. BUGLIOSI. Congressman Barr, let's startin the first place I can't tell you about the architecture as it were of the cartels now in Columbia. Even when I was doing the book, I was only getting my information secondhand. But I understand that there aren't quite as many cartel leadersthere are more cartel leaders now than in the heyday of the Medillin cartel.
The military approach that I was talking about takes cognizance of this fact that cartel leaders like to live just like you and I do. They want to live just as much. And if they have an option where they can stay alive and still lead wonderful lives, very affluent lives, they are going to take that option.
If they knewand I'd like to appear at a different time to talk about my military approachif they knew that they could not conduct their affairs outside of the reach of American armed forceswe would grab them by the scruff of their neck, bring them back, and with due process have a trial in an expedited Federal justice system just for drug lordsand if we're serious we could do that without violation of due process of lawperhaps be executed in a year or soif some drug lord down in Colombia is having coffee in Bogota and reads the morning paper that someone has been executed in New York City, he is going to think twice about coming back to New York City. Why? Because he can continue to go over to Europe and make billions of dollars in Europe and still live. They want to live another day.
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Now let me show you how much deterrence works with these people. In the late 1980's and early 1990's the heyday of the Medillin cartel, they subjected Columbia to a terrorism that probably no country has been subjected to for years and years before, probably never before in South American history. In 1985, they went into the Supreme Court in Bogotaand you wouldn't even find something like this on a Hollywood movie lotand murdered 11 Supreme Court Justicesand they found another out in the streets a couple of months later and killed him.
Why did they kill them? I'll tell you why. Because the court was about to rule on the constitutionality of an extradition treaty. And there was a communique from the Medellin cartel that they'd rather be in a tomb in Colombia than in a jail cell in the United States. That was before we had the death penalty for drug lords. We have it now, since 1994. Before that they were willing to terrorize Columbia. They murdered three presidential candidates. They blew up airplanes, department stores, thousands of police. They blew up publishers, offices of newspapers, editors. They killed the attorney general, the head of the anti-narcotics force down there. They murdered everyone down there who opposed them. I think there was some type of term called, ''plato o plano,'' or something. Either take the silver or take the bullet. And the Colombian people are good people. They fought very, very hard, and they resisted. How do we know they resisted? Because they ended up in a grave. They got murdered down there by the Colombian cartels.
This is the fear that they had, and that was just the fear of incarceration. If their fear was the death penaltyif their fear was the death penalty, common sense tells you that they would go somewhere else, to Europe, where they are already makingit's an emerging situation in Europethey are already making billions of dollars in Europe, not as much as here. But they would rather go over to Europe and live comfortably, a very affluent lifestyle, and still survive then come here where they may be executed.
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The whole issue of posse comitatus and American involvement with the military, I'd like to come back at a later time and talk about that.
They are not going to take someone else's place if they want to live and they want to live as much as you and I do.
Mr. BARR. Thank you. Thank you, Mr. Chairman.
Mr. MCCOLLUM. Thank you.
I think that it is appropriate, Mr. Bugliosi, for you to have an opportunity to respond to Mr. Zeldin. I was going to give you an opportunity to talk about your wire transfers, but I am going to limit this
Mr. BUGLIOSI. Yes, I'd like to talk about that.
Very, very briefly. If these brokers that he is talking aboutand incidentally, like I told you before, Mr. Chairman, there are people who are much more experienced in international finance than I am to answer his question, and they'd be happy to appear before you. But I can answer, I think, for you.
These international brokers, if they are buying the internal currency from drug lords out of this country, they can't get it in, so it's worthless. If they are going to buy it in this countrythey can only buy it in two places, out of the country or in the countryif they are going to buy it in this country, they still have to wire transfer the money out of the country for credit to the drug trafficker's peso account in Columbia.
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And there we get into my whole interdiction of wire transfers. If you are interested to hear about it.
Mr. MCCOLLUM. Yes, I would be. We are not going to stay half an hour to do it, but if you can do it in about 5 minutes, I'd love to hear about it.
Mr. BUGLIOSI. Well, I don't know if I can do it in 5 minutes, but
Mr. MCCOLLUM. Well, do your best. I do want to hear about it.
Mr. BUGLIOSI. All right.
Unlike the currency which is smuggled out of this country which can be totally eliminated except for the Zeldin exception, I guess, which I think would be very, very negative, most of the remaining money, that which is wire transferred out of this country by American banks, cannot be totally eliminated. However, it can be shut off to the point where it will no longer be worthwhile for drug traffickers to remain in business, at least not in America.
When I talk about the Zeldin exception, your Honor, or Mr. Chairman, I'd like to talk later, if I can read just two pages out of this book to tell you what he and his people have been doing for the last six, 7 years in the area of wire transferring. Anyone that reads these two pages will know how serious these people are. Well-intentioned, very well-intentioned, but not accomplishing anything, and working very, very slowly.
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One point that has to be understood is that the initial wire transfer of drug monies out of this country is usually to the so-called bank secrecy havens, normally small countries, islands, and principalities such as Panama, the Cayman Islands, Aruba, the Dominican Republic. And just this Monday, in anticipation of appearing before you today, I spoke to Allen Doody, the director of financial investigations for United States Customs, and he said that what I have just told you is still the general rule of thumb.
Cutting off or interdicting the wire transferring of drug profit monies can be accomplished in one of two ways.
One, by the placing of IRS agents in residence at key banks in America to clear all wire transfers to these bank secrecy havens. I might point out that the vast majority of wire transferring of drug money in this country takes place at banks in four cities, Miami, New York, Houston, and Los Angeles. Currently, although Federal agents from the IRS, DEA and Customs know that the Federal crime of wire transferring of millions of dollars of drug money is taking place everyday inside our Nation's banks, primarily in those cities, remarkably, remarkably, these Federal agents are nowhere to be found at the banks. So they know the crime is being committed here, and they are somewhere else.
Incidentally, I know of no crime, either state or Federal, that leads such a charmed existence. Where law enforcement knows where a crime is being committed and they are no where to be found.
Let me just read to you from my book, page 204, which illustrates what I am talking about. ''The current naive practice by law enforcement of viewing banks as being off limits to them even though they know the crime of money laundering is taking place inside the bank's doors and of being dismissively reduced to being on the outside trying to look in, was starkly exemplified in the 1995 case against the National Mortgage Bank of Greece. Federal agents established their money-laundering case by first, as usual, getting a tip from an informant and then securing corroborative documentary evidence by foraging through the bank's garbage bins in alleys behind its branches in New York, Illinois, and Massachusetts, and Pennsylvania.''
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Now why is this? It's our government's erroneous, I concludedand I've spoken to lead Federal agents at the CID, the Criminal Investigations Division of the IRS, the DEA, Customsand Mr. Saphos, by the way, when I was writing my book was very helpful to methat to stop a wire transfer they have to have probable cause to believe that it was a wire transfer of drug money, which they normally do not have. Under the fourth amendment to the United States Constitution, either a search warrant or probable cause is required to conduct a search. Howeverthis is the point that they are not taking into considerationbecause of the government's sovereign authority to protect itself at its international borders, courts have consistently applied a border search exception to this rule. No search warrantthat noise is what now?
Mr. MCCOLLUM. We're going to have a series of votes after the first vote, so that we have about ten more minutes to conclude the hearing.
Mr. BUGLIOSI. Okay, I'll wrap this up.
No search warrant, probable cause, or any suspicious at all is required to stop and search people or conveyances crossing this Nation's borders. For the record, United States v. Montoya D. Hernandez, 473 United States 531 and page 538, a 1984 case.
Now while most banks of course are not at the border, courts have also held that the border search exception applies to searches conducted at places considered to be ''the functional equivalent'' of the border, e.g., a search at the Minneapolis airport of someone enroute to Calibar, Nigeria was held to be a border search. The rationale being that the person will soon be crossing the border. Before they board the plane is the last time they could be searched. Case in point, United States v. Duncan, 693 Federal 2nd 971.
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The United States Supreme Court has held that the border search exception applies regardless of the mode of transportation across the border. United States v. Ramsey, 431 United States 606.
In view of existing law, it's almost certain that the United States Supreme Court, particularly the current one, which seems to be fairly conservative, would hold that wire transfers, which immediately transfer funds across the border by electronic impulse, would clearly fall within the border search exception.
So Federal agents could lawfully stop every wire transfer to a bank secrecy haven country. This would not be impractical because wire transfers to these countries constitute a very, very small fraction of wire transfers out of the country.
Now after stopping the transfer, the agent would then contact and question the sender as to the source of the money and the purpose of the transfer. When the Federal agent contacts the sender, if in fact the sender is wire transferring drug money, probable cause to believe this will most likely be established during this initial interrogation. If he concludes, finally, that these funds are drug proceeds, obviously he would order the bank to freeze the account, and in conjunction with the United States Attorney's office, seize the funds by way of forfeiture proceedings.
But the principle benefit of the interdiction of the wire transfer would not be the forfeiture of the money. The overriding purpose for the interdiction would be the chilling and deterrent effect on the money launderer. By and large the money launderer is not involved in drug trafficking. Far more often than not he is ostensibly a respected member of the community, a CPA, a lawyer, a businessman. ''The drug people and the money people run in different circles.'' Mike Orndorf, when he was chief of the DEA's financial intelligence unit, told me that most have no previous drug record at all.
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For instance, December 1994, a $70 million drug money laundering operation was dismantled by the DEA, FBI, and New York City Police Department. The launderers included two lawyers, a stockbroker, three bank officials, a New York City police officer, two rabbis, and a hospital administrator.
Now I ask you this. A businessman with no criminal recordcertainly if he has a criminal record, all the more sohe wants to transfer $5 million in drug proceeds to an account in Panamais he going to do that if he knows that there is a strong possibility that a Federal agent is going to call him on the phone and ask him the dreaded question, ''Where did this money come from?'' along with a hundred other questions that he can't answer. The answer to that question, I think, is no, he's not going to jeopardize his life, his career. And the penalty at the present time, I think, is 20 years under the Money-Laundering Control Act of 1986. And without the money launderer, I think that even Mr. Zeldin would agree that drug trafficking in America would be dealt an incapacitating blow.
Very quickly, the second alternative way. This is the main way and one which we should ultimately aspire to. It would be to eventually have a completely computerized central command post staffed by Federal agents that employs the latest automatic data processing system. The previously referred to resident IRS agent at the bank proposal could be employed while the new computerized command post was being developed. An emerging form of advanced technology being used today by the military and big business is the smart systems, or as they are sometimes known ''artificial intelligence,'' and there would appear to be no reason they could not be employed to interdict the wire transfer of drug profits. I know nothing about computers, I don't even own oneI'm still in the 19th century, I wrote this book with a yellow pad and a number 4 pencil. But I've been told that the computer could be programmed with questions, the answers to which would alert the authorities to most wire transfers of drug monies, not just to bank secrecy haven countries, but to all countries.
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For example, does the sender have an account at the bank? If so, are his deposits almost always in cash, money orders, or cashier's checks as opposed to personal or corporate checks? Have there been large cash deposits to the account for a type of business not known to generate such amounts of cash? Does the sender use the account as a temporary repository of his funds, wire transferring them shortly after large cash deposits? Does the sender request or require the normal broad spectrum of banking services? And so forth with perhaps ten or more additional questions.
In other words, the computer system would sound an alarm to the wire transfer monitors at the command post and set forth the reason it believes the wire transfer request is suspicious, at which point a Federal agent, like before, contacts the sender, the money launder, and asks the source and purpose.
Now, one is reticent about relying on cliche's, but sometimes they make immense sense. If we can put a man on the moon and a Pathfinder on Mars, surely we can come up with sufficiently sophisticated computer technology to alert Federal authorities to most wire transfers of drug money. This isn't something that is unrealistic and completely theoretical. In fact, WJM Technologies of Petaluma, California, a company that develops software for the financial services industry, already has a Smart software system of their's in many of the largest banks and S&L's in the country, called ''Early Warning.'' They system alerts these financial institutions to customers whom the bank might not want to do business with, such as loaning them money.
On July 25, 1995 I asked Wayne Johnson, president of WJM Technologies, if his company would have the technical capacity to develop a Smart system to detect illegal wire transfers of drug money out of this country. ''Yes, it would not be difficult at all,'' he replied without hesitation. He went on to say that he had no doubt that the system his company could develop would be able to detect most such transfers. He added that his company could develop such a system for as little as a half of a million dollars
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Mr. CONYERS. Excuse me, Mr. Chairman.
Mr. MCCOLLUM. Yes, Mr. Conyers.
Mr. CONYERS. Point of order. We're in a three-or 4-minute crunch, and I think it would be appropriate, if we could, to at least have some response from the other
Mr. MCCOLLUM. Well, we have about 4 minutes.
Mr. BUGLIOSI. I just have about half a minute here.
Mr. CONYERS. Thank you and forgive me for intruding.
Mr. BUGLIOSI. He went on to say that he had no doubt that the system his company could develop would be able to detect most such transfers. He added that his company could develop such a system for as little as a half million dollars, and he's contemplating an annual licensing fee for around $50,000 a year to each bank to use the system.
If anyone is interested here, his phone number is 707-762-8300. Even if the contemplated Smart system missed 50 percent of all illegal drug money transfers, even if it missed 75 percent of all illegal transfers of drug money out of the country, how many money launderers here in America would be willing to wire transfer drug money out of this country when they knew that each time that they did so there was even a 25 percent chance that some Federal agent is going to call them on the phone and ask them the dreaded question, ''Where did this money come from and why are you sending it?''
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Mr. MCCOLLUM. Well, it is certain that the deterrence is a big factor.
Does anybody else here wish to comment? Mr. Byrne.
Mr. BYRNE. Two very quick things. I neglected to suggest before that there is a bill pending in the Senate that would make identity theft a Federal crime, and I think that helps us all in the context of knowing our customer. It is a bill by Senator Kyle.
The other point, before we put IRS agents in 10,000 banks around the country, I would like to give extensive response to Mr. Bugliosi's comments, because we do have wire transfer record-keeping rules. We have OFAC regulations that require us to stop transfers from specially designated narcotics traffickers. There is a whole litany of things already in place. We file 70,000 suspicious activity reports. So a lot of this, I think, maybe if you have the current facts of what we're doing today, might help the committee decide whether this is a serious proposal that you want to consider. But before you go down that road, we'd like to opportunity, for the record, to give you our views on what happens today in the wire transfer world because I don't think that you got the complete picture.
Mr. MCCOLLUM. Mr. Zeldin, you wished to comment?
Mr. ZELDIN. For fear of carving out another exception and recognizing Mr. Bugliosi's sensitivity to criticism of his ideas, I frankly think, with due respect, that this idea makes the dual currency idea seem the serious one.
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The wire transfer mechanism in the United States is a fully automated system. We clear nearly $2 trillion a day in wire transfers all around the world. We're talking here about the possibility of perhaps a tenth of a percent of all wire transfers and someone intervening physically in that electronic switching operation before they have to settle at the end of the day to ask people questions about what the source of the money is? My God, we can't even ask people questions about the source of their money in a suspicious activity or currency transaction reporting context.
The practicality of this thing is just non-existent.
Mr. BUGLIOSI. Obviously, it is not for each transfer. It is when they've been alerted, the computer alerts them to a suspicious transfer. Obviously, you don't call them up for every single transfer.
Mr. MCCOLLUM. Unfortunately, we don't have time for a debate here.
Mr. Barr, I know you wanted to get one last thing in here.
Mr. BARR. I was just wondering, Mr. Saphos, in particular, you mentioned La Mina, which was part of the Polar Cap operation, a very successful prosecution in which you were involved, in which foreign banks were indicted and we had successful prosecutions against them for money laundering. That was almost 10 years ago, it was in the late 1980's. How do you account for the lack of similar prosecutions since then? Are we just not getting any information? Is the commitment to prosecute not there? What has happened?
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Mr. SAPHOS. Sir, I think that indeed the commitment is there. Unfortunately, there may well be a change of emphasis within Federal law enforcement as what's important. Unfortunately, I think that Federal law enforcement has lost focus of the unique responsibility that the Federal Government has concerning the investigation and prosecution of multi-national and multi-district and multi-state organizations and instead has seen themselves as more of an auxiliary of the metro police force of New York City or something like that.
We're addressingit would appear that more and more we're addressing street-level crime with a unique group of investigators and prosecutors that have international and national subpoena power, investigatory grand juries, and interlocking mechanisms of investigative agencies that can collect evidence nationwide and worldwide. But instead they are doing violent street crimes with those resources which is perhaps misdirected and perhaps we're not getting the bang for our buck.
Mr. MCCOLLUM. Well, we're down to that 3-minute magic mark again to run to vote.
Unfortunately, the votes we've had today have kept us from having the kind of proceedings we normally would have. I would love to stay and continue this dialogue, but because it's almost 2:30, we're going to have to conclude the hearing.
I want to thank all of you for coming today. I would welcome your individual input to me and to the committee on this topic and possible solutions. I hope you won't hesitate to comment, either in writing or in person, on each other's comments today.
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So, with that in mind, this hearing is adjourned.
[Whereupon, at 2:15 p.m., the subcommittee adjourned.]
(Footnote 1 return)
On April 1, 1996 all of the federal financial agencies required banks and other financial institutions to file suspicious activity reports or SARs with the Financial Crimes Enforcement Network (FinCEN). This new streamlined reporting system which greatly enhances the efficiency of reporting possible crimes against the financial community, was the subject of three seminars sponsored by the ABA in 1996 and produced with the help of FinCEN, the Federal Reserve Board, U.S. Secret Service and the FBI. This joint endeavor is just another example of the ongoing alliance between banking and the government that will better equip our industry to respond to fraudulent activity.
(Footnote 2 return)
ABA supported the original money laundering proposals put forth by you, Mr. Chairman, that eventually became part of Title 18. ABA testified in the first Congressional hearing on this subject in 1985. The Association has continued its efforts to support fair and necessary legislation as well as working to improve the current regulatory scheme.
(Footnote 3 return)
One large west coast institution has informed us that the first tier of the new process for exempting CTRs will result in a 15% decrease in 1996 filings.
(Footnote 4 return)
The Money Laundering Suppression Act defines an NBFI as any person who owns or controls a money transmitter business. Specifically, the Act defines an NBFI as any business whose primary business is to provide one or more of the following: check cashing, currency exchange, or money transmitting services, or to issue or redeem money orders, travelers checks, or other similar instruments. Industry estimates on the number of NBFIs range between 200,000 and 1 million.
(Footnote 5 return)
The ABA has been fortunate to have received the support of many government agencies in our seminars, conferences and schools that cover money laundering. During the past 10 years, our members have heard directly from the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Treasury Department, the Department of State, the U.S. Customs Service, the Internal Revenue Service, the Justice Department, FinCEN and many others. This support is critical if bankers are to receive proper training.
(Footnote 6 return)
In addition, then Chairman of ABA's Money Laundering Task Force, Earl Hadlow, told a U.S. Senate Committee in 1989 that ''[t]he emphasis must shift, in a logical and reasonable manner, from currency transaction tracking to know your customer in all facets of transactions. A reasonable approach to the problem can only be accomplished by the concentrated cooperation of the government and the financial services industry.'' Mr. Hadlow went on to add that:
(Footnote 7 return)
For example, one large financial institution, in its Code of Ethics states the following:
(Footnote 8 return)
As one banker pointed out:
(Footnote 9 return)
In addition to increasing reporting thresholds, the new SAR (which replaces the criminal referral form) has two additional benefitsonly one (1) filing will be required by financial institutions (from the current 6) and banks will receive software so that the forms can be completed electronically. The Bank Fraud Working Group deserves credit for agreeing to this new processfirst proposed by and led by the leadership of the Federal Reserve Board.