SPEAKERS CONTENTS INSERTS
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MONEY LAUNDERING CRISIS
SUBCOMMITTEE ON CRIME
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FEBRUARY 10, 2000
Serial No. 110
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 S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
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
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Crime
BILL McCOLLUM, Florida, Chairman
STEVE CHABOT, Ohio
BOB BARR, Georgia
Page 4 PREV PAGE TOP OF DOCGEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
CHARLES T. CANADY, Florida
ASA HUTCHINSON, Arkansas
ROBERT C. SCOTT, Virginia
MARTIN T. MEEHAN, Massachusetts
STEVEN R. ROTHMAN, New Jersey
ANTHONY D. WEINER, New York
SHEILA JACKSON LEE, Texas
GLENN R. SCHMITT, Chief Counsel
DANIEL J. BRYANT, Chief Counsel
RICK FILKINS, Counsel
CARL THORSEN, Counsel
BOBBY VASSAR, Minority Counsel
C O N T E N T S
February 10, 2000
Page 5 PREV PAGE TOP OF DOC Chabot, Hon. Steve, a Representative in Congress From the State of Ohio, and presiding chairman, Subcommittee on Crime
Bruton, William, certified fraud examiner, Kroll Lindquist Avey Company, Atlanta, GA
Byrne, John J., senior counsel and compliance manager, American Bankers Association, Washington, DC
Cassella, Stefan D., Assistant Chief, Asset Forfeiture and Money Laundering Section, United States Department of Justice
Comisky, Ian M., Blank Rome Comisky & McCauley, LLP, Philadephia, PA
Robinson, James K., Assistant Attorney General, Criminal Division, United States Department of Justice
Smith, David, English and Smith, Alexandria, VA
Varrone, John C., Executive Director, Domestic Operations East, Office of Investigations, United States Customs Service
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
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Bruton, William, certified fraud examiner, Kroll Lindquist Avey Company, Atlanta, GA: Prepared statement
Byrne, John J., senior counsel and compliance manager, American Bankers Association, Washington, DC: Prepared statement
Comisky, Ian M., Blank Rome Comisky & McCauley, LLP, Philadephia, PA: Prepared statement
Robinson, James K., Assistant Attorney General, Criminal Division, United States Department of Justice: Prepared statement
Smith, David, English and Smith, Alexandria, VA: Prepared statement
Varrone, John C., Executive Director, Domestic Operations East, Office of Investigations, United States Customs Service: Prepared statement
MONEY LAUNDERING CRISIS
THURSDAY, FEBRUARY 10, 2000
House of Representatives,
Subcommittee on Crime,
Committee on the Judiciary,
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The subcommittee met, pursuant to notice, at 1:37 p.m., in Room 2141, Rayburn House Office Building, Hon. Steve Chabot [chairman of the subcommittee] presiding.
Present: Representatives Steve Chabot, Bob Barr, George W. Gekas, Howard Coble, Bobby Scott, and Sheila Jackson Lee.
Staff present: Daniel J. Bryant, chief counsel; Rick Filkins, counsel; Glenn R. Schmitt, chief counsel; Bobby Vassar, minority counsel; Veronica Eligan, staff assistant.
OPENING STATEMENT OF PRESIDING CHAIRMAN CHABOT
Mr. CHABOT. This hearing of the subcommittee will come to order.
Good afternoon. I am Congressman Steve Chabot from the 1st District of Ohio, and I will be chairing the hearing this afternoon. Mr. McCollum is unable to be here this afternoon, but I will read a statement that he would have made were he here at this time.
Today's hearing provides a valuable opportunity to focus on the growing national and international money laundering crisis and the administration's legislative proposal designed to combat it.
Page 8 PREV PAGE TOP OF DOC The connection between money laundering and the global illegal drug problem and international organized crime is understood at some level by most Americans, I suspect. But I wonder to what extent we as a country fully appreciate that a failure to aggressively attack the problem of money laundering means more plentiful, more potent, and cheaper illegal drugs on our streets, because without the ability to launder the proceeds of their drug trafficking, international drug cartels would be unable to continue operating. So, to put it in very practical terms, curtailing money laundering is in large part about keeping illegal drugs away from our kids. We all have a vested interest in combatting money laundering, and that is why we are here today.
When the first money laundering laws were enacted by Congress in 1986, they primarily targeted domestic money laundering. Those laws have proven to be effective as far as they go, but money laundering has grown into a very serious international problem, and our laws need to be updated to keep up with the drug traffickers and other international criminals who generate large sums of criminal proceeds that need to be laundered.
Monday laundering is the financial side of crime committed for profit. To truly profit from their crimewhether drug dealing, fraud, public corruption or arms traffickingcriminals must find a way to insert their proceeds into the stream of legitimate commerce. They must 'wash' their dirty money and make it look clean in order to spend it or reinvest it in their criminal enterprises.
No one knows exactly how much money is laundered each year, but by all accounts, it has reached alarming and unprecedented levels both here and abroad. Money laundering in the United States, driven largely by the sale of more than $57 billion a year in illegal drugs, is in the tens of billions of dollars annually. Worldwide, it is estimated that hundreds of billions of dollars are laundered every year.
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Money laundering is important in two respects. First and foremost, it facilities the underlying criminal activity. It provides the cash that allows drug traffickers, arms dealers, terrorists, and others to conduct their criminal enterprises. Second, money laundering taints the Nation's financial institutions and, left unchecked, can undermine pubic trust in their integrity. Furthermore, in an age of rapidly advancing technology and globalization, the uncontrolled laundering of large sums of money can cause financial instability.
The problem for law enforcement is daunting. Consider just one aspect of the money laundering problemwire transfers. Every day, more than $2 trillion moves electronically around the world in more than 500,000 transactions. That number is growing fast, and the sheer volume of transactions can make identifying suspect financial transactions as hard as finding a needle in a haystack.
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. They have gone beyond banks and money service businesses that transmit money and redeem travelers' checks and money orders and are now targeting corporations. One popular method of money laundering 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.
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. A growing number of drug traffickers are contracting out their business to money brokers who buy and sell drug profits like a commodity, often using black market peso exchanges.
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Last November, the administration submitted the Money Laundering Act of 1999 to Congress, which is designed to bolster our domestic and international enforcement capability in the fight against money laundering. This draft legislation is an outgrowth of the Money Laundering and Financial Crimes Strategy Act of 1998, which mandated the development of a 5-year anti-money laundering strategy. Were this proposed legislation to become law, it would mark the first major change to the money laundering statutes since they were enacted.
and again, this is speaking for Congressman McCollum, the chairman
that this legislative proposal is good and timely.
I agree with him on that point, but I just want to make sure we are clear on who is talking here. I hope he does not say anything too controversial in this. [Laughter.]
It is a tough proposal, but necessarily so. It would give prosecutors the tools now required to go after today's money launderers and their criminal proceeds both here and abroad. Let me give you three examples of what the draft legislation would do.
First, it would expand the list of foreign crimes that serve as a basis for money laundering prosecutions to include fraud, bribery, misappropriation of public funds, arms trafficking and crimes of violence. Expanding the list of money laundering predicate offenses is essential to prevent the United States from becoming a haven for money laundered by criminals who commit foreign crimes.
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Second, the administration's proposal would make bulk cash smuggling, that is, smuggling more than $10,000 out of the United States, a crime and provide for the confiscation of smuggled currency.
Third, it would require that persons who illegally purchase drug dollars on black market peso exchanges prove that they had no reason to know that the dollars were derived from unlawful activity. Much if not most of the drug money generated in the United States is sold on the black market peso exchange to South American customers. In this way, drug traffickers exchange U.S. dollars for the local currency they need to pay their employees and continue their trafficking operations. The black market peso exchange has proven to be a highly effective mechanism for drug traffickers to launder their criminal proceeds.
My staff has reviewed the proposal, and I have directed them to work with the minority, Justice, Treasury and the Banking Committee to develop a bipartisan bill that we can get enacted into law before the end of this Congress.
We are fortunate to have witnesses testifying today who bring a wealth of knowledge and experience in the area of money laundering. I am sure that their expertise will greatly benefit the subcommittee.
I would now like to turn to my friend from Virginia, the ranking member of the committee, Mr. Scott, for an opening statement if he chooses to make one.
Mr. SCOTT. Thank you, Mr. Chairman. It is a pleasure to serve with you on the subcommittee.
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We were just testifying a few minutes ago at another subcommittee, and I have taken the place of others who had a prepared statement, and it is challenging because you do not know whether to agree with what is being said or not, so I have been there.
I want to express my appreciation to you and Mr. McCollum for holding this hearing on the administration's proposed Monday Laundering Act of 2000. Money laundering involves a criminal enterprise's efforts to move substantial amounts of illegally-obtained money without protection from law enforcement.
Today we will examine whether or not we need to strengthen our existing anti-money laundering statutes. Two key statutes that Congress has enacted to address the problem of money laundering are 18 U.S.C. Sections 1956 and 1957. These two provisions prohibit individuals from engaging in certain kinds of transactions with tainted money. Section 1956 provides, among other things, that it is unlawful to engage in a financial transaction involving the proceeds of specified unlawful activity in order to conceal or disguise the location, source or ownership of the funds or to promote a specified unlawful activity or to avoid a transaction reporting requirement under State or Federal law.
Section 1957 prohibits engaging in monetary transaction involving tainted money from specified unlawful activity where the value exceeds $10,000.
The administration's proposal seeks to amend these statutes in order to strengthen the hand of law enforcement in its fight against money laundering. For example, the Money Laundering Act of 2000 would make it a criminal offense to engage in bulk cash smuggling or to serve as a currency courier. It would also expand the list of foreign crimes for which money laundering prosecutions may be brought and would give Federal prosecutors administrative subpoena power in civil forfeiture matters and greater access to defendants' foreign business records.
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While I certainly support effective money laundering provisions, I believe we must be cautious not to cast the net so broad as to entangle innocent people along with those who are truly engaging in criminal activity. The only way to ensure that this does not happen is to enact narrowly drafted legislation which identifies specific criminal activity. Further, any new provision must not infringe on due process rights and must respect the fundamental principle that a defendant is presumed innocent until proven guilty.
The House recently reaffirmed that basic principle with the overwhelming passage of H.R. 1658, the Asset Forfeiture Bill, sponsored by Chairman Hyde, which among other things shifted the burden of proof back to the Government instead of the present situation where the Government can take the property, and it is up to you to waive your rights and prove your innocence in order to get some of the property back.
It is within this analytical framework that I propose that we consider the administration's proposal today. I am certain that our witnesses will enlighten us on the need for these provisions and whether they are sufficiently well-defined.
I look forward to the testimony of our witnesses and thank you, Mr. Chairman.
Mr. CHABOT. Thank you, Mr. Scott.
Are there any other members of the committee who would like to make opening statements, briefly?
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Mr. GEKAS. Thank you, Mr. Chairman.
I have no formal statement, but I have a note here that says the gentleman from Virginia, the gentleman from Ohio, and the gentleman from North Carolina are friends of mine. [Laughter.]
Mr. CHABOT. We will stipulate to that.
Mr. GEKAS. Thank you.
I have nothing further, Mr. Chairman.
Mr. CHABOT. Thank you.
Mr. COBLE. Mr. Chairman, I have no formal statement. You and Mr. Scott have pretty well touched on the issue. I think we all agree, not least of all our first three witnesses, that when crime results in profitability, money laundering becomes synonymous with that activity.
I thank you for holding this hearing today and am looking forward to hearing the testimony.
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Mr. CHABOT. Thank you, Mr. Coble.
I will note that Mr. Barr has just entered the room, and before the witnesses testify, Mr. Barr, do you have an opening statement or anything that you would like to say?
Mr. BARR. I look forward to hearing from our witnesses. I would like to welcome Bill Bruton, a witness on the second panel today.
I thank you for holding this hearing. I know that you and Mr. McCollum have been very active in this area. It is an area in which I have a particular interest, both from my background as U.S. Attorney, trying to stem the tide of money laundering, and also by virtue of my role on the Banking Committee where we have been looking at these issues and trying to balance the needs of law enforcement with the civil rights of our citizens and privacy concerns in this country.
One area in particular, Mr. Chairman, I am concerned about is the lack of strength in our money laundering statutes and regulations with regard to foreign banks that want to do business in this country. We do not hold them to the same standards we hold U.S. financial institutions. I think that creates a tremendous loophole and severely limits the reach and ability of our Government to enforce our money laundering laws.
So, if not at this hearing, certainly down the road, this is one thing in which I will be very interested. If foreign banks and other financial institutions wish to do business and take advantage of our economy, they ought to abide by the same rules, regulations and requirements regarding money laundering that our financial institutions have to deal with to comply with U.S. laws and regulations.
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I think that kind of level playing field is something we should be aiming for, and maybe we can get into that a little bit today and in future hearings.
Thank you, Mr. Chairman.
Mr. CHABOT. Thank you very much, Mr. Barr.
For our first panel, we are pleased to welcome several very distinguished witnesses. First, the Assistant Attorney General for the Criminal Division at the Department of Justice, James K. Robinson. As Assistant Attorney General, Mr. Robinson oversees the investigation and prosection of cases including public corruption, money laundering, fraud, organized crime, narcotics trafficking, terrorism, and computer crime, which has obviously been in the news quite significantly just in the past couple of days. Before his tenure as Assistant Attorney General, Mr. Robinson served as dean and professor of law at Wayne State University Law School, his alma mater.
Welcome this morning, Mr. Robinson.
We also have as a witness, who will perhaps not actually be testifying but will be able to answer questions and perhaps contribute to Mr. Robinson's presentation, Stefan D. Cassella, who is Assistant Chief of the Asset Forfeiture and Money Laundering Section of the Justice Department's Criminal Division. Mr. Cassella is a prosecutor and one of the Government's foremost experts on the law of asset forfeiture and money laundering. He is a familiar face on the Hill, having testified numerous times, as well as providing this committee with valuable technical assistance on money laundering and asset forfeiture legislation. Mr. Cassella is a recipient of the Justice Department's prestigious John Marshall Award for handling the criminal forfeiture case against the Bank of Credit and Commerce International, the BCCI case, some years ago, which obviously was also very much in the public forum for some time.
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Our third witness on panel one is John C. Varrone, Executive Director for Investigative Operations East for the United States Customs Service. As Executive Director, Mr. Varrone manages, directs and coordinates the investigative activities of U.S. Customs for the East Coast and Caribbean Special Agent in Charge offices. He has served the U.S. Customs Service for the last 30 years and has been instrumental in the development of many national Customs Office investigations and policies.
Good afternoon to you all. As you probably know from having testified before the committee, we have a 5-minute rule, both for those testifying and for members of the committee to ask questions. And we have a new gizmo herethe way it works is when the green light comes on, you have 5 minutes; when the yellow light comes on, you have 1 minute remaining; and when the red light comes on, you are supposed to conclude.
At the previous committee meeting which we had this morning, the yellow lights were not coming on at allit just went from green to redso I am not sure what is going to happen out there, but we hope that when the red light comes on, you will wrap up relatively quickly so we will have time to get to the second panel and also to make sure that all members who have questions can ask them.
So thank you again, very much, and Mr. Robinson, if you would like to begin, please.
STATEMENT OF JAMES K. ROBINSON, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
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Mr. ROBINSON. Thank you very much, Mr. Chairman. I appreciate the opportunity to testify in support of the administration's anti-money laundering legislation, the Money Laundering Act of 2000.
Let me begin by commending you and the cosponsors for holding this hearing on this important piece of legislation. The Department of Justice strongly supports this bill and looks forward to working with you and the subcommittee toward its enactment.
The Money Laundering Act of 2000 sets out a core group of statutory tools that we must have in order to meet the domestic and transnational organized crime threats of the 21st century.
Both Attorney General Reno and Secretary of the Treasury Summers consider the passage of this legislation essential to increasing our ability to succeed in disrupting and dismantling the business of organized crime. The act will give us additional tools to attack the critical infrastructure of money laundering organizations and to do more effectively what the President has called fordepriving the drug barons and other criminals of what they value mosttheir money.
International criminals today engage in a wide range of illegal activities and move vast sums of money through the international financial systemsums dwarfing the combined economies of many nations. In September 1999, Secretary Summers and Attorney General Reno issued the administration's National Money Laundering Strategy for 1999, calling for broad-based international and domestic programs to combat money laundering. Justice and Treasury have worked closely together to implement the strategy, and we continue to do that. One of the key action items is the legislation that you are considering today.
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Money laundering taints our financial institutions and, where allowed to thrive, it erodes public trust in their integrity. In an age of rapidly advancing technology and globalization, it can affect trade flows and ultimately disturb financial stability. Money laundering is a threat to the national security of the United States.
We work closely with Treasury and State Departments every day in carrying out our responsibilities to investigate and prosecute money laundering and to seize and forfeit the proceeds of transnational organized crime. Our goal and that of our colleagues is to ensure that criminals and their laundered money can find no safe haven anywhere in the world, especially in the United States, and to destroy criminal organizations by taking the profit out of crime.
I was a United States Attorney in the latter part of the seventies in the Eastern District of Michigan, when we did not have the arsenal that became available in the mid-1980's. Our current money laundering were enacted for the most part in 1986 and have changed very little since that time. These statutes have served law enforcement well. Every year, in more than 2,000 cases, criminals who seek to launder the proceeds of their criminal activities are brought to justice under these provisions.
When the money laundering laws were enacted in 1986, however, they were designed to address what was then primarily a domestic problem. Today we see money laundering as an international problem. Currency, monetary instruments and electronic funds flow easily across international borders, allowing criminals in foreign countries to hide their money in the United States and allowing criminals in this country to conceal their ill-gotten gains in any one of hundreds of countries around the world, all with little concern that their activities will be detected by law enforcement.
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The reality of international money laundering in this new century has caused countries around the world to look for ways to update their domestic laws to address this threat.
Equally important, countries around the globe are searching for ways to work together to address the problem jointly despite our differing legal systems, our different customs and traditions. Criminals respect no borders. Their criminal proceeds move from country to country in the blink of an eye, making it absolutely essential that our laws be brought up-to-date and are changed to make it possible for the United States to fully cooperate with our international partners in law enforcement. The United States should be the leader in this process, but sadly, we have fallen behind. While our laws have remained mostly static for 14 years, other countries have been moving ahead to criminalize international money laundering and take other steps to separate criminals from their criminal proceeds.
Too often, we in the United States find ourselves unable to render the kind of assistance to foreign law enforcement that we ask them to render to us. And too often, we find ourselves standing by as criminals find new ways to circumvent our laws by moving criminal proceeds abroad.
I would like to focus on two principal problems that are addressed by this legislation, starting with the laundering of the proceeds of foreign crimes by foreign criminals who conceal their money in the United States. This problem has been much discussed in Congress and in the media for the past year. It is now apparent that it is time that the criminals abroad who are causing the proceeds of crime committed abroad to be deposited in United States bank accounts, invested in U.S. securities, and used to purchase U.S. goods and services be dealt with.
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The United States is threatened with becoming haven for the world's criminal proceeds. It should be a crime for foreign criminals to use our domestic financial institutions to launder the proceeds of their criminal activities abroad. Except in a few instances, our current laws simply do not address this problem.
I know the red light is on, Mr. Chairman, but we are going to share this time if it is okay; I will proceed a little further, and then we can both answer questions, so we will not both use 5 minutesif that is okay with the chair.
Mr. CHABOT. Fine.
Mr. ROBINSON. Under Sections 1956 and 1957, it is a crime to launder the proceeds of only three categories of foreign crimes in the United States: drug trafficking, bank fraud, and violent crimes linked to terrorism. A much broader array of serious foreign crimes need to be recognized as predicates for U.S. money laundering charges.
Similarly, we need to be able to assist our foreign counterparts by freezing a criminal's assets found here in the United States until they can file a formal action by increasing the grounds for forfeiture assistance beyond only drug trafficking as is now available and by granting our courts the authority to enforce foreign forfeiture judgments.
Let me now turn to the other side of this problem, and that is what occurs when a criminal who commits a crime in the United States wants to launder his criminal proceeds by sending the money abroad.
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This can occur with regard to all manner of crimestelemarketing fraud, racketeering, drug trafficking, and many other offenses now being committed in ways that routinely result in the transfer of funds outside of the United States to Canada, to the Caribbean, to Latin America, or elsewhere in the world. The problem is enormous with respect to drug trafficking alone, as has been mentioned in the opening statements.
Drug traffickers have an enormous logistical problem. After they have gone through the process of growing, manufacturing, importing and distributing their product, they must find a way of dealing with the money that they receive in return. If the proceeds of cocaine trafficking are received in ''street money''that is, in numbers of $5, $10 and $20 billionsthe money will weight 3 1/2 times as much as the cocaine that was used to produce those proceeds. Clearly, this prevents the trafficker with a serious problem, and it offers law enforcement an opportunity to take advantage of this most difficult and most vulnerable part of the cycle of drug trafficking.
The money laundering stage is when the criminal is most vulnerable for several reasons. First, it exposes him to the greatest risk of loss. If the cocaine coming into the United States is seized by law enforcement at any stage of the process, it can be easily replaced for a fraction of its street value. But if the drug dealer suffers the loss of $1 million in cash, he loses his entire investment plus all the markups and profits that accrue along the way.
It is for that reason that we see the confiscation of the drug proceeds as one of the most important weapons we have to interrupt this trafficking cycle, and it is why the traffickers go to such great lengths to conceal their proceeds from law enforcement.
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The laundering stage also presents great difficulty for the drug trafficker because of the success we in law enforcement have had in keeping the drug traffickers' proceeds out of our banking system through the reporting requirements of the Bank Secrecy Act. The proposed money laundering statute would make it a crime to smuggle cash out of the country and to act as a courier for what is known to be criminally derived proceeds. It would also clarify our authority in proceeding against money remitters who operate without a State license and would extend our jurisdiction over those foreign banks doing business in the United States that are used in money laundering offenses.
The legislation would also address two situations where the money launderer has been able to use U.S. laws as both a sword and a shield. If an individual who is a fugitive from a U.S. criminal case wants to file a claim in a civil forfeiture action here, he must submit to the jurisdiction of the court. If an individual wants to file a claim to disputed property, he must agree to waive the bank secrecy shield of his country so that financial records can be secured for the litigation.
For all of these reasons, we strongly support and believe that the Money Laundering Act of 2000 is long overdue legislation and is needed to update our money laundering laws to address the international movement of proceeds of crime, to give law enforcement the tools to address the real world problems that confront us at the beginning of the 21st century.
Accompany me today is the person who really knows all the answers to the hard, hard questions here, Stef Cassella, who is the Assistant Chief of the Criminal Division's Asset Forfeiture and Money Laundering Section. He is very knowledgeable about the black market peso exchange and other money laundering techniques as well as the details of the Department's legislative proposals.
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We are happy to answer the questions of the committee.
Mr. CHABOT. Thank you very much, Mr. Robinson.
[The prepared statement of Mr. Robinson follows:]
PREPARED STATEMENT OF JAMES K. ROBINSON, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, UNITED STATES DEPARTMENT OF JUSTICE
Mr. Chairman, Congressman Scott, and Members of the Subcommittee, thank you for the opportunity to testify in support of the Administration's anti-money laundering legislation, the Money Laundering Act of 2000.
Our current money laundering laws, which are found primarily in title 18, U.S. Code, Sections 1956, 1957 and 1960, and title 31, U.S. Code, Section 5324, were enacted for the most part in 1986, and have changed very little since that time. Those statutes have served us well. Every year, in more than 2000 cases, criminals who seek to hide the proceeds of their criminal acts are brought to justice under these provisions of the law.
When the money laundering laws were enacted in 1986, however, they were designed to address what was then primarily a domestic problem. Today, we see money laundering as an international problem. Currency, monetary instruments and electronic funds flow easily across international borders allowing criminals in foreign countries to hide their money in the United States, and allowing criminals in this country to conceal their ill-gotten gains in any one of hundreds of countries around the world, all with little concern that their activities will be detected by law enforcement.
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The reality of international money laundering in this new century has caused countries from Northern Europe to South Africa, and from here in the West to the financial centers of the Far East, to look for ways to update their domestic laws to address this threat to our security. Equally important, countries around the globe are searching for ways to work together to address this problem jointly, irrespective of our different legal systems, customs and traditions. The criminals respect no borders; their criminal proceeds move from country to country in the blink of an eye, making it absolutely essential that our laws be brought up to date, and are changed to make it possible to cooperate fully with our partners in law enforcement abroad.
The United States should be the leader in this process, but sadly we are falling behind. While our laws have remained mostly static for 14 years, other countries are moving ahead to criminalize international money laundering and to take other steps to separate the criminal from his criminal proceeds. Too often, we in the United States find ourselves unable to render the kind of assistance to foreign law enforcement that we ask them to render to us. And too often, we find ourselves standing idly by as criminals find new ways to circumvent our laws by moving criminal proceeds overseas. It is time to act.
The Administration's Anti-Money Laundering Strategy
The President in the State of the Union address said:
''. . . the major security threat this country will face will come from the enemies of the nation state: the narco-traffickers and the terrorists and the organized criminals, who will be organized together . . . [and] I'm going to send you new legislation to go after what these drug barons value the mosttheir money. And I hope you'll pass that . . .''
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The Money Laundering Act of 2000 sets out a core group of statutory tools that we must have in order to meet the domestic and transnational organized crime threats of the 21st Century. Both Attorney General Reno and Secretary of the Treasury Summers consider passage of this legislation as essential to increasing our ability to succeed in disrupting and dismantling the business of organized crime. The Act will give us additional tools to attack the critical infrastructure of money laundering organizations and to do, more effectively, what the President has called fordepriving the drug barons and other criminals of what they value most''their money.''
At the G8 Ministerial Conference on Combating Transnational Organized Crime (Moscow, October 1920, 1999) Attorney General Reno and the other Ministers issued a Communique which addressed, inter alia, the fight against the ''dark side of globalization.''
''The financial crime and money laundering activities of transactional organized crime are a threat to the national security of all nations. Money laundering epitomizes the globalization of crime and has created a class of professional money launderers and money laundering organizations. International cooperation and a multi disciplinary approach to block the laundering of illegally acquired proceeds are essential elements of the fight against serious transnational organized crime and will help ensure an environment which promotes official integrity and is intolerant of corruption.''
International criminals today engage in a wide range of illegal activities and move vast sums of money through the international financial systemdwarfing the combined economies of many nations. In September 1999 Secretary of the Treasury Summers and Attorney General Reno issued the Administration's National Money Laundering Strategy for 1999, calling for a broad-based international and domestic program to combat money laundering. Justice and Treasury have worked very closely together to implement the Strategy. One of the key Action Items is the legislation you are considering today.
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Money laundering taints our financial institutions, and, where allowed to thrive, it erodes public trust in their integrity. In an age of rapidly advancing technology and globalization, it can affect trade flows and ultimately disturb financial stability. Money laundering is a threat to the national security of the United States.
We work closely with the Treasury and State Departments everyday in carrying out our responsibilities to investigate and prosecute money laundering and to seize and forfeit the proceeds of transnational organized crime. Our goal and that of our colleagues is to ensure that criminals and their laundered money can find no safe haven anywhere in the world and especially in the United States, and to destroy the criminal organizations by taking the profit out of crime.
As Secretary Summers has stated:
''The attack on money laundering is an essential front in the war on narcotics and the broader fight against organized crime worldwide. Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption.''
Foreign Proceeds in the United States
I would like to focus on the two principal problems that are addressed by this legislation, starting with the laundering of the proceeds of foreign crimes by foreign criminals who conceal their money in the United States. This problem has been much discussed in Congress and in the media for the past year, and I will not dwell on it long. I will say only that it is now apparent, as it has been for some time, that criminals abroadare causing the proceeds of crime to be deposited in U.S. bank accounts, invested in U.S. securities, and used to purchase U.S. goods and services. We do not want the United States to become the haven for the world's criminal proceeds. It should be a crime for a foreign criminal to use our domestic financial institutions to launder the proceeds of his foreign crime. Except in a few instances, our current laws do not address this problem.
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Under Section 1956 and 1957, it is a crime to launder the proceeds of three categories of foreign crimes in the United States: drug trafficking, bank fraud, and violent crimes linked to terrorism. The proceeds of consumer fraud, or public corruption, or racketeering, loansharking, trading in arms and military secrets, or in endangered species are simply not covered. Our present law does not make it a crime to conceal or even to spend the proceeds of any of these offenses in the United States.
Our proposal, the Money Laundering Act of 2000, contains a number of provisions that will give law enforcement some of the tools it needs to arrest this growing problem.
Section 8 expands the list of ''predicate crimes'' to include most serious foreign offenses. Thus, it would be a federal offense, punishable under Section 1956 or 1957, to launder the proceeds of any of the foreign offenses listed in the statute, including any offense for which extradition is available under a multilateral treaty.
In addition, Section 4 would allow a federal judge to freeze the U.S. bank account, for a period of 30 days, of any person arrested abroad, to give federal and foreign authorities an opportunity to gather whatever evidence may be required to commence a formal action against the defendant or the property. This is something that we in federal law enforcement routinely ask of our counterparts in foreign countriesto freeze the assets in that country of the criminal we have arrested here. If the situation were reversed, the United States might not be able to comply with a foreign country's request to freeze the criminal's assets in the U.S.
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Section 26 allows us to render additional assistance by commencing a formal action to confiscate foreign criminal proceeds that are found in the U.S. Under current law, we are permitted to initiate such confiscation actions only against the proceeds of foreign drug trafficking offenses.
As an alternative, Section 25 creates a mechanism whereby a foreign country that has already obtained a confiscation order under its law can ask a federal court to enforce that order in the United States. The provision in Section 25 is modeled on the Canadian statute, and would put the United States in compliance with Article V of the Vienna Convention against drugs. That provision, like others in similar international agreements, calls on the member States to recognize each other's judicial orders regarding the confiscation of criminal proceeds that have moved from one country to another.
Finally, Section 27 closes a loophole in the present statute that authorizes us to share the confiscated funds with other countries that participate in the law enforcement action.
Laundering U.S. Proceeds Abroad
Let me turn now to the other side of this problem: what occurs when a criminal who commits a crime in the United States wants to launder the proceeds of his offense by sending the money abroad. This can occur with respect to all manner of crimes: telemarketing fraud, sports betting, and many other offenses now being committed in ways that routinely result in the transfer of funds out of the United States to Canada, the Caribbean, Latin America, or some place else. The problem is enormous with respect to drug trafficking, alone.
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Drug traffickers have an enormous logistical problem: after they have gone through the trouble of growing, manufacturing, importing and distributing their product, they must find a way of dealing with the money that they receive in return. If the proceeds of cocaine trafficking are received in ''street money,'' i.e., equal numbers of 5, 10 and 20 dollar bills, the money will weigh 3 1/2 times as much as the cocaine. If an airplane is used to smuggle cocaine into the United States, the same airplane would have to fly out of the U.S. three-and-a-half times to return the drug proceeds to the trafficker. The laundering of the drug money thus becomes the most difficultand most vulnerablepart of the drug trafficking cycle.
The money laundering stage is when the criminal is most vulnerable for several reasons. First, it exposes him to the greatest risk of loss. If the cocaine coming into the U.S. is seized by law enforcement, it can be easily replaced for a fraction of its street value. In other words, if a drug trafficker suffers the loss of a load of powder cocaine having a street value of $1 million, he can replace it in South America for a fraction of that amount. He has not yet completed the distribution process that results in the conversion of his product into cold, hard cash. But if the drug dealer suffers the loss of the $1 million in cash, he loses his entire investment plus all the mark-ups and profits that accrue along the way as he moves the cocaine to its final distribution sites. It is for that reason that we see the confiscation of the drug proceeds as perhaps the most important weapon we have to interrupt the trafficking cycle, and it is why the traffickers go to such great lengths to conceal their proceeds from law enforcement.
Also, the laundering stage presents great difficulty for the drug trafficker because of the success we in law enforcement have had in keeping the drug traffickers' proceeds out of the banking system. A legitimate businessman who took in a large quantity of cash from a his grocery store or restaurant would simply deposit the cash in a bank, often on a daily basis. But a drug dealer cannot do that, because in depositing his money in a bank he will create a paper trailthe Currency Transaction Report (CTR) that all banks are required to filedetailing his identity and the time, place and amount of his cash transaction. Creating such a paper trail is the last thing that a drug trafficker wants to do.
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Because of our success in enforcing the CTR and other requirements of the Bank Secrecy Act (31 U.S.C. §5312 et seq.), drug dealers and other criminals are forced to conceal and transport their money outside of the banking system, and therein lies our opportunity to identify, investigate, and prosecute them.
Black Market Peso Exchange
There are many methods used by drug traffickers to move their drug proceeds from the stash houses where it collects in New York, Los Angeles and other cities, large and small, back to South America. One of the most pervasive is the Black Market Peso Exchange.
The scheme works like this: A drug trafficker has a large quantity of cashsay $1 million in the proceeds of drug salesin a stash house. What he really wants is local currency, such as Colombian pesos, at home in South America, where he can spend the money for labor, raw material, equipment, and to live a luxurious life style. To minimize or avoid altogether the risk in repatriating his proceeds, the drug trafficker is willing to pay a substantial premium to someonea money exchanger, also known as a money broker or casa de cambioto handle the money for him.
Money exchangers operate legitimate businesses throughout South Americaand particularly in Colombia, Brazil, Venezuela, Peru and Ecuadorexchanging local currency for U.S. dollars. There are also many money exchangers who will handle drug money, for high fees or to obtain the money at a greatly discounted rate.
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In this scenario, the drug trafficker sells the money exchanger the money in the stash house for, perhaps, $800,000 worth of local currency, such as Colombian pesos. The top half of the diagram illustrates this exchange. When it is completed, the dollars in the stash house belong to the money exchanger, who has paid for them with local currency delivered to the trafficker in South America. Thus, at the earliest stage, the drug trafficker has received what he wanted (local currency at home) and transferred the problem (the stash of U.S. dollars) to the money exchanger who is now responsible for the money still in the U.S.
The money exchanger does not want to keep this money, of course. His business involves selling U.S. dollars to people, such as South American businessmen who need dollars to pay for imported goods like cigarettes, electronics, jewelry, airplanes, farm machinery and anything else that is exported from the U.S., Europe or Asia to South America.
The South American importer who needs dollars to pay for his imports could go to a local bank and buy dollars at the official exchange rate, but he will do better if he goes to the money exchanger and buys dollars that the money exchanger obtained at a steep discount. In this example, the South American importer might pay $900,000 in local currency for $1 million in U.S. dollars.
The importer needs the dollars to pay off the invoices he has received from the exporters in the U.S. and elsewhere who have shipped him goods. So the third party importer (in the lower right corner of the diagram) gives local currency to the money exchanger and instructs the money exchanger to send the dollars to a designee (the exporter) in the U.S., or Italy or Hong Kong, or wherever. The diagram shows the transaction being completed when the money exchanger delivers the dollars to the South American importer's designee.
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In this scheme, all have profitted. The drug trafficker has his money at home, the importer has paid for his goods (with cheap dollars), the exporter has been paid for his exports, and the money exchanger has made a handsome profit. (Because, as the diagram illustrates, there are several sets of parallel transactions, the black market is sometimes referred to as the ''parallel market.'')
This kind of transaction is extremely common. In case after case, in Operation Casablanca, Operation Skymaster, Operation Juno, and others in the last 2 years, we have traced money from a drug trafficking organization through a money exchanger only to find it in the hands of a jewelry exporter in Milan, or an airplane manufacturer in Texas, or an electronics firm somewhere else. And there can be no doubt that the exporters who are accepting drug money in payment for their merchandise through this system are an essential link in the money laundering scheme.
How does the money exchanger get the dollars to the third party's designee?
The diagram is, of course, oversimplified. In particular, it glosses over the most difficult part of the operation for the money exchanger, that is, converting the dollars he has acquired in the stash house (in the upper left of the diagram) into funds he can use to pay the third party or his designee (in the lower left). The next diagram expands this left half of the operation to illustrate how the money exchanger accomplishes this conversion. The money exchanger has several ways in which to turn his hoard of cash into useable funds. First, he can ''smurf'' the money into his U.S. bank account. (All money exchangers maintain U.S. bank accounts to facilitate dollar transactions.) ''Smurfing'' is the crime of turning cash into monetary instruments, such as money orders or travelers checks, or into bank deposits, in amounts structured under $10,000 so as not to generate a Currency Transaction Report. ''Smurfing'' is slow and labor-intensive, but it is still done.
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Second, the money exchanger can collaborate with a U.S.-based money remitter to have the money wired to a designated bank account overseas. Money remitters are commonplace in neighborhoods throughout the United States and conduct a legitimate business sending money to family members in foreign countries. Thus, money remitters are already engaged in a high-volume cash business, and can easily disguise the money received from the money exchanger as legitimate funds destined for families of immigrants ''back home.'' Of course, the money, as the remitter well-knows, is actually drug proceeds that, for a fee, the remitter is willing to deposit in his own bank account and wire to the money exchanger's bank account abroad. When this is accomplished, the money exchanger has his money in a foreign bank.
Finally, and perhaps most commonly, the money exchanger can simply smuggle the cash in bulk out of the United States by means of a courier, container ship, airplane or by some other means. The smuggling usually occurs in several stages: a courier does a ''pick-up'' of cash at the stash house and transfers the money to another courier; the second courier drives the cash southbound on the interstate, or to a place on the southwest border, or turns it over to another courier in a city with a major airport; finally, the last courier (or a group of couriers who divide up the money to reduce the risk of loss) either carries the money physically across the border, or boards a commercial airline flight and flies with the currency in his luggage or concealed on his person.
It is this physical movement of cash that explains the large number of out-bound currency interdiction cases that have come before the federal courts in the last few yearscases involving currency seizures on highways, at airports, in marine terminals, and at border crossings. See United States v. $129,727.00 U.S. Currency, 129 F.3d 486 (9th Cir. 1997) (drug courier intercepted with large quantity of cash in bundles wrapped in fabric softener sheets and plastic wrap); United States v. One Lot of U.S. Currency ($36,674), 103 F.3d 1048 (1st Cir. 1997) (cash seized from courier at airport); United States v. $39,873.00, 80 F.3d 317 (8th Cir. 1996) (currency seized during highway stop); United States v. $189,825.00 in U.S. Currency, 8 F. Supp. 2d 1300 (N.D. Okla. 1998) (cash found concealed in gas tank on highway known as a ''drug pipeline''); Albajon v. Gugliotta,XXXF. Supp.2dXXX, 1999 WL 1049616 (S.D. Fla. Sept. 7, 1999) ($57,000 cash found in courier's socks and pants); United States v. $86,020.00 in U.S. Currency, 1 F. Supp. 2d 1034 (D. Ariz. 1997) (cash taken from courier traveling under false name); United States v. $9,135.00 in U.S. Currency, 1998 WL 329270 (E.D. La. 1998) (courier caught with cash stuffed in pockets and shoes); United States v. $206,323.56 in U.S. Currency, 998 F. Supp. 693 (S.D. W. Va. 1998) (courier caught fleeing from highway stop); United States v. $263,448.00 in U.S. Currency, Civ. No. 1:96CV284HTW (N.D. Ga. Sept. 24, 1998) (unpub) (21-year old drop-out with no source of income caught at airport with $263,000 in street money in a carry-on bag).
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Once the currency has been smuggled out of the country, the money exchanger has many options. He can deposit the money in a foreign bank and wire it to his account in the U.S., or directly to the third-party's designee. He can use it to buy foreign bank draftsessentially cashiers checks written on the bank's own correspondent account in the U.S.and then deposit the bank drafts into his own account or deliver them to the third party's designee. Or he can, through a complex process, use the cash to buy personal checks, money orders and travelers checks from people traveling to and from the U.S., and then send those instruments back to the United States for deposit into his own account, or deliver them directly to the third party's designee. (The travelers are instructed always to leave the payee field blank on their checks and money orders so that it is easier to negotiate them later.)
It is not unusual to see millions of dollars in the form of foreign bank drafts and sequentially numbered personal checks, travelers checks and money orders passing through the U.S. bank account of a large scale money exchanger.
In sum, through this process, or some variation thereof, the money exchanger performs his task of converting a stash house full of cash into funds that he can easily transfer to an exporter designated by a South American businessman as the recipient of the U.S. dollars the businessman has purchased from the money exchanger.
This proposed legislation can help law enforcement break this money laundering cycle. Referring again to the diagram, there are a number of points where we could interrupt the flow of the laundered money, if we had the tools to do so.
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First, as set forth in Section 22, we must make bulk cash smuggling a crime. It is a crime to smuggle all manner of things, from jewels to guns to CD's to rhino horns, but it is not a crime to smuggle currency. The only criminal offense associated with bulk cash smuggling is the reporting requirement in 31 U.S.C. §5316, which makes it an offense to transport more than $10,000 in or out of the United States without filing a report with the Customs service. See 31 U.S.C. §5322(a). The Supreme Court has held that a reporting violation is a minor offense for which the punishment is limited. See United States v. Bajakajian, 524 U.S. 321 (1998). In that case, the Court limited the punishment to the confiscation of $15,000, even though the defendant had been convicted of a criminal offense involving the failure to report $357,000 that was concealed in the false bottom of a suitcase and under his wife's clothing.
It is time to recognize that the smuggling of cash in large quantities is itself a serious offense that merits significant punishment, including loss of the smuggled money itself. We note that Section 22 has already been separately introduced by Chairwoman Roukema of the Banking and Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit.
Second, as set forth in Section 23, we should make it an offense to transport criminal proceeds in interstate commerce. In other words, we should make it a crime for the currency courier to transport money that he knows is criminal proceeds on the interstate highways, at airports or border crossings. Current law does not make being a currency courier a criminal offense. See United States v. Puig-Infante, 19 F.3d 929 (5th Cir. 1994) (transporting drug proceeds from Florida to Texas is not a money laundering ''transaction''); United States v. Gonzalez-Rodriguez, 966 F.2d 918 (5th Cir. 1992) (carrying cash through an airport is not a money laundering transaction).
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Next, we can tighten up the law on money remitters. Section 3 clarifies the mens rea requirement in the existing law, 18 U.S.C. §1960, to ensure that we can prosecute money remitters who knowingly operate their businesses without a state license. See United States v. Velastegui,XXXF.3dXXX, 1999 WL 1136863 (2d Cir. Dec. 13, 1999) (defendant prosecuted for operating money remitter business without New York license).
Section 6 gives us ''long-arm'' jurisdiction so that we can file an enforcement action against a foreign bank that knowingly participates in a money laundering offense in the United States. Current law, 18 U.S.C. §1956(b), already authorizes such lawsuits, but it has two major short-comings. First, the absence of a long-arm statute makes it difficult for a court in the United States to obtain jurisdiction over the foreign bank, even if it committed the money laundering offense here. Second, current law contains no mechanism for freezing the U.S. assets of the foreign banki.e., its correspondent account, so that the United States is able to collect its judgment if it prevails in its §1956(b) lawsuit. Section 6 addresses both problems.
Section 16 would apply when we bring a criminal action against a money exchanger or other person involved in this scheme, but he remains a fugitive. Current law allows fugitives to contest the confiscation of the property they leave behind by proxy, i.e., through counsel. The fugitive from justice should be forced to make a choice: either surrender to face the criminal charges or stay abroad and suffer the consequences. A fugitive should not have the option of flouting the jurisdiction of the criminal court while at the same time availing himself of the opportunity to use the same court to preserve his interest in the criminal proceeds he left behind. Section 16 forces the fugitive to make this choice by codifying what is known as the ''fugitive disentitlement doctrine.''
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Likewise, Section 5 would apply when a money launderer attempts to frustrate the government's attempt to establish the connection between his property and a criminal offense by hiding behind the bank secrecy laws of a foreign country. Those challenging the confiscation of criminal proceeds should not be allowed to use the law as both as sword and a shield simultaneously. If bank records that are material to a money laundering or other criminal case are in a ''bank secrecy'' jurisdiction, the defendant must choose between waiving the bank secrecy laws or withdrawing his claim to the disputed property. He cannot have it both ways.
We also need to focus on the third party (or designee) who is the ultimate recipient of the laundered drug money. As described earlier, that person plays an essential role in this process. If he were not willing and able to purchase the drug money on the black market, this entire money laundering scheme would come to a halt. Unfortunately, the only means we have of deterring black market customers is to seize the money from their bank accounts under 18 U.S.C. §981, but that statute has proven to be an ineffective deterrent because it allows a black market customer to recover his property on a simple showing that he did not know that the money came from an illegal source. See United States v. Funds Seized From Account Number 20548408 at Baybank, N.A., 1995 WL 381659 (D. Mass. 1995) (wealthy Colombian who purchased 182 dollar-denominated money orders totaling $100,000 was innocent owner; he had no duty to inquire as to source of the money); United States v. Real Property 874 Gartel Drive, 79 F.3d 918 (9th Cir. 1996) (in contrast to other innocent owner statutes, claimant in a money laundering case governed by §981(a)(2) can prevail simply by showing lack of knowledge; there is no requirement that claimant take all reasonable steps to avoid acquiring criminal proceeds); United States v. $705,270.00 in U.S. Currency, 820 F. Supp. 1398, 1402 (S.D. Fla. 1993) (because §981(a)(2) does not contain a consent prong, the ''all reasonable steps'' test does not apply).
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We think that the bar should be raised just a little higher. Under Section 15, black market customers would be required to show that they took all reasonable steps to verify that the funds in question were not derived from criminal activity. Many will be able to meet that standard; but some will not, and that will put all on notice that the days when money can be freely laundered through the black market are over.
Finally, I would like to highlight two provisions that will apply whenever we succeed in bringing criminal charges against a money launderer and have brought him before the court. First, Section 20 gives the criminal court the authority to order the defendant standing before it to bring his laundered criminal proceeds back into the United States or face contempt of court sanctions. Second, for cases where it impossible to locate the laundered criminal proceeds, or impossible to recover them from a foreign country, Section 32 gives the criminal court the authority to freeze the U.S. assets of the defendant so that they are available to satisfy a money judgment that may be imposed as part of the sentence at the conclusion of the criminal case. See United States v. Voigt, 89 F.3d 1050, 1084, 1088 (3rd Cir. 1996) (government is entitled to a personal money judgment equal to the amount of money involved in the money laundering offense); United States v. Saccoccia, 823 F. Supp. 994, 1006 (D.R.I. 1993) (court enters money judgment for the amount laundered, $136 million, most of which the defendant had transferred overseas), aff'd 58 F.3d 754 (1st Cir. 1995); United States v. Saccoccia, 898 F. Supp. 53, 56 (D.R.I. 1995) (the money judgment may be satisfied out of the laundered funds, property traceable thereto, or substitute assets).
The courts are, at present, divided as to whether current law already authorizes such pre-trial restraint. The issue is one of statutory interpretation. Compare In Re Billman, 915 F.2d 916 (4th Cir. 1990) (pre-trial restraint of substitute property is authorized); United States v. Scardino, 956 F. Supp. 774 (N.D. Ill. 1997) (holding that reference to ''subsection (a)'' property in §853(c) applies to substitute assets, and stating, in dicta, that the same would apply to pre-trial restraint under §853(e)); United States v. O'Brien, 836 F. Supp. 438 (S.D. Ohio 1993) (government entitled to pre-trial order restraining substitute assets); with United States v. Gotti, 155 F.3d 144 (2d Cir. 1998) (pre-trial restraint not authorized); United States v. Floyd, 992 F.2d 498 (5th Cir. 1993); In Re Assets of Martin, 1 F.3d 1351 (3rd Cir. 1993); United States v. Ripinsky, 20 F.3d 359 (9th Cir. 1994); United States v. Field, 62 F.3d 246 (8th Cir. 1995).
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Section 32 resolves the ambiguity in the current law, making it clear that a money launderer's assets can be restrained if a money judgment may be imposed upon conviction in a criminal case.
Corrections to close other loopholes
The remaining elements of the bill seek to plug loopholes or correct errors in the statutes that have been discovered over the past decade.
For example, as representatives of the Department have testified before, in money laundering cases where the underlying crime is some type of fraud, one of the principal purposes of bringing the case is to recover the laundered fraud proceeds so that they can be restored to the victim. Some money laundering statutes allow the Attorney General to restore the property to the victims, but some do not. Section 28 corrects this unevenness in the money laundering statutes.
In addition, current law, except in the Second Circuit, requires every financial transaction to be charged as a separate offense, even if identical transactions are conducted repeatedly on a regular basis. See United States v. Prescott, 42 F.3d 1165 (8th Cir. 1994) (charging multiple financial transactions as a continuing course of conduct in a single count is duplicitous); United States v. Conley, 826 F. Supp. 1536 (W.D. Pa. 1993) (dismissing duplicitous charge with leave to refile); but see United States v. Gordon, 990 F. Supp. 171 (E.D.N.Y. 1998) (single money laundering count charging multiple financial transactions not duplicitous where all transactions were part of single continuous scheme; applying U.S. v. Margiotta, 646 F.2d 729 (2nd Cir. 1981) (multiple mailings may be charged in single mail fraud count)). In major cases, this can lead to indictments that resemble the Manhattan telephone directory. Section 11 will allow prosecutors to charge a money laundering scheme as a ''course of conduct'' in one count in an indictment.
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Section 12 is needed to update the venue provision in the money laundering statutes in light of the Supreme Court's decision in United States v. Cabrales, 524 U.S. 1 (1998). The amendment permits the prosecutor to charge the money laundering offense in the district where the underlying crime occurred, as long as the money launderer committed at least some act in that district. This allows prosecutors to join money laundering cases with charges for the underlying crime, instead of having to indict and try the cases separately in two different districts.
Finally, a most important revision to the existing statutes is needed to overcome a controversial decision of the Court of Appeals for the Ninth Circuit. Under Section 1957, the government must prove that at least $10,000 in criminally-derived funds was involved in the financial transaction. The problem arises when a defendant puts more than $10,000 in criminal proceeds into a bank account and commingles it with other funds before conducting a transaction in excess of $10,000. The following diagram illustrates this scenario.
When a criminal commingles $100,000 in criminal proceeds with $100,000 in money from an unknown source, the ''clean money'' and the ''dirty money'' are indistinguishable from each other. Whether the subsequent transfer of more than $10,000 from the commingled account constitutes a money laundering offense under Section 1957 turns on whether the court assumes that the ''dirty money'' moves first or last.
In United States v. Rutgard, 108 F.3d 1041 (9th Cir. 1997), a defendant, who had deposited fraud proceeds into a California bank account and commingled it with other money, got wind of the criminal investigation and transferred a large portion, but not all, of the commingled funds to the Isle of Man. The government charged the defendant with a Section 1957 offense, alleging that it was logical to assume that the defendant had transferred the fraud proceeds overseas and left the ''clean money'' in California. But the Ninth Circuit held that defendants are entitled to a presumption that the criminal proceeds are the ''last out'' of a commingled bank account. Thus, the conviction was reversed.
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We do not believe that the Congress intended this result when it enacted 18 U.S.C. Section 1957. To address the problem, Section 17 provides that transactions in excess of $10,000 from commingled bank accounts involve the required amount of criminal proceeds as long as at least $10,000 in such proceeds were deposited into the commingled account at an earlier point in time.
For all of these reasons, we strongly believe that the Money Laundering Act of 2000 is long overdue legislation needed to update our money laundering laws, to address the international movement of the proceeds of crime, and to give law enforcement the tools necessary to confront the real-world problems before us at the beginning of the 21st Century.
Mr. CHABOT. Mr. Cassella would you like to take a couple minute to fill in anything you think we should know at this point?
STATEMENT OF STEFAN D. CASSELLA, ASSISTANT CHIEF, ASSET FORFEITURE AND MONEY LAUNDERING SECTION, UNITED STATES DEPARTMENT OF JUSTICE
Page 43 PREV PAGE TOP OF DOC Mr. CASSELLA. Yes, thank you very much, Mr. Chairman, and thank you very much for having me back.
I thought I would not read a statement but just take a moment or two to explain how the black market peso exchange works, and we have brought along some charts to help the subcommittee understand this process. It is the green and white chart that you see over to your right.
As Mr. Robinson explained, the drug trafficker has an enormous logistical problemhis cash simply takes up too much space and weighs too much to move it easily about the country and overseas.
The drug trafficker does not want to create a paper trail. That is the most serious problem that he has, not to create a paper trail. If he puts the money in the bank, he will create that paper trail; that is because of our success in enforcing the Bank Secrecy Act requirement that transactions over $10,000 in cash be reported to the IRS.
He also does not want the cash in the United States. He wants it to be repatriated to him overseas, where he can use it in the form of his local currency to acquire more raw material, equipment, finance his luxurious life style and hire labor.
So what happens is that the drug trafficker will go to a money exchange or a person doing business in a Latin American countryperhaps Colombia or Peru or Ecuador or Braziland say I have dollars in a stash house in the United Statesthe upper left-hand corner of the exhibitand I would like to have pesos here in my own country.
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The money exchanger says finefor $1 million in the stash house, I will pay you $800,000 in pesos.
The money exchanger pays the pesos to the drug trafficker in South America; the drug trafficker is happy to take $800,000 worth of money because he has avoided all risks, and now he has the money in South America.
The beauty of this is that at the very beginning of the scheme, the drug trafficker is out of the picture; he has his money, and the money in the stash house now belongs to the money exchanger. Of course, the money exchanger does not want to keep the moneyhe wants to sell itand there are many people in South America who want to buy dollars.
In the lower right-hand corner of the diagram, we see that there are third parties such as importers, persons who import cigarettes, electronics, other consumer goods like farm machinery and appliances, and need to pay for these with dollars.
The third party, then, the importer, will say to the money exchanger: I will buy $1 million of U.S. dollars from you for $900,000 in pesos. He gets a much better deal doing it that way than if he went to the bank and paid the official exchange rate, and the money exchanger is happy to make this transaction, because after all, he only paid $800,000 for the dollars in the first place. So in the lower right-hand corner, you see the arrow brings pesos to the money exchanger.
And finally, the last step in the transaction is what does the money exchanger do with the dollars that he has now sold to the South American importer. Well, the South American importer does not want the dollars himself; he wants them to be used to pay his accounts receivable, to pay his invoices for the jewelry or the consumer goods or the electronics that he has purchased. So he directs the money exchanger to deliver dollars to the third party's designee.
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On the second chart, we can look at the left-hand side of this diagram and see exactly how that transaction is accomplished. The peso exchange occurs largely in South America and is beyond our control, but the dollar exchange occurs in part in the United States and is something we can attack with our money laundering statutes. This is the left-hand side of the same document we saw a moment ago.
The money exchanger now has the money in the stash house, and he wants to get it to the third party or his designee in the lower left-hand corner of the diagram. How does he do that?
He has three principal ways of doing it. First, he has a U.S. bank accountall money exchangers have U.S. bank accounts to facilitate their transactionsso he can what we call ''smurf'' the money into his bank account. That is, he can conduct numerous sub-$10,000 transactions to place the money in the account in cash. This is very time-consuming and laborious. If we are talking about $1 million, it takes more than 100 transactions to get the money into his account without generating a currency transaction report or CTR.
The second method he has is to use a money remitter, a person who does business in an ethnic neighborhood in a U.S. city, who exists for the purpose of remitting money back to South American countries or Caribbean countries on behalf of immigrants who are sending money home to family members. But that same process can be perverted and can be used to take the drug money from the money exchanger and send it to South America to his foreign bank account, where he can then use it to pay the third party or his designee.
Page 46 PREV PAGE TOP OF DOC The third method is that he can physically smuggle the cash out of the country. That happens in several steps. He has someone go to the stash house and pick up the money from the drug trafficker's agent. That pick-up person then gives it to a courier who usually drives the money in an automobile on the interstate highway down to a border location along the Southwest border or to a city where there is a major airport with many South American flights, like Atlanta or Miami or Houston or Los Angeles, and then it is transferred to one or more smugglers who secrete the currency in their luggage or on their person and physically travel out of the country, or put it in container shipping, in consumer goods that are being shipped out of the country.
Once the cash is physically smuggled out of the country and is in South America, it can be deposited in a foreign bank account, where again, bank drafts can be drawn on the foreign bank, or wire transfers can be made to the party in the lower left-hand corner of the diagram, or the cash can actually be brought back into the United States, this time declared above-board, and used to purchase cashier's checks, money orders, travelers checks, or to open bank accounts where the checkbooks are then left with the payee blank and turned over to the money exchanger to use as he willto deposit them into his own bank account or give them to the third party's designee.
The bottom line is that the cash that was in the stash house has moved through this elaborate process in one of these various ways to a third party or to a person designated by the third party to receive the money, and this is called the black market peso exchange. Because there are numerous parallel transactions taking place here, you can see why it is also sometimes called the ''parallel market.''
Page 47 PREV PAGE TOP OF DOC Our legislation is intended to target each node on this diagram to find ways in which we can attack each of the various steps that the money launderers are forced to go through because of their inability to use their banking system. One way that has been mentioned is to make bulk cash smuggling a crime, to attack that avenue. Another is to make the work of the pick-up courier, the person transporting the money in his automobile on the interstate highway, to make the act of transporting that currency a criminal offense. We can crack down on what the money remitter is allowed to do under our Federal laws. We can go after the foreign bank itself with long-arm statutes that bring them within our jurisdiction for civil enforcement action and allow us to freeze what assets they have in the United States in their correspondent bank accounts.
We can go after the broker's account itself, the money exchanger's account at a U.S. bank. We can perhaps indict the broker and then move to freeze his account, and if the broker remains a fugitive, bar him from making a challenge to that forfeiture action because he has chosen not to surrender on the charges on which he is a fugitive. And as Mr. Robinson mentioned, we can also bar him from hiding behind the bank secrecy laws of his foreign state.
We can go after the individual in the lower left-hand corner, the third party or the designee who receives the money, by forcing him to show that he did not have any reason to know and took all reasonable steps to prevent the receipt of this money.
And of course, we can prosecute the money exchanger himself, and when he is standing before the court, ask the court to order him to repatriate his assets, to bring them back into the United States.
The bottom line, Mr. Chairman, is that we think we have drafted a set of proposals specifically targeted to a real problem and are linked one by one to the particular aspects of this money laundering scheme, and we are happy to answer questions about those proposals when the time comes.
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Mr. CHABOT. Thank you very much, Mr. Cassella.
Mr. CHABOT. Mr. Varrone?
STATEMENT OF JOHN C. VARRONE, EXECUTIVE DIRECTOR, DOMESTIC OPERATIONS EAST, OFFICE OF INVESTIGATIONS, UNITED STATES CUSTOMS SERVICE
Mr. VARRONE. Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, good afternoon. I am pleased to join my colleagues from the Department of Justice, Mr. Robinson and Mr. Cassella, to discuss our efforts to combat money laundering. I am especially pleased to have the opportunity today to comment on the Money Laundering Act of 2000, which includes provisions which will substantially assist the United States Customs Service in our fight against international money laundering.
Mr. Chairman, with your permission, I would like to submit my long statement for the record.
In order to talk about money launderers and the systems they employ, Customs has been given broad authority to conduct international money laundering investigations. As you are aware, Customs has implemented an aggressive strategy to combat money laundering, and we presently dedicate in excess of 400 agents worldwide to this effort.
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During FY98 and FY99, Customs money laundering investigations have led to the arrest of more than 2,100 violators and the seizure of more than $600 million. Customs efforts against money launderers are not limited to drug-related money laundering but to the illegal proceeds of all crime.
International criminal organizations launder their ill-gotten gains through a variety of different methods and systems ranging from bulk cash smuggling to the more complex systems like the black market peso exchange. All are attacked through a combination of intelligence collection, interdiction, as well as domestic and international investigations.
The Customs Service maintains a variety of enforcement initiatives to attack these money laundering organizations and systems. I will briefly describe a few of their more successfully anti-money laundering programs, such as our undercover operation, outbound currency interdiction program, asset identification and removal groups, and our Money Laundering Coordination Center.
Since Congress authorized U.S. Customs to conduct long-term undercover money laundering investigations, our enforcement operations have resulted in the seizure of approximately $1 billion in cash and monetary instruments, 2,000 arrests, and the seizure of more than 37,000 kilograms of cocaine. It was a Customs undercover operation in the late 1980's that first exposed the criminal money laundering activities of the Bank of Credit and Commerce International. More recently, in 1998, the Customs Service concluded Operation Casablanca, which has been recognized as the largest and most successful drug money laundering investigation in the history of U.S. law enforcement. This investigation resulted in the indictment and conviction of two Mexican banks on criminal money laundering charges and the civil money laundering conviction of a third Mexican bank. We also seized over $100 million and have convicted more than 30 Mexican and Venezuelan bankers, along with their Cali and Juarez Cartel associates.
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In direct response to the threat and challenge of identifying violator assets, we created the prototype Asset Identification and Removal Program, to target the assets of criminal organizations as early as possible within all of Customs' primary investigative areas. Currently, we have trained, equipped and implemented 21 of these groups, which are comprised of special agents, auditors, and forensic accountants. These groups have had a significant enforcement impact on all of our anti-money laundering investigations. It was the excellent work performed by our Asset Removal Group in South Florida, in conjunction with the Monroe County Sheriff's Office, that traced the assets of a convicted marijuana smuggler who for nearly 15 years had hid his assets through a myriad of nomine corporations, business dealings, and offshore bank accounts. Last year, this convicted smuggler forfeited $50 million to U.S. Customs. In November 1999, Commissioner Kelly shared $25 million of the seized money with the Monroe County, Florida Sheriff's Office.
Customs continues to lead the way in the coordination of undercover money laundering investigations. To that end, we have developed and implemented the Money Laundering Coordination Center which became operational in December 1999. This Center provides deconfliction support to all U.S. Customs undercover financial investigations. The Center also allows us to track and coordinate all of Customs' undercover actions in real time. This Center acts as a safety mechanism to ensure that we never have undercover agents unwittingly pursuing the same target or working at cross-purposes with other law enforcement agencies.
Additionally, Customs continues to seize large amounts of bulk outbound cash at our airports, seaports, and land borders. Over the past 4 years, we have seized in excess of $233 million in smuggled bulk cash.
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Mr. Chairman, we believe the sections of this legislation which will have the most significant impact upon Customs' enforcement operations can be found in the sections which deal with bulk cash smuggling and currency couriers.
As you can see from the photographs exhibited in the hearing room today and from my previous testimony, criminal organizations routinely collect sizeable amounts of cash derived from illegal activities and then attempt to smuggle these large cash shipments out of the United States.
U.S. Customs has discovered and seized bulk cash shipments in cars, boats, stereo equipment and in magic markers. Just 1 month ago, a violator attempted to smuggle a quarter million dollars wrapped in carbon paper and aluminum foil and concealed inside magic markers such as the one I am holding in my hand in an effort to thwart our inspection efforts. I have also provided a marker, and if you will just remove the tip of it, you can see that it is pretty simple. In this case, the violator concealed $3,200 in each one of these magic markers, and there were 77 magic markers for a total of $250,000.
The extent to which criminals will go is only limited to their imagination. For example, we have arrested numerous smugglers who have swallowed large quantities of cash. In two recent but separate cases, two female couriers were intercepted, one of whom ingested $22,200, while the second had ingested $12,500.
Mr. Chairman, on behalf of the dedicated men and women of the U.S. Customs Service who serve our country as the first line of defense, I wish to thank you and your subcommittee for all your support to law enforcement. I would also like to thank the subcommittee for the opportunity to comment on the Money Laundering Act of 2000 and commend you for your work in providing Customs and all Federal law enforcement agencies with the legislation necessary to more effectively fight global money laundering.
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[The prepared statement of Mr. Varrone follows:]
PREPARED STATEMENT OF JOHN C. VARRONE, EXECUTIVE DIRECTOR, DOMESTIC OPERATIONS EAST, OFFICE OF INVESTIGATIONS, UNITED STATES CUSTOMS SERVICE
Chairman McCollum, Members of the Sub-Committee, good afternoon. I am pleased to join my colleagues from the Department of Justice, Assistant Attorney General James Robinson and Assistant Chief Stefan Cassella to discuss our efforts in combating money laundering. I am especially pleased to have the opportunity to comment on The Money Laundering Act of 2000.
Mr. Chairman, in September 1999, the Department of the Treasury and the Department of Justice released the first National Money Laundering Strategy as Congress directed. The 1999 National Money Laundering Strategy set forth a series of action items designed to advance four fundamental goals in the fight against money laundering: strengthening domestic enforcement, enhancing the measures taken by banks and other financial institutions, building stronger partnerships with state and local governments, and bolstering international cooperation.
Since September, the Departments of Treasury and Justice have been working hard in a comprehensiveand cooperativeinteragency process to accomplish these goals. That interagency process is directed by Deputy Secretary Eizenstat and Deputy Attorney General Holder, and some of the results of this work should be apparent this later this month when the 2000 National Money Laundering Strategy is transmitted to Congress.
Page 53 PREV PAGE TOP OF DOC The 1999 National Money Laundering Strategy recognized that Federal law enforcement authorities could combat money laundering even more effectively if some loopholes and missing pieces that remain in our nation's counter-money laundering legal structure were repaired.
The 1999 Strategy announced the Administration's intention to submit this very bill, and Deputy Secretary Eizenstat and Deputy Attorney General Holder fulfilled that promise on November 10, 1999. The Money Laundering Act of 2000 is designed to enhance the ability of law enforcement to investigate and prosecute money laundering. The Department of the Treasury supports the Money Laundering Act of 2000, and will continue to work with this subcommittee and other members of Congress to seek the enactment of this bill.
The passage of this bill will greatly assist the Federal government and Treasury Department's ongoing efforts to combat money laundering in the U.S. and across the globe.
I would like to begin my testimony by providing you with an overview of Customs anti-money laundering efforts and then turn to the proposed legislation.
The Customs Service plays a critical role in the Federal government's efforts to combat money laundering and it provides key support to the National Money Laundering Strategy. In order to target the money launderers and the systems they employ, the United States Customs Service has been given a broad grant of authority in the conduct of international financial crime and money laundering investigations. This authority is primarily derived from the Bank Secrecy Act and the Money Laundering Control Acts of 1986 and 1988.
Page 54 PREV PAGE TOP OF DOC Customs has implemented an aggressive strategy to combat money laundering, and now dedicates in excess of 400 agents worldwide to money laundering investigations. Combined with our unique border search authority, Customs enforcement efforts focus on the most significant international criminal organizations whose corrupt influence often impacts global trade, as well as economic and financial systems. These efforts against money laundering are not limited to drug related money laundering, but to the proceeds of all crime laundered in a variety of ways. During Fiscal Years 1998 and 1999, our money laundering investigations resulted in the arrest of over 2,100 violators and the seizure of more than $600 million dollars.
International Criminal Organizations launder their ill gotten gains through a variety of different means, methods, and systems. These systems range from the very simple, such as bulk cash smuggling, to the most complex, such as the Black Market Peso Exchange. They are best attacked through a combination of inter related enforcement techniques which, when aligned, succeed in disrupting and dismantling the criminal enterprise's core function: the laundering and investments of the proceeds and profits of their illegal activity.
The Customs Service maintains a variety of enforcement tools to attack these money-laundering systems:
U.S. CUSTOMS UNDERCOVER INVESTIGATIONS
The U.S. Customs Service is a leader in combating money laundering through undercover operations. U.S. Customs undercover operations directed at money launderers have resulted in the seizure of approximately $1 billion dollars in cash and monetary instruments, over 2,000 arrests and the seizure of more than 37,000 kilograms of cocaine.
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Customs undercover operations first exposed the criminal money laundering activities of the Bank of Credit and Commerce International (BCCI).
As you know, in 1998, U.S. Customs announced the conclusion of Operation Casablanca, the largest, and most successful drug money laundering investigation in the history of U.S. law enforcement. This investigation resulted in the indictment and conviction of two Mexican banks on criminal money laundering charges and the civil money laundering plea of a third Mexican bank. We also seized over $100 million dollars in that case and have convicted more than 30 Mexican and Venezuelan bankers , along with their Cali and Juarez Cartel associates.
II. ASSET IDENTIFICATION AND REMOVAL GROUPS
In response to the threat and challenge of identifying criminal assets, Customs created the prototype Asset Identification and Removal Groups, or AIRGs, to target the assets of criminal organizations as early as possible within all of Customs' investigative areas. Currently Customs has trained and equipped 21 AIRGs, composed of Special Agents, Auditors, and forensic accountants.
It was the excellent work performed by our Asset Removal Group in South Florida that traced the assets of a convicted marijuana smuggler, who for nearly 15 years, had hidden his assets through a myriad of nominee corporations, business dealings, and off shore bank accounts. Despite his best efforts, the Asset Removal Group was able to trace the profits of his drug trade. Just last year, this convicted drug smuggler forfeited 50 million dollars to Customs, the largest single Customs Service and Treasury Department monetary seizure. The Monroe County (Florida) Sheriff's Office provided substantial assistance to the investigation and, based upon their contributions, last year, Commissioner Kelly shared 25 million dollars of the seized money with that department.
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As part of Customs' efforts to implement the 1999 National Money Laundering Strategy, these groups will be augmented this year to focus on the Black Market Peso Exchange. There will also be a Suspicious Activity and Review Unit within each group that will work to disseminate intelligence gathered from the SARs and distribute the information to our field agents.
III. THE MONEY LAUNDERING COORDINATION CENTER
The U.S. Customs Money Laundering Coordination Center, or MLCC, is now operational and will soon provide 24 hour deconfliction support to all U.S. Customs undercover financial investigations. By doing so, the MLCC acts as a safety mechanism so that all Customs undercover actions are tracked and coordinated in real time, thus ensuring that our numerous money laundering investigations don't conflict with one another and that undercover agents are not unknowingly pursuing the same target. The MLCC also analyzes information provided by these operations in order to more fully develop targets and expand investigations. We have invited all Federal law enforcement agencies that are conducting relevant investigations to participate in the MLCC.
As outlined in the National Money Laundering Strategy, the Money Laundering Coordination Center is also the repository for all U.S. Government information relating to the Black Market Peso Exchange. Information is gathered on, among other targets, money brokers, bank accounts, and trade data. The information is analyzed by Customs and targets, systems, and patterns are detected and sent to our field offices for further investigation.
Page 57 PREV PAGE TOP OF DOCCOMMENTS ON THE PROPOSED LEGISLATION
Mr. Chairman, members of the Committee, I am extremely grateful and pleased to have the opportunity to comment on The Money Laundering Act of 2000. There have been a number of committees in Congress that have worked with Customs, Treasury, and Justice in proposing legislation that enables us to continue the fight against money laundering. And I would like to thank you for those efforts.
As I have just outlined, Customs conducts a myriad of money laundering investigations, ranging from bulk cash smuggling cases to money remitters to the Black Market Peso Exchange. We believe all of the proposals encompassed in The Money Laundering Act of 2000 will have a dramatic and positive impact on the way money-laundering investigations are conducted by the U.S. Customs Service . Additionally, the Department of the Treasury supports the bill, which provides important new tools to all of its law enforcement bureaus, including the Customs Service, in the fight against money laundering.
Please allow me to comment on the most significant aspects of the legislation from a Customs perspective.
The portion of this bill that will have the most immediate impact upon Customs falls under Sections 22 and 23, which deal with Bulk Cash Smuggling and Currency Couriers. As the term ''bulk cash smuggling'' implies, criminal organizations collect sizable amounts of currency, derived from varied crimes, and then smuggle the cash in large shipments out of the United States. Over the past four years, the Customs Service has seized more than $233 million dollars in outbound currency seizures at our land borders, seaports and airports.
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There are a number of reasons for criminal organizations to smuggle cash. The first and most important, is to avoid the reporting requirements of the Bank Secrecy Act. Additionally, currency smuggling is used to evade filing Currency Transaction Reports which require the reporting of transactions greater than $10, 000 conducted in U.S. financial institutions.
The proposed Bulk Cash legislation takes the standard failure to report currency and monetary instruments offenses and adds the element of ''knowing concealment''. In this way, the government can focus on those who ''knowingly'' smuggle unreported cash. The forfeiture provisions in the bill are restructured to provide a clearer basis for determining what property is subject to forfeiture and more importantly adds a standard for determining a proportional forfeiture.
As members of the Committee are aware, the Customs Service leads the El Dorado Money Laundering Task Force in New York. El Dorado developed evidence that certain New York area money remitters and their agents were moving drug money to Colombia by breaking up large cash transactions to avoid BSA reporting requirements.
In response to this evidence, in August 1996, then Under Secretary of the Treasury Raymond Kelly issued a GTO that required 12 New York area money remitters and their approximately 1200 agents to report identifying information on all cash remittances of $750 or more to Colombia. The GTO was expanded several times, to include wire transfers to the Dominican Republic, before it expired in October 1997.
Page 59 PREV PAGE TOP OF DOC This series of GTOS had a significant impact on the flow of drug proceeds through the targeted remitters. Several of the remitters targeted under the GTOs stopped sending funds to Colombia altogether, while many others sent significantly lower amounts. The GTOs also forced the traffickers to resort to other, less effective and riskier tactics to move their money. In the first six months after the GTOs went into effect, Customs' currency seizures at East Coast port of entry increased approximately four hundred percent as traffickers were forced to move money in bulk.
The GTOs played an important role in severely disrupting a drug money laundering system. This legislation strengthens our ability to enforce the GTOs. At the same time the legislation enhances the penalties for violations of the GTOs, which are an important anti-money laundering tool.
Mr. Chairman, the Customs Service is pursuing aggressive investigative initiatives designed to target the Black Market Peso Exchange. Section 15 of the legislation will assist Customs in these initiatives by amending Title 18 USC 981(a) to better define the term ''money broker'' as a person who sells cash at a premium.
Finally, Mr. Chairman, the legislation expands the universe of Specified Unlawful Activities, which are the underlying violations for money laundering charges, to include falsely classifying goods and export control violations. These are important steps against those who illegally traffic in international arms sales and will provide Customs and other Federal agencies with the tools to remove the profit from this trade.
Mr. Chairman, I thank you for the opportunity to comment on The Money Laundering Act of 2000. I would like to thank you and commend you and the members of the Committee for your work in providing Customs and all Federal law enforcement agencies with the legislation necessary to more effectively fight global money laundering.
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Mr. CHABOT. Thank you very much, Mr. Varrone. We appreciate your testimony, and we appreciate the testimony from all the witnesses this morning. At this point, committee members will have an opportunity to question the witnesses for up to 5 minutes, and I will begin on behalf of Mr. McCollum.
Mr. Robinson, as you know, the administration's proposed Money Laundering Act of 1999 contains several asset forfeiture provisions. Some have argued that any new substantive changesI will speak up a little at this point, since the microphones have gone out. Some have argued that any new substantive changes or expansions in forfeiture authority should be put on hold pending passage of the asset forfeiture reform legislation. What is the Justice Department's position on the reform legislation pending in Congress? In particular, what is the Department's position on H.R. 1658, Chairman Hyde's Civil Asset Forfeiture Reform Act?
Mr. ROBINSON. Well, let me say that we have expressed some concerns about some of that legislation, but we have also been supportive of a number of the provisions, and we are happy, obviously, to continue to work with Congress on some of the civil reform proposals that have been made with regard to such issues as the burden of proof and the like. But we do not think that it would be appropriate to hold off on these important changes in the money laundering statutes to await these other provisions. I think that this one ought to proceed on its own merit.
So we think these particular provisions are very important, and we are obviously happy to continue to work with Congress on these other provisions as well, and we can obviously supply the subcommittee with a copy of the administration's statement which has been submitted on the Hyde bill. I do not know if Mr. Cassella has other comments.
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Mr. Cassella. Just to say, Mr. Chairman, that this is very much a money laundering bill. We are seeking here to attack the money laundering problem that I was describing. The procedural due process questions that are essential to H.R. 1658, of who should have the burden of proof, what should the standard of proof be, and how many days should one have in which to file a claimall of those important concerns are not a part of this at all. That is a piece of legislation that is moving on a separate track.
Here, we are attempting to attack a serious law enforcement problem that involves the movement of money. It is impossible to attack the movement of money without touching the money, and so necessarily there are forfeiture provisions here, but they are part and parcel of a substantive attack on a criminal problem that needs to be fixed, because we have, as Mr. Robinson said before, waiting for 14 years to update these statutes, and delay only works to the benefit of the money launderers and the drug dealers for whom they are working.
Mr. CHABOT. Thank you very much.
I have been advised by staff that we need to recess just for a moment or two while we try to fix the sound system.
Mr. CHABOT. We are going to reconvene and try again. I am going to end my questioning at this point so we can move along.
Page 62 PREV PAGE TOP OF DOC At this point, I will defer and recognize Mr. Scott, the gentleman from Virginia, for 5 minutes.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Robinson, following up on the forfeiture bill, who should have the burden of proof when the Government takes your property, getting it back?
Mr. ROBINSON. We think the notion of having the Government assume the burden is a reasonable proposal. We have indicated support for that general notion.
Mr. SCOTT. In the area of giving forfeiture for foreign crimes as a predicate, crime to forfeit property, how will you ensure due process to make sure that whatever the foreign predicate crime is is legitimate and that the information you have is legitimate? How does that process work?
Mr. ROBINSON. Well, it obviously has to be addressed on a case-by-case basis. I do not know if Stef has further particulars on the details.
Mr. CASSELLA. Congressman, if this proposal were to become law, there would be authority for the United States as plaintiff to file an action against property found in the United States that was the proceeds of one of the enumerated foreign crimes. Under the existing statutes, there is a procedure that applies to the seizure and the forfeiture of proceeds of domestic crimes and the same procedure and process would apply with respect to foreign crimes. If we had to get a seizure order from a judge or a magistrate, we would initiate a forfeiture action. It is governed by statute. The person whose property it is is entitled to notice both by publication and by personal service even if that person is abroad.
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In cases that we file today where claimants are abroad, we publish in overseas newspapers and seek to have the service provided for us by the law enforcement officials of the foreign country. That person has the right to file a claim within so many days, he has a right to a jury trial, and the case is then determined on the preponderance of the evidence standard by the trier of fact, whether it be a jury or by a judge.
Mr. SCOTT. The initial seizure, thoughhow would you get the right to freeze the bank account?
Mr. CASSELLA. There are two ways. One is without even the change in the law that is proposed in this legislation we can get a seizure warrant for a bank account from a judge or magistrate based on a probable cause showing in the same way we would get a search warrant in any other criminal case.
Under this legislation, there is an additional tool that is made available. There are cases where a foreign government makes an arrest of a citizen abroad, and that citizen turns out to have property linked to the crime located in the United States. The foreign government in that instance makes a request of the United States to freeze the assets of the arrested person for a period of 30 days.
Under this legislation, the United States district judge would have the authority to freeze that bank account for 30 days upon a showing by the government that the arrest has taken place and that there is reason to believe that the property in question is linked to the crime on which the arrest is based, and finally, that within 30 days, we will have the evidence in hand to move forward. If we do not get that evidence within the 30 days, and the judge does not extend the time period, then, of course, the freeze order would be lifted.
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Mr. SCOTT. To whom is the property forfeited in that case?
Mr. CASSELLA. If there is ultimately a forfeiture, we are talking about a forfeiture brought under U.S. law, so it is forfeited to the United States.
Mr. SCOTT. Based on a foreign crime.
Mr. CASSELLA. That is correct. And that is true today with respect to one particular species of foreign crime, and that is foreign drug trafficking. The legislation expands the list of foreign crimes, but it does not change the procedure. So the procedure for foreign drug crimes is already in place, and that is the forfeiture of the property to the United States, and then, pursuant to law, we are able to share the forfeited property with the foreign government that assisted in the law enforcement investigation or that made the request for the seizure in the first place.
Mr. SCOTT. Mr. Robinson, either you or Mr. Varrone mentioned the $25 million forfeiture that went to a local sheriff's office.
Mr. VARRONE. Yes, I mentioned it, Mr. Scott.
Mr. SCOTT. Can you comment on what effect that might have generally on the criminal justice system when local law enforcement departments have a financial interest in the outcome of a case?
Page 65 PREV PAGE TOP OF DOC Mr. VARRONE. I really cannot comment on how it is going to affect their local government or their policy procedures or their law enforcement efforts.
Mr. SCOTT. Well, just which cases they go afteryou had one where they could pick up $25 million, and others where they could not pick up any money. I believe there was a case in South Carolina where they ruled it unconstitutional for the traffic court judge to be paid based on a percentage of the fines, and having the presiding officer have a financial interest in the outcome of the case was a fundamental violation of due process.
Do you get into that same concept when you have a police department with a multi-million-dollar interest in the outcome of a case?
Mr. VARRONE. If I could just back up 1 second, in this particular case, it took 15 years for us to identify that money, so I do not think it was a motive on the police department's part that they were ''chasing the money,'' so to speak.
What I can say in a larger sense is that under the national strategy, the 1999 National Money Laundering Strategy that Treasury and DOJ have put forth, there is much more coordination with State and locals, and those activities are monitored much more closely.
Customs, in our leadership role, in our task forces, we have State and locals who participate with us. I do not think there is enough State law on money laundering that gives them that wide range of flexibility.
Mr. SCOTT. Just following up on that, it would not be a better criminal justice process for the money to be forfeited to the general treasury rather than to the law enforcement officials involved in the case?
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Mr. VARRONE. It is both first forfeited either to Justice or Treasury forfeiture fund, and then they make application depending on their percentage of involvement in each particular case, and then we make those decisions on how much their appropriate share would be.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. CHABOT. I thank the gentleman.
The gentleman from North Carolina is recognized for 5 minutes.
Mr. COBLE. Thank you, Mr. Chairman.
Gentlemen, it is good to have you all with us. I want to revisit the question that was put to you by the chairman when the PA system went haywire. There is a school of thought that suggests we should suspend any substantive changes regarding forfeiture authority until passage of present legislation pending.
Mr. Robinson, what is the Justice Department's position on the reform legislation pending in Congress, first, and in particular, what is the Department's position on Chairman Hyde's Civil Asset Forfeiture Reform Act, which I guess is languishing in the Senate now?
Mr. ROBINSON. I do not know if it is languishing or not; I think it is being worked on, and we are working with them on it
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Mr. COBLE. Yes. Strike ''languishing.'' I did not mean that literally.
Mr. ROBINSON. I understand. We have continued to work with Congress on these provisions, and we support some of the provisions and have concerns about others. We have obviously made detailed submissions in that regard, but we do think that it does not make sense to halt the process of making improvements in the money laundering statutes. Maybe one way to say it is that the perfect is the enemy of the good. We really do need these provisions to be enacted, and Stef made the point that every day we delay from expanding these statutes is making the lives of money launderers and criminals easier and beyond our reach.
So I think it is important to proceed on parallel tracks, but this track we think is particularly important given the kinds of issues that have been identified in the testimony here and have been recognized by the statements from the subcommittee.
Mr. COBLE. Mr. Cassella, in your written testimony, you indicated that when you all try to interrupt this scheme of money laundering and go after the money exchanger's U.S. bank account, the money exchanger, I think, to use your words, prefers having his cake and eating it too.
Elaborate in a little more detail what you mean by that.
Mr. CASSELLA. Certainly, Congressman. If we look again at the diagram, the first circle in the middle there, the U.S. bank account of the money exchange is where he would place the money that he has received from the drug trafficker by one of these methods. There are times when we will indict the money exchanger, but he remains abroad as a fugitive, but nevertheless we move to confiscate the contents of the bank account.
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Under present law, as a fugitive, he can flout the jurisdiction of the Federal court where the indictment is pending, that is, refuse to appear in the criminal case, and yet litigate the Government's effort to confiscate the money by proxy through his attorney in the civil case.
In a case in the Supreme Court a few years ago, Justice Kennedy expressed his view that it was unseemly to allow a fugitive to repose in Switzerland in that case while sending papers to the same court that he refused to appear in to answer the criminal charges and asking that those papers be considered. That is having your cake and eating it too.
Under our proposal, he would have to make a choice. If he wants to appear in the criminal case and answer the charges and be afforded all due process, he can do so, and then he can contest the civil case as well, or he can remain abroad as a fugitive until we apprehend him some daybut if he is going to do that, he is not going to be able to use the jurisdiction and the tools of the Federal court system.
Mr. COBLE. Thank you, sir.
Thank you, gentlemen. Thank you, Mr. Chairman.
Mr. CHABOT. Thank you, Mr. Coble.
If there are no further questions, we are finished with this panel. We appreciate very much your testimony here this afternoon, and we will now move on to the second and final panel.
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Thank you all, and we apologize for the system going crazy there for a moment.
Mr. ROBINSON. That is quite all right.
Thank you very much.
Mr. CHABOT. I will call the members of the second panel forward as we make the introductions.
We are pleased to introduce the first member of the panel, John J. Byrne, who serves as senior counsel and compliance manager at the Regulatory and Trust Affairs Section of the American Bankers Association, the ABA, Government Relations Division. He is responsible for the ABA's lobbying, regulatory and educational efforts on money laundering, asset forfeiture, computer security, and white collar crime. Mr. Byrne is a member of the Treasury Department's Bank Secrecy Act Advisory Board and serves as co-chair of the ABA's Money Laundering Subcommittee.
We are very pleased to have you here this afternoon, Mr. Byrne.
Our next witness will be Mr. William Bruton, a certified fraud examiner at the Atlanta firm of Kroll Lindquist Avey. Mr. Bruton served as a special agent supervisor with the IRS Criminal Investigation Division for 26 years, where he specialized in the international investigation of money laundering fraud and criminal tax cases. While at the IRS, he also managed an investigation of the Colombia black market peso exchange system.
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We welcome Mr. Bruton.
Our third witness will be Ian M. Comisky, a partner with the law firm of Blank Rome Comisky & McCauley, which practices in the area of white collar criminal defense and commercial litigation. Mr. Comisky specializes in criminal tax investigations in litigation. Before beginning his defense practice, Mr. Comisky served as an Assistant U.S. Attorney in the Southern District of Florida and as assistant district attorney in Philadelphia.
We welcome you, Mr. Comisky.
Our final witness this afternoon will be Mr. David B. Smith, a partner with the law firm of English & Smith. Mr. Smith specializes in Federal criminal defense, RICO litigation, and forfeiture procedures and is the author of a leading treatise on the law of asset forfeiture. He is a former assistant director of the Asset Forfeiture Office, Criminal Division, of the Justice Department. In addition to private practice, Mr. Smith currently serves as co-chairman of the National Association of Criminal Defense Lawyers Forfeiture Abuse Task Force.
Again, we welcome all four of the witnesses and look forward to hearing your testimony here this afternoon. We would request again that you try to keep within the 5-minute time frame if at all possible so there will be time for us to ask questions.
We will begin with Mr. Byrne.
STATEMENT OF JOHN J. BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, AMERICAN BANKERS ASSOCIATION, WASHINGTON, DC
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Mr. BYRNE. Thank you, Mr. Chairman and members of the subcommittee.
I am here today to present the views of the ABA on the broad issue of money laundering prevention and specifically, the Money Laundering Act of 2000.
The banking industry has a long history of support for Government efforts directed at money laundering prevention, but we have also frequently raised concerns about the various mandates crafted to address that worthy goal. You have asked for our views on the administration's proposal, and before I talk briefly about some of those concerns, I would like to present some general comments regarding how the industry views the 15-year anti-money laundering efforts through the current statutory and regulatory structures.
I will say as an aside that we were pleased to work with Chairman McCollum back in the mid-eighties on the creation of the Money Laundering Enforcement Act of 1986 and subsequent changes to the laws that we thought were important then and we think are important now.
In my statement today, I will cover the following three areas: the critical need for requiring all financial service providers to report possible violations of law; the importance of reforming the civil asset forfeiture laws before passing any new forfeiture provisions; and ensuring that enhancing prosecutorial tools for money laundering by foreign entities does not result in retribution against domestic financial institutions or the creation of extensive new burdens on our industry.
Page 72 PREV PAGE TOP OF DOC As I said, we have participated in every congressional debate regarding the subject of money laundering since 1985. Since that time, the banking industry has made money laundering awareness and prevention a key element in employee training and education for all banks, and we are proud of the fact that bankers have assisted law enforcement in many successful prosecutions of money laundering violations.
It should also be emphasized, however, that the banking industry remains virtually alone in the private sector as partners in this effort because of the woeful lack of requirements on other financial service providers to prevent and report possible violations of law. The ABA is skeptical of the value of enacting new laws and regulations affecting the banking industry as long as there remains this regulatory chasm between banks and everyone else.
Again as an aside, it was encouraging to see the administration in their strategy statement of September list as one of their goals the need to assure that all types of financial institutions are subjected to effective Bank Secrecy Act requirements. We have been waiting for this level playing field for years.
This is not just a problem for banks. Money launderers know the holes in the system and are certainly using non-banks for their criminal activities, as we heard from the earlier panel.
Mr. Chairman, the ABA has also been a strong supporter of utilizing the civil and criminal forfeiture laws as deterrents to crime. Once again, the forfeiture laws are yet another example of well-intended laws that sometimes have negative and harmful effects on legitimate commerce. ABA and many other business organizations have lent their support to H.R. 1658, a bill that would for the first time place the burden of proof in a civil forfeiture case on the Government instead of the individual or company. That measure has overwhelmingly passed the House and is now being considered in the Senate. We support a similar measure, S. 1931, which is also receiving extensive backing by the business community.
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The financial services industry has long sought improvements to the forfeiture process where innocent owners or leinholders are harmed by a system that delays justice and unfairly increases costs. As Chairman McCollum has said in the past, we need to balance reforms on one hand with consideration of the ''rights of innocent third parties and principles of due process'' on the other.
We are hopeful that a reform bill can pass this year, due to the areas of agreement from both proponents of the House bill and the administration. It has been especially encouraging that the Department of Justice has stated its support for changing the burden of proof and a uniform innocent owner defense. ABA urges all sides to work together to move a bill this year, and we will be happy to assist in this endeavor in a useful and productive manner.
Let me now turn to our general comments on the administration's money laundering proposal.
First, we would like to commend the administration for many of the elements contained in its September 1999 strategy relating to the need for cooperation with the private sector. As an original and current member of the Treasury Department's Bank Secrecy Advisory Group, I know first-hand the value of working with the Government on issues of common ground.
For example, there is an ongoing effort to develop new ways of providing feedback to the industry on the results of the suspicious activity reporting process. Feedback will enable us to better train our employees on how to report criminal activity that assists in prosecuting criminals and further protecting customer privacy.
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The 1999 draft of the proposal is designed to ''address the international laundering of criminal proceeds'' and to grant prosecutors added tools to use against foreign criminals. We share those goals, but we have concerns that U.S. banks may be subject to retaliation by foreign jurisdictions where we are engaged in business.
In addition, the industry has expressed fears that the expansion of the list of ''specified unlawful activities'' which constitute the predicate offenses for money laundering may place an untenable burden on U.S. banks to have to understand the nuances of foreign laws. We hope that as Congress considers this bill, these questions can be resolved.
Finally, just a couple of brief comments about several sections. Section 3 of the bill clarifies the knowledge requirement for prosecutors so that it is sufficient to prove the operation of an illegal money transmitting business by showing that the defendant knew the money transmitter was unlicensed and that a license was required by State law. We think this is a useful change and may help stem the increase in money laundering by illegal money transmitters.
Section 8 of the bill, which expands the list of foreign crimes, as we talked about with the earlier panel, the Justice Department has strongly supported. While it is true that there are already several foreign offenses which are predicates for money laundering, the addition of some new crimes presents some challenges. Let me just add one challenge. We are not suggesting that a bank might not be willing to report a crime about which it has direct knowledge to our Government. Instead, we are concerned about examples like capital flightthe situation where someone in a foreign country, because they are concerned about their economy basically going south, and they want to transfer that money to a U.S. institution. That could be a violation of foreign law and thus a predicate offense under our laws. We just want issues like that clarified, and we would certainly be happy to work with the committee to do that.
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Finally, Mr. Chairman, because it was mentioned earlier, I just want to say that section 22, which changes 31 USC 5331 to create a new bulk cash smuggling offense, makes a lot of sense. It is in a separate bill by Chairwoman Roukema of the Banking Committee, and we think that that should also be adopted but again suggest only after reform of the civil asset forfeiture laws that we mentioned before.
Thank you for your time.
Mr. CHABOT. Thank you very much, Mr. Byrne.
[The prepared statement of Mr. Byrne follows:]
PREPARED STATEMENT OF JOHN J. BYRNE, SENIOR COUNSEL AND COMPLIANCE MANAGER, AMERICAN BANKERS ASSOCIATION, WASHINGTON, DC
The banking industry has a long history of support for government efforts directed at money laundering prevention, but we have also frequently raised concerns about the various mandates crafted to address that worthy goal. We offer some brief comments on the Administration's initiative, and how the industry views the 15-year anti-money laundering efforts through the current statutory and regulatory structures.
The written statement covers the following three areas:
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The critical need for requiring all financial service providers to report possible violations of law;
The importance of reforming the civil asset forfeiture laws before passing ANY new forfeiture provisions; and
Ensuring that enhancing prosecutorial tools for money laundering by foreign entities does not result in retribution against domestic financial institutions or the creation of extensive new burdens on our industry.
The banking industry remains virtually alone in the private sector as partners in the anti-money laundering effort because of the woeful lack of requirements on other financial service providers to prevent and report possible violations of law. The ABA is skeptical of the value of enacting new laws and regulations affecting the banking industry as long as there remains this regulatory ''chasm'' between banks and everyone else. This is not just a problem for banks; money launderers know the ''holes'' in the system and are certainly using non-banks for their criminal activities.
ABA, and many other business organizations, have lent their support to H.R. 1658, a bill that would, for the first time, place the burden of proof in a civil forfeiture case on the government instead of the individual or company. That measure has overwhelmingly passed the House and is now being considered in the Senate. (We support a similar measure, S. 1931 that is also receiving extensive backing by the business community)
Page 77 PREV PAGE TOP OF DOC We are hopeful that a civil asset forfeiture reform bill can pass this year, due to the areas of agreement from both proponents of the House bill and the Administration. It has been especially encouraging that the Department of Justice has stated its support for changing the burden of proof and a uniform innocent owner defense. ABA urges all sides to work together to move a bill this year, and we will be happy to assist in that endeavor in a useful and productive manner.
It is important, Mr. Chairman, that, in order to achieve this goal, Congress not enact any other laws modifying the forfeiture laws until the necessary reforms are made. There are a number of amendments to the forfeiture laws included in the Money Laundering Act of 2000. These provisions, no matter how laudable, should not be permitted to move through the Congress until such time as there is an agreement on civil asset forfeiture reform. We believe this can occur during this session.
The 1999 draft of the proposal is designed to ''address the international laundering of criminal proceeds'' and to grant prosecutors added tools to use against foreign criminals. Mr. Chairman, we share those goals, but we have concerns that U.S. banks may be subject to retaliation by foreign jurisdictions where we are engaged in business. In addition, the industry has expressed fears that the expansion of the list of ''specified unlawful activities'' which constitute the predicate offenses for money laundering may place an untenable burden on U.S. banks to have to understand the nuances of foreign laws. We hope that, as the Congress considers this bill, these questions can be resolved.
The Justice Department has voiced strong support for expanding the list of foreign crimes for which money laundering prosecutions may be brought. While it is true that there are already several foreign offenses that are predicates for money laundering, the addition of some of the new crimes presents new challenges to the U.S. banking industry.
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For example, the addition of fraud against a foreign government may force a financial institution to have to be aware of what constitutes a violation of foreign law that is not a crime in our country. We are not suggesting that a bank might be unwilling to report a crime about which it has direct knowledge to our government. Instead, we are concerned about instances of ''capital flight'' whereby a foreign customer is simply moving his or her funds to a U.S. institution because of fear of economic or political instability. If moving those funds is a ''crime'' in the host country, we could be liable for failure to report such a transaction and if we are required to report this legitimate activity, we run the very real risk of losing customers who are not criminals to institutions outside of the United States.
Finally, in order to protect financial institutions from hiring individuals that have already committed fraud against another institution, we urge the Congress to consider a change that grants liability protection for assisting other institutions. Financial institutions need this liability protection to improve the tools at their disposal for ensuring the safety and soundness of our financial industry. It should be noted that the Senate is currently considering a bill with a similar provision (S. 1663) and the House Banking Committee Chairman has that section included in H.R. 2986.
Mr. Chairman and members of the Subcommittee, I am John Byrne, Senior Counsel and Compliance Manager, with the American Bankers Association, Washington, D.C. I am pleased to be here today to present the views of ABA on the broad issue of money laundering prevention and the ''Money Laundering Act of 2000.'' We want to salute you, Mr. Chairman, for your continuing efforts to combat money laundering.
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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 bank trade association in the country.
Mr. Chairman, the banking industry has a long history of support for government efforts directed at money laundering prevention, but we have also frequently raised concerns about the various mandates crafted to address that worthy goal. You have asked for our views regarding the Administration's proposal. Before we offer some brief comments on that initiative, I would like to present some general comments regarding how the industry views the 15 year anti-money laundering efforts through the current statutory and regulatory structures.
Therefore, in my statement today, I will cover the following three areas:
The critical need for requiring all financial service providers to report possible violations of law;
The importance of reforming the civil asset forfeiture laws before passing ANY new forfeiture provisions; and
Ensuring that enhancing prosecutorial tools for money laundering by foreign entities does not result in retribution against domestic financial institutions or the creation of extensive new burdens on our industry.
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Money Laundering Prevention and the Bank Secrecy Act
Mr. Chairman, the American Bankers Association has participated in every congressional debate regarding the subject of money laundering since 1985. In fact, the ABA was privileged to work with you and your staff when the original crime of money laundering was created in 1986.(see footnote 1) Since that time, the banking industry has made money laundering awareness and prevention a key element in employee training and education for all banks, and we are proud of the fact that bankers have assisted law enforcement in many successful prosecutions of money laundering violations. It should also be emphasized, however, that the banking industry remains virtually alone in the private sector as partners in this effort because of the woeful lack of requirements on other financial service providers to prevent and report possible violations of law. The ABA is skeptical of the value of enacting new laws and regulations affecting the banking industry as long as there remains this regulatory ''chasm'' between banks and everyone else.(see footnote 2) This is not just a problem for banks; money launderers know the ''holes'' in the system and are certainly using non-banks for their criminal activities.
In addition to the criminal statutes covering money laundering, the banking industry has had to comply with the Bank Secrecy Act (BSA). This law, enacted in 1970 (PL 91508), was created ''to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.'' The BSA is a reporting and recordkeeping mandate that, in general, requires the filing of currency transaction reports (CTRs) for cash transactions over $10,000. This statute has been costly for the industry to implement, but we acknowledge that it has achieved some success in the money laundering prevention area. Whether or not the benefits have been worth the resource allocation is an issue that should continue to be addressed.
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In 1993, Mr. Chairman, I authored a law review article on the subject of BSA burdens on our industry and their relative lack of utility. I pointed out that the BSA regulations have not always been consistent with the 1970 goals mentioned above, and that subsequent changes to the Act ''have resulted in a patchwork of regulations and laws that have saddled financial institutions with many responsibilities'' that have ''never been subject to any thorough analysis of whether they have (or will) fulfill the intended purpose of the BSA.''(see footnote 3)
Congress and the agencies also believed there was a need to change how cash transactions were filed and as a result passed the 1994 Money Laundering Suppression Act. This law received widespread support, in part, because of the Congressional concern that routine CTRs ''are expensive for financial institutions to file and for the Treasury to process, and [they] impede law enforcement by cluttering Treasury's CTR database.''(see footnote 4) We appreciated your efforts then, and we are pleased with the forum you are providing now, to continue the debate on the laws affecting money laundering issues.
The 1994 statutory changes to the CTR reporting system were finally implemented by Treasury's Financial Crimes Enforcement Network (FinCEN) in 1998, and financial institutions may now reduce, to a one-time filing, cash reports of many retailers, governmental agencies and other legitimate entities. FinCEN deserves much credit for actively seeking industry input while trying to improve an old and cumbersome system. Since banks file millions of routine CTRs each year, a mandate to reduce those filings was indeed welcome. While this revised system is still relatively new, unfortunately the number of CTR filings is not dropping as dramatically as both the industry and the government had hoped. If the filings remain at these very high levels, the usefulness of cash reporting for law enforcement purposes will continue to be called into question. ABA will continue to urge our members to take advantage of the new system but this is an area that bears watching. If there is no change, ABA would recommend that after a reasonable period of time additional changes to the filing of routine CTRs should be considered, such as increasing the threshold for reporting. (see footnote 5)
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The high volume of CTR reports is another area that should receive attention prior to enacting any additional money laundering related laws.
Finally, ABA asks that Congress revisit another BSA-related mandate. In 1990, the Treasury Department required financial institutions to maintain a centralized chronological ''log'' of all sales of certain monetary instruments purchased with over $3000 in cash. These instruments, (cashier's checks, traveler's checks or money orders) had been characterized by law enforcement as tools to move illegal monies through the banking system.
Since law enforcement failed to request copies of those logs for several years, the banking industry requested a change in this recordkeeping mandate. Treasury agreed and eliminated the log requirement in 1994 by allowing banks to retain the statutorily required information in any format as long as it was accessible within a reasonable period of time. The banking industry applauded the move in concept, but because the information was still required by law, many institutions have retained a monetary instrument log as the only practical method of compliance. This is an unacceptable burden to the industry and runs contrary to the intent of the Treasury Department.
To remedy this inequity, we recommend an amendment to the original statute that completes the 1994 effort by Treasury to both streamline Bank Secrecy Act recordkeeping requirements and ''increase the effectiveness of institutions operating under the BSA to detect and report actual or potential money laundering.''(see footnote 6)Under our proposal, financial institutions would still be required to verify the identity of the customer or noncustomer purchasing the monetary instrument and report possible criminal activity engaged in by those individuals. However, instead of retaining all of the information on the purchase of the monetary instrument, financial institutions would be required to simply maintain a copy of the instrument purchased for the 5-year retention period under the Bank Secrecy Act. Verification of accountholders would be the same as today, that is by looking at the signature card. Nonaccountholder purchases would need a record of the identification verification, as the Treasury now requires. Therefore, banks would need additional information for nonaccountholders sales but would only have to keep copies of the instrument for account-holders.
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This change can be accomplished by amending 31 USC 5325 (a)(1)(B) to read:
31 USC 5323 Identification Required to Purchase Certain Monetary Instruments
(a) In General.No financial institution may issue or sell a bank check, cashier's check, traveler's check, or money order to any individual in connection with a transaction or group of such contemporaneous transactions which involves United States coins or currency (or such other monetary instruments as the secretary may prescribe) in amounts or denominations of $3000 or more unless
(1) the individual has a transaction account with such financial institution and the financial institution
(A) verifies that fact through a signature card or other information maintained by such institution in connection with the account of such individual ; and
(B) retains a copy of the monetary instrument sold.
Mr. Chairman, this change will result in a cost savings to the industry but, more importantly, will eliminate a requirement that neither the industry nor the government believes has any utility.
The Need for Civil Asset Forfeiture Reform
Page 84 PREV PAGE TOP OF DOC Mr. Chairman, the American Bankers Association has also been a strong supporter of utilizing the civil and criminal forfeiture laws as deterrents to crime. Once again, the forfeiture laws are yet another example of well-intended laws having negative and harmful effects on legitimate commerce. ABA, and many other business organizations, have lent their support to H.R. 1658, a bill that would, for the first time, place the burden of proof in a civil forfeiture case on the government instead of the individual or company. That measure has overwhelmingly passed the House and is now being considered in the Senate. (We support a similar measure, S. 1931 that is also receiving extensive backing by the business community)
The financial services industry has long sought improvements to the forfeiture process where ''innocent owners or lienholders'' are harmed by a system that delay justice and unfairly increases costs. As you have pointed out, Mr. Chairman, we need to balance reforms on the one hand, with consideration of the ''rights of innocent third-parties and principles of due process'' on the other.
We are hopeful that a reform bill can pass this year, due to the areas of agreement from both proponents of the House bill and the Administration. It has been especially encouraging that the Department of Justice has stated its support for changing the burden of proof and a uniform innocent owner defense. ABA urges all sides to work together to move a bill this year, and we will be happy to assist in that endeavor in a useful and productive manner.
It is important, Mr. Chairman, that, in order to achieve this goal, Congress not enact any other laws modifying the forfeiture laws until the necessary reforms are made. There are a number of amendments to the forfeiture laws included in the Money Laundering Act of 2000. These provisions, no matter how laudable, should not be permitted to move through the Congress until such time as there is an agreement on civil asset forfeiture reform. We believe this can occur during this session.
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The Money Laundering Act of 2000
Let me now turn to our general comments on the Administration's anti-money laundering proposal. First, we would like to commend the Administration for many of the elements contained in its September 1999 Strategy relating to the need for cooperation with the private sector. As an original and current member of the Treasury Department's BSA Advisory Group, I know first hand the value of working with the government on issues of common ground. For example, there is an ongoing effort to develop new ways of providing feedback to the industry on the results of the Suspicious Activity Reporting process. Feedback will enable us to better train our employees on how to report criminal activity that assist in prosecuting criminals and further protecting customer privacy. We hope that not only will we be able to work with you, Mr. Chairman, on this and any other money laundering related proposals, but that the Administration will continue to recognize the value of having input on operational and other effects that any new proposal may have on our industry.
The 1999 draft of the proposal is designed to ''address the international laundering of criminal proceeds'' and to grant prosecutors added tools to use against foreign criminals. Mr. Chairman, we share those goals, but we have concerns that U.S. banks may be subject to retaliation by foreign jurisdictions where we are engaged in business. In addition, the industry has expressed fears that the expansion of the list of ''specified unlawful activities'' which constitute the predicate offenses for money laundering may place an untenable burden on U.S. banks to have to understand the nuances of foreign laws. We hope that, as the Congress considers this bill, these questions can be resolved.
Page 86 PREV PAGE TOP OF DOC The following are comments on specific portions of the bill:
This section clarifies the knowledge requirement for prosecutors so that it is sufficient to prove the operation of an illegal money transmitting business by showing that the defendant knew that the money transmitter was unlicensed and that a license was required by state law. We think this is a useful change and may help stem the increase in money laundering by illegal money transmitters.
These sectionswhich grant access to U.S. officials of records in bank secrecy jurisdictions, create a ''long-arm statute'' for foreign money launderers and make it a crime to launder money through foreign banks are all worthy and important law enforcement goals. As we stated above, the industry is concerned about retaliation against our banks in those countries and simply asks for a thorough discussion of this matter. It would be helpful to know the views of the State Department. We respectfully urge the Congress to clarify this question.
The Justice Department has voiced strong support for expanding the list of foreign crimes for which money laundering prosecutions may be brought. While it is true that there are already several foreign offenses that are predicates for money laundering, the addition of some of the new crimes presents new challenges to the U.S. banking industry. For example, the addition of fraud against a foreign government may force a financial institution to have to be aware of what constitutes a violation of foreign law that is not a crime in our country. We are not suggesting that a bank might be unwilling to report a crime about which it has direct knowledge to our government. Instead, we are concerned about instances of ''capital flight'' whereby a foreign customer is simply moving his or her funds to a U.S. institution because of fear of economic or political instability. If moving those funds is a ''crime'' in the host country, we could be liable for failure to report such a transaction and if we are required to report this legitimate activity, we run the very real risk of losing customers who are not criminals to institutions outside of the United States.
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Mr. Chairman, ABA is opposed to any changes that place our industry in this untenable situation.
The Administration is also seeking a change to 31 USC 5331 creating a new bulk cash smuggling offense. This change, also in Rep. Roukema's H.R. 240, gives the government another strong weapon against smugglers and should be adopted, but only after the reform of the civil asset forfeiture laws that we have mentioned above.
As Congress grapples with these issues, ABA would ask that you consider an additional proposal. Another related issue is the inability of banks to disclose the fact that former employees were terminated for committing fraud against an institution. Insider abuse and bank frauds have been the focus of industry and governmental concern for many years. Fraud losses are in the billions of dollars, and banks have stepped up their efforts to report possible crimes, improve investigative techniques and create fraud deterrence programs. Congress has increased the penalties for fraud and for hiring individuals that have been convicted of crimes against financial institutions.
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 lawsuit. Several states (eleven, at last count) 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]
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In order to protect financial institutions from hiring individuals that have already committed fraud against another institution, we urge the Congress to consider a change that grants liability protection for assisting other institutions. Financial institutions need this liability protection to improve the tools at their disposal for ensuring the safety and soundness of our financial industry. It should be noted that the Senate is currently considering a bill with a similar provision (S. 1663) and the House Banking Committee Chairman has that section included in H.R. 2896.
Mr. Chairman, as more and more requirements are placed on the banking industry, we need strong protection against potential problemsthis section would accomplish that.
The American Bankers Association appreciates the opportunity to discuss these issues and we welcome being part of this important debate. We look forward to continuing to work with you and your staff. I would be happy to answer any questions.
Mr. CHABOT. Mr. Bruton, you are next on the list.
STATEMENT OF WILLIAM BRUTON, CERTIFIED FRAUD EXAMINER, KROLL LINDQUIST AVEY COMPANY, ATLANTA, GA
Mr. BRUTON. Mr. Chairman, thank you very much for giving me the opportunity to talk about my experiences for the past 11 years with the black market peso exchange system.
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These investigations started during the tenure of Bob Barr as United States Attorney for Atlanta. When the investigation was started, it was captioned as ''Operation Polar Cap.'' The investigation was supervised by myself, Albert ''Skip'' Latson, with the Drug Enforcement Administration, and Wilmer Buddy Parker, Assistant United States Attorney. As the honorable Bob Barr may recall, at the end of this investigation, we froze approximately 750 bank accounts nationwide, holding approximately $10 million. We soon learned that the majority of not all of these accounts claimed the status of innocent owner. They claimed that they purchased these dollars, deposited to their accounts, and did not know that they were proceeds of drug trafficking activities.
It might be helpful, even though Stef Cassella has already reviewed the black market peso system, to give you a little insight that I gleaned which is very similar to his.
I have placed a chart to your right entitled ''Emerging Money Laundering Systems.'' A simple explanation of the peso exchange system might be defined as System A, dollars, and System B, pesos.
In the lower left-hand corner, the drug dealer starts the process by shipping his drugs to the United States. He then converts it or trades the drugs for currency, and it stays in a stash house.
At about the same time, in the lower, again the peso system, the person in the center is the money laundering currency exchanger. He is approached by a businessperson in Colombia who has a need for dollars in the United States. Because of the historical prohibition against having dollar accounts by the Colombian Government, he is required either to go through the central bank or to go through the currency exchanger. Because of the economics of this situation and sometimes the lack of the central bank having dollars, he goes to the currency exchanger. The currency exchanger then by cell phone or beeper contacts and buys the dollars in the United States.
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The businessman then tells the currency exchanger to which account and in what form he wants the dollars to be deposited. The reason he wants the dollars is because he wants a commodity shipped from the United States that he can either smuggle into Colombia or import legally.
If we follow the trail as a law enforcement officer would see it and as my experience has shown me, we only see the dollar or A Systemwe see the drugs coming in, the dollars converted to a stash house, and the dollars then transferred to U.S. business and a commodity sent out. If we follow the trail of money, we follow the money to a U.S. business; we do not see the underlying peso exchange in South America.
From the early days, the Atlanta IRS and DEA conducted many international undercover investigations of domestic and international money laundering groups. All of these investigations had one thing in common, and that was the black market peso system.
I call it a ''system'' because it is actually a system of exchanging currency, a System A and a System B. Skip Latson DEA and I, along with Larry Anderson, Assistant U.S. Attorney in Atlanta, have operated an undercover bank and an undercover stock brokerage firm. The undercover bank called Operation Dinero operated in Atlanta with the cooperation of the British, Italian, and Spanish governments. This bank and its undercover representatives and informants offered to the Colombian drug cartel leaders the service of hiding their narcotics money and attempting to provide financial services for them through the undercover bank.
We had the opportunity to see first-hand some of the inner workings of the black market peso exchange system and why it was of such value to them. During these meetings, we were offered $300 million in bonds and other assets.
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During Operation June, a recently concluded operation, operated as an undercover stock brokerage firm, we were offered the opportunity to invest in computer products that were to be sold in Bogota. If we had accepted this offer, we would have been shown to U.S. businesses in the United States that would have accepted cash and then would ship these electronics to Bogota. We were assured that we could have our representative in Colombia receive pesos within 10 days of delivering the dollars.
An interesting note was the fact that we were told where we could receive our cash, from a very prominent business located in Colombia. When I mentioned this to a newly-arrived DEA agent from Bogota, he laughed and said the Embassy purchases their computer products from the same outlet because they are so cheap.
Any strategy used to assist Federal law enforcement and field law enforcement and attorneys in fighting the war on drugs must be viewed as a chess game in order to move forward. During the early seventies in South Florida, the Federal Reserve, investigators and prosecutors saw banks that were accepting boxes full of currency and gladly accepting this cash on deposit. Congress then countered that move and instituted a Currency Transaction Reporting form, or CTR, and the Government educated banks as to its purpose in following the process with prosecutions. Narcotics traffickers countered that move with moving to using businesses to launder their proceeds, these businesses being on a bank exempt list.
Congress then enacted the 8300 Form, and Government agencies educated businesses on its purpose and use, and then prosecutions followed.
Page 92 PREV PAGE TOP OF DOC Narcotics traffickers then moved to nonfinancial institutions, transferring money via wire remitters to Mexico and Colombia. The Secretary of Treasury then implemented a General Targeting Order in New York. Narcotics traffickers were now moving to other systems.
During the past 15 years, narcotics traffickers have been moving toward, increasing their use of, the black market peso exchange system. I am very happy to see that this law will move toward countering narcotics use of this system. This system not only assists narcotics traffickers with repatriation of their wealth but also devastates the market economy of the people and businesses using the cheap dollar-peso exchange to conduct private enterprise in Colombia.
I would encourage a ''sense of the House'' that the branches of Government that will enforce these sanctions educate private industry as to their due diligence requirement, making sure that they are not subject to receiving funds purchased through the black market peso exchange system.
Several years ago, Ms. Doe testified before the Subcommittee on General Oversight and Investigation and listed several prominent Fortune 500 businesses to which she had sent money to purchase goods through the black market peso exchange system. I have attempted on at least two occasions to try to convince a branch of Government to educate U.S. businesses but was not successful in getting this type of education done.
The education before enforcement is as important as a passage of the law itself. I feel this law is critical if we are to continue in the chess moves against narcotics traffickers, for they have agility and speed, and a highly educated staff of financial advisers assisting them in moving their drug wealth from the place of origin back to their banks to assist them in enhancing their life styles.
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During one undercover meeting, we asked a narcotics trafficker in South American how much money he had made the year before. He said he personally made $500 million in the United States and his extended family had earned an additional $500 million.
Narcotics traffickers are getting older and are concerned with estate planning and how they can become part of the country club set and spend their ill-gotten gains into retirement. The black market peso exchange system affords them the opportunity to show that they did not get their money from drug trafficking or from the sale of electronics or other consumer goods purchased through the black market peso exchange system. The funds processed this way are almost untraceable by the Colombian Government.
The black market peso exchange system has for years frustrated law enforcement. If we spend months tracing the drugs to money and the money to a bank account, we are then faced with the ''innocent owner'' defense. If we try to resolve the issue of knowledge of the ''innocent owner'' and his offshore accounts in bank secrecy countries, we are stopped by the secrecy defense.
In various undercover activities, we have been asked to receive proceeds of crime from around the world for deposit into a U.S. bank account, but have been stopped because we could not ''fit'' it into one of the existing specified unlawful activities. This bill will go a long way toward resolving many of the problems we have faced in the past.
In closing, I would like to restate that I fully support this bill, and I thank you very much for the opportunity to appear before you today.
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Mr. CHABOT. Thank you very much, Mr. Bruton.
[The prepared statement of Mr. Bruton follows:]
PREPARED STATEMENT OF WILLIAM BRUTON, CERTIFIED FRAUD EXAMINER, KROLL LINDQUIST AVEY COMPANY, ATLANTA, GA
ISSUE: MONEY LAUNDERING
Mr. Chairman, my name is William Bruton. It is a pleasure for me to be here today speaking before this subcommittee about my experiences with the Black Market Peso Exchange System. I recently retired in July 1999 after 26 years with the Criminal Investigation Division Internal Revenue Service. During the past 11 years, I have spent the majority of my time managing a group of agents investigating, in part, the Colombian Black Market Peso Exchange System. The investigations started during the tenure of Bob Barr, at that time the United States Attorney in Atlanta GA. The investigation that started was captioned ''Operation Polar Cap''. This investigation was supervised by myself, Albert ''Skip'' Latson, Drug Enforcement Administration and Wilmer Buddy Parker, Assistant United States Attorney. As the Honorable Bob Barr may recall, at end of this investigation, we froze approximately 750 bank accounts nationwide, holding over 10 million dollars. We soon learned that the majority, if not all of these account owners, claimed the status of innocent owner. They claimed that they purchased these dollars, deposited to their accounts, and did not know that they were proceeds of drug trafficking activities.
It might be helpful to review this system of money laundering in order to show why this system is so sinister and harmful, not only helping to repatriate the profits to the drug dealers but how it subverts a foreign government's ability to control the basic products of its economy. The Black Market Peso System starts by the shipment of drugs from Colombia to the shores of the US. The drugs are sold for dollars in the US. Over the years the Colombian government would not allow any citizen to have a domestic US dollar account so the drug trafficker needs Pesos in Colombia to pay for the manufacture of more drugs and to pay for his life style enhancements. Legitimate business persons need dollars in the US to purchase products for resale in Colombia. The drug dealer contacts a black market ''currency exchanger'' and offers to sell him $500,000 in US currency in a US city. A code and cell number is given the currency exchanger to call and arrange to pick up the money. In some cases, the currency exchanger may charge as high as 20% discount fee to the drug dealer.
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A legitimate business person in Colombia goes to see the currency exchanger telling them that he needs to pay for some products he is buying in the US. The businessman buys the dollars in the US and exchanges his pesos in Colombia. He buys the pesos at a lower rate than is being offered as the official exchange rate, sometimes a 10% discount. The businessman tells the currency exchanger what account to sent the money to in the US. Many times the money arrives at the US business from an account, on in a name, not associated with the Colombian businessman. Many times the US business will research which customer to credit the funds to or in the case of checks, they may be hand delivered and the receiver is told which person is sending the funds, even though the businessman's name is not on the item being presented.
If the products are then smuggled into Colombia through a free trade zone, the government is denied all the tax benefits of the commerce being conducted within the country.
As the circle closes, the drug dealer has his pesos in Colombia (at a 20% discount), the business man has his products in his store at a cheaper cost than his competitors who have gone through the central bank and the currency exchanger has made money from both.
From the early days, Atlanta IRS and DEA, conducted many international undercover investigations of domestic and international money-laundering groups. All of these investigations had one thing in common, and that was the Black Market Peso Exchange System. Skip Latson DEA and I along with Larry Andersen, Assistant United States Attorneys in Atlanta, have operated an undercover bank and an undercover stockbrokers firm. The undercover bank, call Operation Dinero, operated in Atlanta with the co-operation of the British, Italian, and Spanish governments. This bank, and its undercover representatives and informants, offered to the Colombian Cartel drug dealers the service of hiding their narcotics money and attempting to provide financial services for them through our undercover bank. We had the opportunity to see first hand some of the inner workings of the Black Market Peso Exchange System and why it was of such value to them. During these meetings, we were offered $300 million in bonds, the assistance of South American airline to bulk ship currency out of the country, and works of art to convert to cash. We were also offered many millions of dollars of Mexican bank drafts to be processed through our bank. During Operation Juno, a recently concluded operation, operated as an undercover stockbrokerage firm, we were offered the opportunity to invest in computer products that were to be sold in Bogotá. If we accepted, we would be shown the U.S. businesses in the United States that would take cash, and then they would ship electronic products to Bogotá. We were assured that we could have our representatives in Colombia receive pesos within 10 days of delivering the cash to these US businesses. An interesting note was the fact that they told us where we could retrieve our cash, from a very prominent business location in Colombia. When I mentioned this to a newly arrived DEA agent from Bogotá, he laughed because he said that the embassy purchases their computer products from the same outlet because the prices are so cheap.
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During the last 11 years, I have spoken to DEA agents who have had extensive experience in conducting investigations of narcotics organizations. Almost to a person they have said that following the money, doing a financial investigation along with a drug investigation, can lead you to the highest level of narcotics organizations more quickly than strictly following the drugs.
Any strategy used to assist field law-enforcement and attorneys in fighting the war on drugs must be viewed as a chess game in order to move forward. During the early '70s in South Florida Federal Reserve, investigators and prosecutors saw that banks were accepting boxes full of currency and gladly accepting this cash on deposit. Congress then countered that move and instituted a Currency Transaction Reporting Form (CTR), and the government educated banks as to its purpose, following the process with prosecutions. Narcotics traffickers countered that move with moving to using businesses to launder their proceeds, these businesses being on a bank exempt list. Congress then enacted the 8300 form, and government agencies educated businesses on its purpose and use, and then prosecutions followed. Narcotics traffickers then moved to non-financial institutions, transferring money via wire remitters to Mexico and Colombia. The Secretary of The Treasury then implemented a General Targeting Order (GT0) in New York. Narcotics traffickers are now moving to other systems. I have had the opportunity to work with Al James at FINCEN and have seen how they are attempting to stay ahead of the money laundering cycle.
During the past 15 years narcotics traffickers have been moving toward, increasing their use of, the Black Market Peso Exchange System. I am happy to see that this law will move toward countering narcotics use of this system. This system not only assists the narcotics trafficker with the repatriation of his wealth, but also devastates the market economy of the people and businesses utilizing the cheap dollar peso exchange to conduct private enterprise in Colombia. I have provided a paper I delivered two years ago at Cambridge, England and recently published by Henry Stewart Publications, London, England. This publication goes into more detail than I have allotted time to cover this topic.
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I support this bill and the effect it will have on the Black Market Peso Exchange System. I would encourage a ''sense of the house'' that the branches of government that will enforce these sanctions, educate private industry as to their due diligence requirement, making sure that they are not subject to receiving funds purchased through the Black Market Peso Exchange System. Several years ago Ms Doe testified before the subcommittee on General Oversight and Investigation and listed several prominent Fortune 500 businesses, which she had sent money to purchase goods through the Black Market Peso Exchange System. I have attempted on at least two occasion to try to convince a branch of government to educate U.S. businesses. I was not successful at getting this type of education for business. The education (before enforcement) is as important as a passage of this law. I feel that this law passage is critical if we are to continue in the chess moves against narcotics traffickers, for they have agility and speed and a highly educated staff of financial advisers assisting them in moving their drug wealth from the place of origin back to their banks to assist them in enhancing their life styles. During one undercover meeting, we asked a narcotics trafficker in South America how much money he made the year before. He said he personally made five hundred million dollars in the United States and his extended family had made an additional five hundred million dollars. Narcotics traffickers are getting older and are concerned with estate planning, and how they can become part of the country club set and spend their ill gotten gains into retirement. The Black Market Peso Exchange System is affording them the opportunity to show that they did not get their money from drug trafficking but from the sale of electronics or other consumer goods purchased through the Black Market Peso Exchange System. The funds, processed this way, are almost untraceable by the Colombian Government.
The Black Market Peso System has for years frustrated law enforcement. If we spent months tracing the drugs to money and the money to a bank account, we are then faced with the ''Innocent Owner'' defense. If we try to resolve the issue of knowledge of the ''innocent owner'' and his off shore accounts, in bank secrecy countries, we are stopped by the secrecy defense. In various undercover activities we have been asked to receive proceeds of crime from around the world for deposit into a US account, but have been stopped because we could not ''fit'' it into one of the existing SUA's. This bill will go a long way in resolving many of the problems we have faced in the past.
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In closing, I would like to restate that I fully support this bill and I thank you very much for the opportunity to appear before you today.
MONEY LAUNDERING: IS IT NOW A CORPORATE PROBLEM?
BY: WILLIAM F. BRUTON, CFE(see footnote 7)
Money laundering occurs in almost every crime where there is a financial motive. People who commit most crimes have, at least as one of their motives, personal enrichment. Because of the need to hide the fact that wealth came from a criminal act, the criminals need to disguise the money. This forms the basis of all money-laundering and tax crimes. To complete the money-laundering activity generally involves a series of transactions designed to disguise the source of funds, so that these assets may be used without discovery by law enforcement. Through the money-laundering process the individual tries to transform the appearance of the funds, derived from the illegal activity, into one having come from a legitimate source. There has been an emerging new system of money-laundering where the use of legitimate commercial trade activity is being used by criminals involved in illegal activity to disguise their criminally derived profits as coming from legitimate businesses.
This new system of using trade to assist in their money-laundering system may have far-reaching social consequences and may even rise to the level of threatening economic policies. In order for criminals to use trade and financial systems to complete their activity, they must manipulate these trade and financial systems for their own selfish ends.
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In recent years, multi-national law enforcement investigations have shown that criminal organizations are international in scope and their criminal activities are utilizing financial institutions worldwide. With the rapid advancement of the Internet and the ability for individuals to use this vehicle to transfer funds and wealth, criminal organizations are globalizing their use of financial and trade industries. History has shown that as criminal groups start to use a legal system of any type, they start the process to control and manipulate the system for their own use. Unchecked, criminal groups could potentially control the means of capitol production for a political entity.
Modern financial systems permit anyone to transfer large amounts of dollars through computers and financial institutions. Illegal moneys have been laundered through every available method. This is only limited by one's imagination. Moneys have been laundered through currency exchangers, stockbroker firms, gambling houses, private banking facilities, offshore financial institutions, wire transfers, and trade financing, all with the objective to launder and hide the proceeds of illegal activity. Money launderers in recent years have been receiving assistance from professional individuals such as accountants and lawyers. These individuals have been trained in the more sophisticated methods of investment and movement of wealth. Money launders have an impact on national economies by moving millions of dollars outside the normally regulated trade avenues. With this type of activity, nations may not be able to monitor national fiscal activities, levy taxes, collect customs import duties, and protect local businesses from unfair competition.
As in many black markets, where products are considered items with which to barter for value, the Colombian black market considers any national currency to be tradable commodities that hold value. In order to understand the mentality of the peso exchange you have to appreciate and understand that national currencies are considered commodities to be exchanged and sold. The black market peso exchange has evolved into an economic system whereby the value of cocaine is traded for currency, and that currency is traded/sold for another commodity (consumer goods) or currency. The true ownership or title to the asset is only known by a currency exchanger (in this case Colombia Peso exchanger) who follows the transaction which is conducted in another country (in this case the United States). This system has been well documented both in testimony before the U.S. Congress and in the U.S. Courts. The inability for a national government to control this system of informal finances is well documented by the Colombian Trade Commission.
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By way of simple introduction, it is necessary to define, in general terms, a basic working understanding of the Colombian black market peso exchange. This particular black market developed because of central government restrictions placed on access to foreign currencies used in conducting merchant trade. Many black markets around the world start as a cottage industry in response to pent-up demand for some type of goods, service, or because of national economic or tax policies. In the case of Colombia, in the purchase of foreign goods for resale, the retailer must acquire U.S. dollars as a means to pay for goods from non-Colombian manufacturers. Access to dollars by Colombian citizens is regulated and administered by the central bank. This regulation by the central government was instituted to ensure that Colombian duties and taxes have been collected.
Because of the perceived over-regulation by the central government, a system was established which presented retailers with alternative means of paying for imported foreign goods. The Colombian black-market peso exchange offers the retailer the option of purchasing U.S. dollars, either outside government control or through the central government. While utilizing the Colombian black market the exchanger violates national laws. This system, because of its appeal and acceptance, has become institutionally accepted. A further hideous byproduct of the black market rests in the fact that the products purchased with black market funds give the appearance and aura of being of a higher quality, latest technology or a prestigious symbol. In essence, there has been created a public perception that a product imported legally, paid for through the national bank, and otherwise complying with all tax and customs laws would, by its very nature, be inferior. This perception, to some extent, is fostered by the black market itself, in order to generate a demand for black market products in deference to legitimately imported products. In essence, the desire by the central government to control its economy and currency has the opposite effect of creating an industry that has the converse effect on the goals and objectives of a controlled economy.
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In the case of Colombia, the black market in consumer goods has existed for many years. It is only in the last 10 to 15 years that the drug traffickers have seized upon the opportunity to utilize this existing informal economic system. This is done in order to repatriate their wealth earned in another national jurisdiction. It is because this black market peso exchange system had become so efficient in the payment for and the smuggling of goods and currency that the drug trafficker has been able to enhance and improve upon an already existing system. The sheer volume of wealth involved in drug trafficking introduced into this black market system has evolved into its own personality. The black market system has matured into a financial system capable of controlling the fundamental basis of wealth with the potential to manipulate the ownership of various segments of an economy.
The Colombian black market peso exchange system has evolved into a four-step process, which relies upon an informal but tightly controlled ''trust'' system to ensure its continued growth. This system assumes an unlimited amount of currency and a desire for goods and services. The following represents its most basic components:
A system that can place currency into a monetary system or bank (placement)
The ability to hide the source of the currency (layering)
The ability to convert original currency or wealth into a currency of choice
The ability to deliver goods while concealing the source of payments (integration)
Page 102 PREV PAGE TOP OF DOC In the United States, during the mid 1970s, Operation Leprechaun found that large boxes of currency were delivered to financial institutions. The placement of drug dollars into the monetary system of the United States was as simple as driving up to the front door, opening your trunk and being assisted by bank employees in depositing cash. The system of placing cash into the bank was as uncomplicated as walking up, filling out a deposit slip, and placing one million dollars in cash into an account, no questions asked. Because this system violates no U.S. laws, money-laundering statutes were instituted to disrupt this system of currency placement. Congress passed the Bank Secrecy Act of 1970; Pub. Law 91-508; 12 USC 1829, 12 USC 1951 and 31 USC 5311-5326. The Bank Secrecy Act imposes a duty on financial institutions to file a Currency Transaction Report (CTR) whenever a customer conducts a financial transaction in cash exceeding $10,000.
In 1986, in an effort to combat organized criminal activity Congress passed the Money Laundering Control Act of 1986; public law 99570 (18 USC 19561957). The statute criminalized the movement of money and wealth derived from specific unlawful activities. This law was designed, in part, to prosecute those who are engaged in a ''specified unlawful activity'' and who are attempting to disguise the true source and nature of their illegally gained wealth. The law also assists in the seizing of the assets and profits of the specified unlawful activity.
During this time banks were the most efficient method of moving large bulks of currency. As an example, a kilo of heroin weighs 2.2 lb., which is then converted to currency in U.S. dollars of 5's, 10's and 20's weighing 10 times the original drug weight, even as much as 256 pounds. While it may be easy to conceal 2.2 pounds, it becomes impossible, in the same fashion, to conceal a package weighing 256 pounds. These figures are even more dramatic when you consider that a single trafficker may earn as much as $500 million in the United States from the sale of cocaine. The weight of the illicit currency would exceed 125,000 pounds of money. Because financial institutions routinely handle large volumes of currency, it became a system of choice to use financial institutions to convert this weight to either cashier's checks or wire transfers.
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With the institution of money-laundering statutes, banks and depository institutions became the first line of defense in penetrating and preventing drug traffickers from using our financial institutions to aid in their criminal enterprises. The new money-laundering statutes require financial institutions to strip the veil of anonymity that was an essential element for money launderers. The record-keeping system identifies depositors and allows the government regulators to trace and identify money-laundering groups. As a result of the identification, money-laundering groups must move to different systems to avoid detection.
In 1994, DEA Administrator Thomas Constantine and IRS Commissioner Margaret Richardson announced the close of Operation Dinero, ending a two-year undercover drug money-laundering operation coordinated between IRS and DEA. This operation also had international law enforcement assistance from the United Kingdom, Canada, Spain, and Italy. The investigation culminated in the arrest of 116 suspects, seizure of more than a hundred million dollars in cash and nine tons of cocaine. This investigation highlighted the need for international law enforcement and regulatory agencies to cooperate in the investigation of international money-laundering rings.
Operation Dinero had two parts. The first part focused on currency pickups, both domestic and international. It identified the connection between Colombian drug trafficking and their money cell groups in the United States. The second part focused on the operation of a Class B bank established on the island of Anguilla, British West Indies. Once the undercover bank began operation, IRS and DEA undercover agents promoted the bank's services within the domestic and international criminal communities.
Page 104 PREV PAGE TOP OF DOC This undercover Class B bank operated in the same manner as any other offshore Class B bank. The undercover operation offered checking accounts, savings accounts, and wire transfer services. While in operation it offered third party '' Mexican checks'' for deposit. The Mexican checks came from currency smuggled into Mexico and used to purchase cashier's checks from Mexican banks that had U.S. correspondent accounts. These checks were in U.S. dollar amounts and written by the Mexican banks on accounts of their correspondent bank in the U.S. These checks were written to Hispanic-sounding names and endorsed over to our undercover bank. In addition, we were offered 300 million dollars in securities maintained in Europe that were purchased with drug dollars in South America. The drug traffickers and peso exchangers routinely sent the undercover bank U.S. dollar checks, wire transfers etc. They then wrote checks on their account or wire transferred the money to another domestic or international bank account. With an analysis of the documentation surrounding the funds coming into the account and disbursement from the account, the U.S. government and the other governments cooperating in this effort gained intelligence that led to supplemental investigations both domestically and internationally.
The Colombian peso exchange system has brought the ability to hide the source of the illegal currency to the level of a fine art. This exchange system uses two parallel financial transactions in different countries. The exchange system starts with a drug trafficker contacting a peso exchanger indicating that he had a large sum of currency, for example in New York. In a separate transaction, a Colombian importer contacts a peso exchanger in Colombian with pesos, stating that he needs U.S. dollars to purchase goods in the United States, for example in Detroit. The currency exchanger purchases the currency in New York for as much as a 15 percent discount from the drug trafficker. He then ''trades'' the dollars for pesos to the Colombian importer at the discounted black market rate. The black market peso exchanger asks the drug trafficker into which account he wants the pesos deposited. He then asks the importer where he wants the dollars deposited in the United States for payment of the purchased goods.
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Drug dealers have an almost unlimited source of currency. It has been estimated that the Colombia Drug Cartels may have generated as much as 10 Billion U.S. Dollars of profit which they need to get back to their control. They need an efficient mechanism to deliver the profits to them in a means and method that makes them available to enhance their wealth. The Colombian businessperson needs U.S. dollars or other foreign currency in order to purchase goods and services for resale by him in Colombia. The Colombian black market peso exchanger has analyzed the needs of both of these parties. He has designed a system to alter the way financial transactions are legally conducted and fulfills the financial needs of both groups.
During the last seven years an important lesson has been learned by law enforcement. Law enforcement has identified criminal organizations that specialized in purchasing consumer products with illegally derived cash and exporting this wealth disguised as consumer products to South America. The movement of illegally derived moneys, via the purchase of products, is not limited to the United States. Drug organizations are utilizing this system around the globe. Where there is strict monitoring of financial transactions, criminal organizations are using the cash generated from illegal activities, purchasing products and then shipping/smuggling the products into another country. They are selling the product at a discount, and utilizing the sale of the smuggled products as justification for their enhanced life styles.
Law enforcement undercover operations have indicated that major drug criminal organizations are utilizing warehouses in Miami, Panama and Aruba to purchase consumer products with drug dollars. This merchandise is then delivered through shipping brokers to Colombia. In Colombia the products are then sold below average retail price. This system has created a very high demand for these types of sales.
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On Oct. 22, 1997, before the United States House of Representatives, Subcommittee on General Oversight and Investigations, Committee on Banking and Financial Services, Washington D.C., an individual testified anonymously and stated the following:
''As a money broker, I arrange payments to many large U.S. and international companies on behalf of Colombian importers . . . These companies were paid with U.S. currency generated by narcotics trafficking. They may not have been aware of the source of this money. However, they accepted payments from me without ever questioning who I was or the source of the money. For two years, I acted as a money broker in Columbia. I brokered both the illegally and legally obtained dollars and pesos along with other licensed and unlicensed money brokers. During this time, I brokered several million dollars on behalf of the Cartel.
Upon my introduction to the business, I was amazed at the large numbers of brokers. In Columbia, brokers often operate in what can be described as a flea market atmosphere. Importers shop for United States dollars at the mall, traveling from office to office to get the best black-market exchange rate.
The broker would be told which narcotics trafficker owned the money in United States, whether or not they asked, to instill the fear of reprisal into the broker so that they would not steal or misappropriate funds.
I would like to offer my explanation of money brokerage. As an example, a coffee broker in Colombia needs to purchase a tractor from a United States tractor maker. He purchases the tractor for 500,000 dollars. He receives a tractor in Columbia but has pesos. He needs to pay the U.S. company in dollars. So the grower takes the pesos to the black-market money broker instead of using Colombian banks, because he can buy the dollars at a lower rate and avoids taxes and tariffs of up to 20 percent.
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The broker buys the 500,000 dollars in pesos from the coffee grower and charges in a commission for his service. The broker then approaches a financial representative of the Cartel who has 500,000 dollars in drug money on the U.S. streets. The broker buys the 500,000 dollars from the Cartel representative and pays for it with the farmer's 500,000 dollars in Colombian pesos, minus a commission he takes for getting the cash off the Cartel's hands. The broker receives the dollars and uses them to pay for the farm tractor in the United States. In this manner, the farmer's debt is paid to the U.S. company, the drug dealer has been paid pesos for his narcotics, and broker has received a commission from both parties.''
The attached chart is offered as an explanation of the parallel dollar peso exchange system. The attached chart shows two separate boxes. Box A represents the dollar system and box B represents the peso exchange system. The actual flow of funds does not move from system to system and thereby tracing and following the money cannot be accomplished.
The arrow on the left sign of the chart shows that the exchange system starts by a narcotic trafficker or Cartel organization in Columbia shipping drugs from Columbia to United States. The drugs are then sold for cash. The cash is brought to the trafficker's representative in the United States. The dollars are then accumulated in a stash house until directed by the Cartel financial adviser to release the dollars to a representative of the peso exchange system.
Figure 1: Emerging money-laundering systems
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Under the peso exchange system, System B, a Colombian businessperson will approach a peso exchanger and request to purchase dollars in the United States. The businessperson needs the dollars to pay for products he wishes to purchase in the United States. The peso exchanger would approach a '' Duros'', the financial representative of the drug Cartel, and ascertain the amount of U.S. dollars available on the black-market. If the official exchange rate is 1000 pesos per dollar, the peso exchanger would offer 800 pesos per dollar to the Duros. The exchanger would then sell the pesos to the businessperson for 890 pesos per dollar, for profit of 90 pesos. The businessperson would give the pesos to the currency exchanger, who would then deposit the pesos in a form requested by the Duros.
The businessperson would then be asked where he wished the dollars to be transferred. System A shows the moneys being held in the stash house then being transferred to a bank account of a U.S. business. Our experience has shown that these transfers do not necessarily contain the name of the businessperson in Columbia. The U.S. business(es) will then ship the requested products to the Colombian businessman.
What makes this system difficult for law enforcement is the fact that the communication between the two systems is done by cell phone, fax and beepers. No books and records are maintained in the U.S. for review by legal authorities. Once the transfer is done there is no traceable record of the flow of funds. As described in these two boxes in the above chart, the only overt relationship between these two systems are shown by the shipment of drugs to the United States and shipment of products from the United States to Columbia. For years, law enforcement has investigated using the philosophy of ''follow the money''. If one were to follow the drugs coming into the United States, being sold on the street, money going to the stash house and then deposited to a bank account at the direction of trafficker in Colombia, one would believe that the bank account where the dollars were deposited may be owned by the narcotics trafficker. There have been many investigations by the Department of Justice and U.S. Treasury Department that have followed this trail and made the assumption that they have found the bank accounts of the Colombian cartels. Further investigation showed that these accounts are owned by U.S. businesses, which sold products to the foreign businessperson and the dollars represented payment for these products. The U.S. businessperson claimed to be the innocent owner. In Operation Polar Cap, the U.S. Government froze over 700 bank accounts. The many owners of these accounts came forward to assert the claim of innocent owner. The accounts were then unfrozen when it could not be proven that the account owners had ''knowledge'' of drug funds entering their account.
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The businesses being utilized by the peso exchanger are not limited to the United States. Investigations have shown that the peso exchangers and narcotics traffickers utilize businesses in whatever country they sell their drugs. We have been asked to conduct money pickups for the drug Cartel and currency exchangers in Europe, Asia, and Russia. This indicates that businesses are capable of being used by the Cartels in any country in which the Cartels sell their drugs.
During the last couple years I was asked by a U.S. business to look at information from some of their bank accounts. This was done at the request of the U.S. business to help them to identify whether they were targeted by a money-laundering peso exchange system. A review of their accounts showed the following:
1. They had received cashier's checks, which were credited to one of their customer's account. These cashier's checks were issued from a non-U.S. bank but were drawn on a U.S. dollar account from a U.S. correspondent bank. The cashier's checks were issued in various Hispanic names containing an endorsement on the back of the check. In some cases there were several endorsements, none of which contained the name of the customer to whose account these checks were credited.
2. The account also contained wire transfers. The wire transfers did not come from an account owned by the Colombian customer of the U.S. business.
3. The account contained cash deposits, but always under the $10,000 reporting requirement.
The U.S. business told me that this customer ordered the U.S. products and shipped these to Aruba for sale. I also found that this customer was arrested by U.S. law-enforcement for laundering drug money, but not because of doing business with this company. The Colombian Government Trade Bureau in Washington D.C. has expressed to many law enforcement officials their concern for the effect that the black-market exchange system is having on their legitimate business people.
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This concern can be best explained as follows:
Narcotics traffickers are continually concerned with the Colombian government's attempt to eliminate their illegal activity. A new law being enforced by Colombia is the illegal enrichment law. The illegal enrichment law states that if income reported on a tax return comes from an illegal source the tax rate will be over 50 percent. Narcotics traffickers are also concerned with estate planning. Because of the drug traffickers' enormous wealth and assets, they are attempting to enter into legitimate commercial enterprises in order to give the appearance that their wealth is derived from legitimate activity. They either create their own front companies or utilize businesses and other commercial entities to repatriate the proceeds of their narcotics trafficking from an underground economy. Narcotics traffickers want to be able to become part of the '' country club'' set. Therefore, they have started businesses and have taken over companies using their narcotics proceeds to further the economic benefit of these entities.
Let us take a hypothetical example of how this process is working. Imagine there exists five wholesale outlets for products manufactured by ABC Corporation in Atlanta, GA. Four of these outlets comply with all currency, tax and customs import duty laws. The fifth outlet gets its' U.S. currency from the black-market, imports its products illegally from Panama or Aruba and smuggles them into Colombia.
The first four outlets import 1,000 products, paying $100.00 U.S. each. The narcotics trafficker has drug money in New York with which to purchase his products. He is accustomed to paying a peso exchanger a discount of 30 percent to place his narcotics proceeds into a financial institution. He now has the ability to use his drug money to purchase the products from ABC Corporation in Atlanta, GA and smuggles them into Colombia in order to sell them at his store.
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The first four outlets, in order to make a profit, must sell the products purchased from ABC Corporation in Atlanta, GA for more than $100 each. The narcotics trafficker has already made a significant profit on the sale of drugs and does not need to earn any money selling products of ABC Corporation.
In fact, if he sells the product at the exact price he paid for it, he will have already reduced his total business expenses by 15 percent. The 15 percent are the cost he would have paid the currency exchanger to convert the dollars to pesos if he did not use the purchase of products to get his drug money converted. The use of front companies, where legitimate products are sold, offers narcotics traffickers a tremendous advantage in legitimizing their illegal underground wealth. If they were to move 100 million dollars through this process each year, narcotics traffickers could file tax returns showing the profits from this business. A narcotics trafficker could visit with the ''country club set'' and say he was the president of this very profitable organization.
What happens to the other four businesses that cannot compete with the drug trafficker in selling ABC Corporation's product for the same price? They're faced with only three alternatives. Use the black-market and violate currency regulations, tax and Customs laws; go out of business or sell the business to the drug trafficker. Many of the businesses cannot compete with the narcotics trafficker and his financial advantage. Therefore, the narcotics trafficker starts to control the vast majority of the industry within the circle he competes. Let's take our story one step further. Now the narcotics trafficker has become the largest purchaser of products from ABC Corporation. In order to maintain an inventory level large enough to supply his newfound South American vendors, ABC Corporation establishes a multimillion-dollar manufacturing facility in the Pacific Rim. This manufacturing facility employs several hundred people and has boosted the economy of that area.
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As the South American business market grows, it becomes more important to ABC Corporation. After several years, ABC Corporation will be asked by the narcotics trafficker for ''special'' services to aid in the trafficking of drugs or the trafficking of illegal currencies. This could be as simple as a request to borrow the company plane when it comes to visit from the States, or to carry a package from the U.S. to Colombia. When ABC Corporation says it will not participate, the drug trafficker says, ''I will switch from selling your product to selling a competitor's product within two days.'' Now ABC Corporation, who has become financially dependent on the South American vendor, finds itself on the horns of a dilemma.
While only part of this story is true, if we do not take corrective action the entire story may become a reality.
Corporations and businesses need to establish a ''know your customer'' policy. These types of policies have been established for several years by financial institutions in order to prevent criminal groups from laundering drug dollars through their institutions. Because of the success of this policy, drug organizations are moving their drug profits through the use of international commerce. The following is an example of some policies that would assist corporations:
1. Establish customer identification and documentation requirements.
2. Establish payment policies that require the payment to be received from the established bank account in the name of the customer.
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3. Prohibit the use of third party checks for payment credited to customers account.
4. Develop policies requiring the reporting of suspicious payment activities.
5. Consider the establishment of a compliance officer who has broad authority to monitor and insure compliance with relevant laws. This is especially critical where products are being exported to high-risk areas.
Mr. CHABOT. Mr. Comisky is our third witness on this panel this afternoon.
STATEMENT OF IAN M. COMISKY, BLANK ROME COMISKY & MCCAULEY, LLP, PHILADEPHIA, PA
Mr. COMISKY. Good afternoon, Mr. Chairman, members of the committee. I appreciate the opportunity to be here. This is my first opportunity to ever speak before any congressional panel, and it is certainly a different experience from what I am used to in a more academic or other setting.
I am not going to rely on my remarks and will just submit those as I have written them, and I will talk about some general concerns I have with respect to the money laundering statutes.
There are certain portions of this bill which are certainly worthy of support and worthy of enactment. Just on a personal note, I would ask the committee to exercise some caution because any time they make an amendment or a change, I have to rewrite portions of my textbook, and it is becoming more and more time-consuming every time you have a major bill in front of you.
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As Congress is well aware, money laundering is a powerful tool. There are significant penalties, heavy sentencing guidelines, asset forfeiture, finesit covers a dramatic and broad range of offenses. If you are going to look at asset forfeiture and money laundering changes, there are structural problems with the money laundering statute nowI am not going to talk about asset forfeiture today; I will leave that to my distinguished colleague, Mr. Smith, who has a two-volume set on that subjectbut on the money laundering end itself, there are structural problems as the case law has developed. If you are looking to broaden the statute, you ought to try to cure and reach some of the issues which have created problems among the courts and have created problems in the interpretation of the statute.
In my time, let me cover a few certain elements of 1956 and 1957. The broader money laundering statute, the 20-year felony, has different provisions. Prosecutors ordinarily charge either the promotion element or the concealment element of the statute. The promotion element criminalizes any individuals who engage in the transactions with the intent to promote the carrying on of specified unlawful activity. There is a split among the circuits now which has developed over the last few years. The question is what are you promoting. If the concept of the statute is to provide incremental punishment and severe punishment under the Sentencing Guidelines as they exist under the statutes, for incremental conduct, the courts are now split about whether you should punish promotion of past activity or future activity. The early cases said that it is sufficient to establish a money laundering offense if you promote a completed crime. More recent circuit courts which have looked at this have said you cannot punish it as money laundering unless you are promoting a future offense.
So if you are going to reach the money laundering statute and expand it and take a look at it, that is a critical element that ought to be examined. My personal view there is that promotion should be interpreted to promote only future offenses, not past offenses, and the statute should be looked at and perhaps amended in that fashion.
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The second most often charged section is the intent to conceal section, which provides that if you intended to conceal or disguise the nature, the location, the source, the ownership or the control of the proceeds of specified unlawful activity, that is another provision under the money laundering statute which provides for a 20-year sentence. In the case law as it has developed there, you would think that the Government would most often charge sophisticated organized crime, drug trafficking for the concealment element. Instead, what they have doneand we should not forget that the money laundering statutes as written go well beyond drug trafficking; almost any offense you can think of, based on the amendments to this statute which have occurred through the nineties, which have expanded the predicate activities, almost any offense you can think of can be charged as money launderingmail fraud, environmental violations, telemarketinganything you can think of, almost any crime I come across as a defense practitioner with a white collar practice can be charged as a money laundering offense and is threatened by the prosecution or charged by the prosecution as such.
The concealment elementwhen you read the cases, when they charge the statute, they are not charging the sophisticated establishment of the corporations and hiding money in black market peso exchange operationswhen you read the cases, you have a guy who has bought a computer, you have an individual who buys a car, you have an individual who buys a house, and the first question is do you want the concealment element to reach and create a 20-year felony out of each conduct when you purchase consumer goods. And the case law is badly split among the circuits about what is the nature of the concealment. In some circuits, if you purchase a house in your wife's name, that is enough to show concealment of the predicate offense and get your conviction. In some circuits, you put in your wife's name, and it is not. In some circuits, you buy a car and put the car in your own name, it is not. In some circuits, you buy the car in your own name, it is. In some circuits, you deposit money from a scheme, and just the depositing of the money creates a money laundering offense.
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It is a real significant problem, and we ask Congress, if you are looking at this, to take a look at the statute itself in the framework for both promotion and concealment, and you can either rewrite the statutes to narrow them or tailor themyou could use, for instance, the term ''sophisticated concealment'' or something like that to try to tailor itor the other way to go about it is to go through the Sentencing Guidelines themselves and give direction to the Commission to change the Guidelines for different kinds of predicate money laundering offenses.
Finally, the statute which affects my bank clients the most is 1957, which has no special intent or knowledge requirement. It says that if you engage in a financial transaction with the proceeds of any unlawful conduct, and it turns out to be a specified unlawful activity predicate, it is a 10-year felony. Our bank clients continue to have difficultyand I treat this almost every weekthe banks are studiously trying to comply with the Suspicious Activity Reporting Requirement forms, the SARs, which Mr. Byrne was talking about, and the problem which occurs is you think you have ferreted out something, the bank reports it as a suspicious transaction, but then you have a credit facility with a customer, and the bank calls me up as outside counsel and says: We want to get our credit facility repaid. I say, Okay, that is fine. Then, they tell me: We filed an SAR.
Wait a minute. You said you suspected money laundering. If you accept repayment of the funds based on the suspected money laundering, the Government could come in and say you have obtained and been repaid with dirty money. They can require you to disgorge the money. Worse than that, if you accept over $10,000 in a financial transaction, you could be charged with a money laundering offense.
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If you are going to look at this legislation 1957 in particular, needs some modification so that a bank that is attempting to comply and is complying with filing these SARs for suspicious activity has some protection that they will not lose money, that they can get their credit facilities repaid, and that they can be made whole by acting as a good corporate citizen and turning in a customer for a suspected violation.
Mr. CHABOT. Thank you very much, Mr. Comisky.
[The prepared statement of Mr. Comisky follows:]
PREPARED STATEMENT OF IAN M. COMISKY, BLANK ROME COMISKY & MCCAULEY, LLP, PHILADEPHIA, PA
Distinguished Members of the Committee. I appreciate the opportunity to testify with respect to proposed amendments to the money-laundering statutes. After graduating from the University of Pennsylvania Law School, I clerked for the Honorable Alfred Luongo of the District Court for the Eastern District of Pennsylvania. I was then an Assistant District Attorney in Philadelphia and an Assistant United States Attorney in the Southern District of Florida before joining my present firm Blank Rome Comisky & McCauley, LLP in 1980, which now has over 350 attorneys. I have lectured both nationally and internationally to government agencies, attorneys, accountants and financial institutions on money-laundering and related issues. I am co-author of a treatise entitled ''Tax Fraud and Evasion'' which includes in Volume 2, chapters on money-laundering and asset forfeiture. My practice includes white collar criminal defense and compliance-related work on behalf of our firm's financial institution clients. Hopefully, therefore, I bring to the discussion a different prospective and view with respect to these money-laundering proposals.
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Over the years, Congress has attacked money-laundering using two different approaches. Legislation was initially enacted as far back as 1970, and expanded during the 1980's to require currency reporting for financial and other transactions where none had existed before. Congress, thereafter, began to attack money-laundering directly by enacting specific money-laundering offenses. In general, the statutes prohibit engaging in certain kinds of transactions with ''tainted money.'' The proposals I will discuss today describe amendments both to the currency reporting and the money-laundering statutes. Due to the short time-frame involved to study the proposals, I am limiting my remarks to certain selected proposals dealing with money-laundering. I will then discuss global issues that Congress may wish to consider in connection with any review of these statutory provisions. In general, Congress should review several of the proposals with caution and may wish to consider broader clarifying legislation with respect to various elements of the statutory framework in need of revision.
The currency reporting and money-laundering statutes are already powerful tools in the government's arsenal. They provide for significant criminal penalties, including heavy sentences under the Sentencing Guidelines, see U.S.S.G. §2S, fines, and the specter of civil and/or criminal asset forfeiture. The ''mean'' money-laundering sentence, as reported by the United States Sentencing Commission for fiscal year 1998, was 35.9 months for a Category I offender. 1998 Sourcebook of Federal Sentencing Statistics, Table 14. Amendments are proposed to both 18 U.S.C. §1956, the 20-year felony dealing with the laundering of monetary instruments and 18 U.S.C. §1957, a statute which provides almost strict liability for those engaging in monetary transactions with property derived from specified unlawful activities.
Section 7 of the proposed legislation seeks an amendment to 18 U.S. C. §1956(c)(6) to include a foreign bank, a defined term, with the definition of a ''financial institution.'' This proposal, however, cannot be examined in a vacuum because the term is included in other definitional provisions. The term ''financial institution'' is employed in 18 U.S.C. §1956(b)(4) as part of the definition of a ''financial transaction.'' The term ''financial transaction'' is defined, in part, to include ''(B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree. . . .'' 18 U.S.C. §1956(a)(1) then prohibits conduct by ''[w]hoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity.''
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The proposed amendment would thus seem to provide domestic jurisdiction for conduct which occurs entirely outside the United States through a foreign bank. At present, it is clear that a financial transaction occurring entirely outside the United States is not subject to the scope of the money-laundering laws. See United States v. Kramer, 73 F.3d 1067 (11th Cir.), cert. denied, 519 U.S. 1011 (1996). 18 U.S.C. §1956(f) already provides for some extraterritorial jurisdiction if the conduct is by a U.S. citizen, or if by a non-U.S. citizen, the conduct occurs in part in the United States and the transaction involves over $10,000. I believe that caution should be exercised before expanding the potential reach of the statute to include purely off-shore transactions when a U.S. citizen is involved or, alternatively, foreign transactions involving a non-U.S. citizen if some overt act, perhaps a single telephone call in furtherance of an alleged money-laundering conspiracy, occurs in the United States.
Section 8 of the proposal also seeks to expand the reach of the statute by enacting new categories of specified unlawful activity. I believe that several of the expanded definitions should be subject to scrutiny and study before enactment. The proposal includes as a new predicate offense, ''fraud or any scheme to defraud committed against a foreign or individual entity, an individual residing in a foreign country, a foreign government, or foreign governmental entity.'' Existing case law currently permits the government to charge as money-laundering a scheme involving foreign governmental victims. See United States v. Trapilo, 130 F.3d 547 (2d Cir. 1997), cert. denied sub nom. Pierce v. United States, 119 S. Ct. 45 (1998).
Trapilo sustained a money-laundering conviction with respect to a scheme to defraud involving the smuggling of liquor to avoid Canadian taxes. The court examined the scheme with reference to existing domestic wire and mail fraud law. See 18 U.S.C. §1343 and 18 U.S.C. §1341. The proposed amendment does not specify whether the fraud or the scheme to defraud would require a determination of foreign law and an application of foreign law to the money-laundering statute. For instance, one can readily conceive of circumstances where an individual could be subject to a ''fraud'' type charge where the same conduct would not be considered a crime in the United States. See McNally v. United States, 483 U.S. 350 (1987); United States v. D'Amato, 39 F.3d 1249 (2d Cir. 1994); United States v. Brown, 79 F.3d 1550 (11th Cir. 1996) (discussing limits of mail fraud statute). If some change is to be made, it should be grounded as in Trapilo and rely on existing applications of the mail and wire fraud law.
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The statute also includes a new specified unlawful activity for an ''offense with respect to which the United States would be obligated by a multilateral treaty either to extradite the alleged offender or to submit the case for prosecution. . . .'' It is unclear what multilateral treaties would be brought into play, and perhaps the better approach here would be to list the multilateral treaties and the specific type of predicate offenses which the government believes would be swept into the money-laundering statute by adding this new specified unlawful activity.
If this Committee is to examine the specified unlawful activities predicate of the money-laundering statutes, review of the existing case law that has developed with respect to mail fraud and wire fraud is appropriate with a view toward clarifying the use of certain of the predicate offenses. Congress intended the money-laundering statutes to impose incremental punishment on those who engage in the predicate offenses and then in subsequent financial transactions with the ''tainted funds.'' In most circumstances, the statute requires and the case law provides that the underlying criminal offense must be completed and ''proceeds'' created before a money-laundering charge can be brought. Stated another way, the government is required to prove a second financial transfer, rather than an initial transfer of funds, before charging money-laundering. See United States v. Johnson, 971 F.2d 562 (10th Cir. 1992) (18 U.S.C. §1957 decision); United States v. Christo, 129 F.3d 578 (11th Cir. 1997).
In cases involving mail fraud, wire fraud and similar predicate offenses, however, there is emerging case law that the crime is completed upon the creation of the scheme and, therefore, the first financial transaction is sufficient to create a money-laundering offense. See generally United States v. Kennedy, 64 F.3d 1465 (10th Cir. 1995); United States v. Pretty, 98 F.3d 1213 (10th Cir. 1996), cert. denied, 520 U.S. 1266 (1997) (18 U.S.C. §666 predicate offense); United States v. Mankarious, 151 F.3d 694 (7th Cir.), cert. denied, 119 S. Ct. 621 (1998) (attempting to harmonize rulings under mail fraud, wire fraud and bank fraud statutes). This conflates the underlying offenses of mail fraud with the money-laundering offense and permits a money-laundering charge based upon conduct identical to that required to establish the underlying predicate offense. Incremental punishment is achieved with no incremental conduct under some of these cases.
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On a broader level, in connection with any proposed amendments, the Committee may wish to consider revision of other statutory provisions which have created significant divisions among the courts under existing law. The government almost always charges that the defendant either promoted the carrying on of a specified unlawful activity and/or concealed the location or source of the proceeds. 18 U.S.C. §1956(a)(1)(A)(i) prohibits conducting a financial transaction ''with the intent to promote the carrying on of specified unlawful activity.'' The promotion element of the statute has resulted in significant conflicts among the circuit courts as to whether one can promote a completed, as opposed to ongoing, criminal scheme. Compare United States v. Calderon, 169 F.3d 718 (11th Cir. 1999) (suggesting that one can only promote ongoing criminal activity) with United States v. Cavalier, 17 F.3d 90 (5th Cir. 1994); United States v. Paramo, 998 F.2d 1212 (3d Cir. 1993), cert. denied, 510 U.S. 1121 (1994); United States v. Montoya, 945 F.2d 1068 (9th Cir. 1991) (promotion of completed scheme). The Committee may wish to consider reviewing this case law and clarifying whether the statute should reach the promotion of past or just future conduct.
The most often used section of the money-laundering statute is 18 U.S.C. §1956(a)(1)(B) which prohibits engaging in a financial transaction ''knowing that the transaction is designed in whole or in part(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity. . . .'' In general, courts have held that the statute does not prohibit the mere spending of money. Nonetheless, instead of employing the statute to charge money-laundering with respect to sophisticated schemes to conceal, prosecutors have charged any asset acquisition as concealment money-laundering. Case law, thus, varies dramatically from circuit to circuit as to whether a particular purchase, or titling of property, is sufficient to establish an intent to conceal. Compare United States v. Stephenson, 183 F.3d 110 (2d Cir.), cert. denied, 120 S. Ct. 517 (1999) (open and notorious purchase of vehicle in defendant's own name insufficient to establish intent to conceal); United States v. Dobbs, 63 F.3d 391 (5th Cir. 1995) (deposit of proceeds of fraudulent cattle sales into wife's bank account and conversion of sales checks into a number of small cashier's checks insufficient to establish intent to conceal); United States v. Olaniyi-Oke,XXF.3dXX,XX, 1999 WL 1269165 (5th Cir. 1999) (purchase of computers for use unrelated to underlying credit card scheme insufficient to establish intent to conceal) with United States v. Willey, 57 F.3d 1374 (5th Cir), cert. denied, 516 U.S. 1029 (1995) (bankruptcy fraud scheme employing checks issued by corporation to a co-defendant to pay the mortgage on a property controlled by the defendant; holding that concealing the defendant's relationship to the proceeds was sufficient to establish an intent to conceal); United States v. Wilkinson, 137 F.3d 214 (4th Cir.), cert. denied, 119 S. Ct. 172 (1998) (corporation diverted funds from an insurance provider designed to finance physician's accounts receivable and later transferred funds to original owner to make required interest payments; holding sufficient evidence to establish intent to conceal); United States v. Powers, 168 F.3d 741 (5th Cir.), cert. denied, 120 S. Ct. 360 (1999) (scheme to defraud gas producer by inserting middleman to purchase and resell gas; deposit of funds into account of corporation owned by defendant and his wife prior to transfer to a personal account held sufficient to establish intent to conceal). Congress may wish to clarify that ''money spending'' is not prohibited and to change the language with respect to the type of concealment activity (perhaps sophisticated concealment) warranting conviction under this money-laundering statute.
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Finally, any review of the statute should undertake an examination of the applicable sentencing guidelines. The circuit courts continue to struggle with whether the guidelines for money-laundering offense overstate the seriousness of the criminal activity for those not involved in narcotics or large-scale organized frauds. See, e.g., United States v. Skinner, 946 F.2d 176 (2d Cir. 1991); United States v. Smith, 186 F.3d 290 (3d Cir. 1999); United States v. Hemmingson, 157 F.3d 347 (5th Cir. 1998).
Section 17 of the proposed legislation deals with the concept of commingled accounts under 18 U.S.C. §1957 and is worthy of comment. It appears to have been drafted to overrule a specific decision of the Ninth Circuit, United States v. Rutgard, 108 F.3d 1041 (9th Cir. 1997), which required the government to show a tracing of funds in order to obtain an 18 U.S.C. §1957 convictions. The proposal then goes on to provide ''clarifying'' amendments with respect to commingled funds for purposes of 18 U.S.C. §1956.
The proposal actually contains two separate provisions with respect to 18 U.S.C. §1957. First, it amends the statute to provide that any transaction of more than $10,000 from a commingled account would be presumed to consist of specified unlawful activity proceeds. The commentary relies on United States v. Banco-Cafetero of Panama, 797 F.2d 1154 (2d Cir. 1986), a civil forfeiture case which provided a first out ''presumption'' for civil forfeiture purposes. 18 U.S.C. §1957, however, is a criminal statute creating almost strict liability for financial transactions involving over $10,000 of specified unlawful activity proceeds. The statute is of special concern to financial institutions because it contains none of the knowledge or intent requirements of 18 U.S.C. §1956. Financial institutions face difficult issues in this area because of the requirement that they investigate customer conduct and file Suspicious Activity Reports (''SARs'') for questionable transactions. See 31 U.S.C. §5318(g); 31 C.F.R. §103.21. Institutions which engage in financial transactions on behalf of their customers after filing a SAR may run afoul of 18 U.S.C. §1957 and are subject to charter revocation if convicted. See 12 U.S.C. §1818. This proposed amendment should be carefully examined. For example, when an account has $1 million dollars of proceeds of which $10,000 are allegedly tainted, any transaction from the account could be charged by the government as an 18 U.S.C. §1957 violation up to the full amount of funds contained in the account, or the funds in the account as later replenished. As proposed, the use of the account would forever be prohibited. Similarly, if $10,000 were placed in an account containing more significant sums, $10 million, $20 million or more, the account would still be tainted. As written, a binding presumption would be created subject to constitutional challenge as eliminating a required element of a money-laundering offense. See Sandstrom v. Montana, 442 U.S. 510 (1979).
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Second, the proposal would add a ''structuring'' provision for 18 U.S.C. §1957 for amounts under $10,000. Since its inception, the statute has contained a monetary threshold of over $10,000 because of its strict penalties and broad scope. I recommend that Congress carefully review whether it wants to permit aggregated transactions, that is, structured deposits under the $10,000 limit but in toto exceeding the limit, under a statute which requires none of the intent or knowledge requirements imposed by 18 U.S.C. §1956. Such a provision would also place an additional burden on financial institutions to monitor non-cash transactions of its customer's accounts.
Finally, section 22 of the proposal includes a new crime for bulk cash smuggling. The government's stated view is that by creating a new 31 U.S.C. §5331, the limits imposed by the Supreme Court under the Eighth Amendment Excessive Fines Clause would be circumvented. The offense of bringing money into or out of the country can already be punished under two different statutes, 18 U.S.C. §1001 and 31 U.S.C. §5316. I question whether the creation of an additional statute, including a proportionality provision providing guidance for a district court in determining whether the forfeiture is excessive under the Eighth Amendment Excessive Fines Clause, serves any useful purpose.
I am happy to answer any questions.
Mr. CHABOT. Our final witness for the afternoon is Mr. Smith. Thank you.
STATEMENT OF DAVID SMITH, ENGLISH AND SMITH, ALEXANDRIA, VA
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Mr. SMITH. Thank you, Mr. Chairman.
I would urge the committee to defer action on this bill for several reasons. First, the money laundering statute needs to be fundamentally reexamined and greatly narrowed in scope, as my colleague Mr. Comisky has just indicated. But I would go a little bit further than he would, or at least, be a little bit more blunt in my statement. I think the statute covers way too much activity that simply is not money laundering, or if it is money laundering, if it involves concealment, which is what I call money laundering, it is not all that significant. It is the small-time crook placing his car or his house in his wife's name.
The statute just covers too much activity that is not all that serious, if it should be a crime at all. The best example of that is section 1957, the provision that Mr. Comisky was just talking about, which does not punish money laundering, it punishes the deposit or withdrawal of more than $10,000 in proceeds from an unlawful activity without requiring any effort to conceal anythingjust the mere deposit of this moneyif a secretary takes the boss' money that he obtained through a Medicare fraud and deposits the doctor's check for $10,000 in the doctor's bank account, the office bank account, she has just committed a section 1957 offense, if she is aware of the fraud that generated that money. If she is aware of what the doctor is doing, that he is cheating Medicare, and she makes the deposit, she has just committed a 10-year felony, and the Sentencing Guidelines punish her, the secretary, far more severely than her boss, the doctor, who has committed the fraud against the Government. And if anybody on the Government side can explain to me why that makes sense, please do. I do not understand it. It does not make sense that that secretary should face twice or three times as much time as the doctor who defrauded Medicare.
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But that is what the statute allows the Government to dogo after the folks who, with varying degrees of knowledge and varying degrees of complicity in the underlying activity, make the deposit or the withdrawal. More commonly, it allows the Government to charge someone who commits a crimeas Mr. Comisky indicated, virtually any crime in the Federal Codethat generates money. Unless it is an assault, a murder, a rape, it is going to generate money. That is what crime is all about. And it follows that those offenses are in the statute already as predicates.
Of course, when you get money, you do not hide it under your mattress. You put it in a bank, or you put it in some other financial institution. Well, you have just committed a section 1957 offense. If you do not hide it under your mattress, you are ipso facto guilty of money laundering, and the Government will charge money laundering in any case it wants to with no restrictions. The only limitation is that it has got to be more than $10,000, and that is not a significant limitation.
Turning to section 1956, the main money laundering provision, that provision does not even have the $10,000 limitation. If you take one dollar of dirty money and put it in a bank account in your wife's name, you have just committed a 20-year felony under section 1956.
Section 1956 ought to cover significant money laundering activity, significant concealment, sophisticated concealment, of significant sums of money. It should not cover the one dollar purchase of chewing gum at the corner grocery storebut it does. And of course, the Government has not prosecuted anybody yet, as far as I know, for using a dollar to buy something, that that is the way the statute is written. It is extremely overly broad.
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I believe that section 1956 should not cover these promotion offenses that Mr. Comisky talked about, because any time you deposit money in a bank account or withdraw it, the Government is going to be able to show that that somehow was done with the intent to promote the underlying illegal activityagain, unless you spend the money on consumer goods. Each deposit or withdrawal is going to somehow promote the activity, and the courts have interpreted ''promotion'' extremely broadly; you do not really have to show anything to prove that.
So again, every time there is a deposit of even a dollar of dirty money, the Government can charge money laundering as a promotion of the underlying illegal activity, and that is just not right, particularly because of the way the Sentencing Commission's Guidelines punish money laundering. You know, or you should know, that the Sentencing Commission does not want to do that, and the Sentencing Commission came to Congress in 1995 and begged Congress to allow it to modify these Guidelines to make them make sense, to bring them into alignment with the underlying offenses so that you did not get a triple punishment for depositing the money in a bank.
Unfortunately, for reasons that I have never really understood, Congress rejected those Guideline amendments in 1995 at the urging of the Justice Department. I understand the Commission is going to have another run at itthey finally got commissionersand you will be hearing another proposal along the same lines to make sense of these Guidelines, but until that is accomplished, you have some real problems with the punishment scheme here.
The other problem that I would like to highlight is that the Government really has not done anything to rein in these abuses of the money laundering statute. I would contrast that with the Justice Department's very responsible handling of the racketeering statute, the RICO statute. Ever since 1980 when I was with the Department and involved in this, the Government has exercised very careful control over prosecutorial use of the RICO statute. Why is that? It is because the RICO statute is also a draconian statute which is very, very broadly written and covers virtually everything. The way it has been interpreted by the courts, at least, it is a very flexible statute; you can charge it in every case, and prosecutors were starting to do so. The Justice Department said this is not going to fly. We cannot charge RICO in every case. We have got to get control over this statute and use it only where it is really appropriateonly against true organized crime.
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They have never done the same thing with respect to the money laundering statute which was sold to Congress as a tool to go after the big drug money launderers and other major criminals who really deserve to be prosecuted and sent away for 20 years.
That is what the statute ought to be used for. Instead, unfortunately, it is being used every day inI think I heard Mr. Robinson say in over 2,000 indictments a year. Compare that to the number ofdo you know how many RICO indictments there are each year, recently? Seventy-five a year. Seventy-five versus 2,000. There really probably ought to be 75 money laundering indictments a year, too, if the statute were being used to go after the big guys, the ones who the Justice Department told Congress need to be prosecuted under this statute. Instead, they are going after the small-time criminals who commit a crime and then deposit the proceeds of the crime in their own bank accounts, and they are doing it to jack up the sentences enormously, and they are going to keep doing it, as my friends at the Sentencing Commission say, until the Sentencing Commission or Congress stop it.
So until these changes are made, either by the Congress, by the Sentencing Commission or by the Justice Department, to rein it in, I do not want to see the money laundering statute and its drastic forfeiture provisions, which also need to be greatly narrowed, expanded, because that is just going to aggravate the problems that we already have.
I say this despite the fact that there are provisions in this bill, particularly the ones relating to foreign money laundering, which I think are necessarythey may need to be modified in the ways that Mr. Byrne suggested for the bankersbut I think that is an area where there is a big problem, and we do need more tools to go after it, and I would like to see the Government devoting more of its efforts to go after big-time foreign money laundering, which is a true problem. But I think there needs to be a look taken at the whole statute from the ground up at the same time to prevent all this stuff from being abused.
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I know I have not gone into a lot of detail, but I see my time is way up, and if I have questions, I will get into more detailed criticism of some of those provisions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Smith follows:]
PREPARED STATEMENT OF DAVID SMITH, ENGLISH AND SMITH, ALEXANDRIA, VA
Distinguished members of the Committee. I appear today as an individual defense attorney who is an expert on our nation's money laundering and forfeiture laws. In the interest of full disclosure, I want you to know that I serve as co-chair of the Forfeiture Abuse Task Force of the National Association of Criminal Defense Lawyers and have testified in that capacity before the House Judiciary Committee in support of Chairman Henry J. Hyde's Civil Asset Forfeiture Reform Act, HR 1658. I have been deeply involved from the start in the reform effort that led to the Hyde bill. The views I express here are my own; however, I would hope that if I was speaking on behalf of the NACDL, my statement would not differ significantly from what it is. Many years ago, I was the deputy chief of the then-newly organized Asset Forfeiture Office of the DoJ's Criminal Division. I was responsible for supervising all of the government's forfeiture litigation and helped draft some of the forfeiture laws on the books today. I am also the author of the leading treatise on forfeiture law, Prosecution and Defense of Forfeiture Cases (Matthew Bender 1999).
The Administration bill you are considering today is by and large a forfeiture bill. Many of the provisions in this bill are also found in the Senate bill introduced by Senator Sessions on behalf of the Department of Justice as an alternative to the Hyde bill. The Sessions bill, S. 1716, is, as I write, in competition with S. 1931, the Civil Asset Forfeiture Reform Act sponsored by Senate Judiciary Committee Chairman Orrin Hatch and Senator Leahy, the Ranking Member. S. 1931 is basically the Hyde billalbeit some of its more far-reaching provisions are watered down to smooth passage through the Senate. The Sessions bill contains none of the reforms found in the Hyde bill, which the House Judiciary Committee approved by a vote of 273. Instead, the Sessions bill is merely a DoJ wish list for expanding its forfeiture powers with only a whiff of procedural reform thrown in. The bill you have before you today has the forfeiture-expanding provisions of the Sessions billalong with many other provisions designed to aggrandize the government's forfeiture powersand no forfeiture reforms whatsoever.
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I have to wonder why this Subcommittee would now want to consider proposed forfeiture legislation the Full Committee rejected last year when it approved the Hyde billparticularly at the very moment when the Senate Judiciary Committee is getting ready to vote on many of the same DoJ proposals. I also have to wonder whether the Subcommittee on Crime should be in a position to, in effect, review and possibly undercut the splendid work of the full House Judiciary Committee last year. The House approved the Hyde bill (HR 1658) by a vote of 37548. With all due respect, I believe this bill is, in part, an effort to make an end run around the Hyde legislation when the ink on the Hyde bill is barely dry. To what purpose?
Nonetheless, some of the new forfeiture provisions in the bill may have solid merit. I am particularly sympathetic to the government's need for greater authority to combat foreign money laundering. Thus, I would support sections 6, 7, 8, 25, 26 and 27 of the bill you have before you. There are many other provisions in the bill that I have no problem withso long as they are part of a package that includes much needed reforms as well. The other provisions I find unobjectionable are sections 3 (Illegal Money Transmitting Businesses), 4 (Criminal Forfeiture for Money Laundering Conspiracies), 10 (Subpoenas for Bank Records), 11 (Charging Money Laundering as a Course of Conduct), 12 (Venue in Money Laundering Cases), 13 (Technical Amendment to Restore Wiretap Authority for Certain Money Laundering Offenses), 19 (Discovery Procedure for Locating Laundered Money), 20 (Repatriation of Property Placed Beyond the Jurisdiction of the Court), 21 (Laundering Proceeds of Terrorism), 28 (Restoring Recovered Property to Victims), 29 (In Personam Judgments), 30 (Use of Subpoenaed Records), 33 (Including Tribal Governments in the Definition of a Financial Institution), and 36 (Penalties for violations of geographic targeting orders and certain record keeping requirements).
Page 130 PREV PAGE TOP OF DOC Other provisions in the bill have merit but need to be modified in some way. For example, I could support section 4 (Restraint of Assets of Person Arrested Abroad) of the provision if it provided a right to a meaningful post-restraint hearing. Although the section by section analysis states that a party whose property is restrained would have such a right, the language of the bill says nothing about that. Amazingly, an American citizen whose property is seized or restrained in a criminal forfeiture case has no statutory right to a post-restraint hearing and the courts are divided as to whether and under what circumstances there is a constitutional right to such a hearing. If Congress is going to provide foreigners arrested abroad with a right to challenge the restraint order, as it should, why not take this opportunity to provide American citizens facing criminal forfeitures in this country with the same basic due process right?
I wish I had time to provide a detailed critique of the remaining provisions in the bill, which I oppose. A number of these proposals have been unsuccessfully put forward by the DoJ since 1994 as part of an ever-expanding wish list of forfeiture legislation. Some of them reflect an unseemly desire to overrule Supreme Court decisions that have correctly rejected the government's position on issues like fugitive disentitlement and excessive fines under the Eighth Amendment. I and others have critiqued these provisions before, both in the House and recently in the Senate. I would be happy to share these critiques with you.of Serial No. 94. As NACDL observed, ''there is no valid reason to treat non-production of foreign account information any differently than any other failure to comply with a legitimate discovery request. Under the Federal Rules of Civil Procedure, a party can move the court for appropriate relief for an opposing party's failure to comply. Each case should be determined on its own merits as all are present discovery disputes.'' The section by section analysis says that a judge would have discretion to dismiss the claim for failure to produce the foreign account records. The bill actually requires a judge to dismiss the claim. There is no discretion. Some of the less controversial proposals may make it into the Senate forfeiture reform bill or a conference committee bill and become lawthereby obviating the need for this Subcommittee to consider them further. However, some of the forfeiture proposals are ill-conceived attempts to get around the Hyde reform bill provisions the House has overwhelmingly approved. Section 35 (Limitations period for challenges to cash seizures) directly conflicts with the Hyde and the Hatch/Leahy bills. Those bills follow current law by giving a claimant six years from the date he discovers that his property was forfeited without notice to him to file suit. Claimants who actually wait yearswithout good causebefore filing suit have had their cases thrown out based on the equitable defense of laches raised by the government. Thus, there is no need for a change in the law to protect the government against stale claims.
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In my view, consideration of the forfeiture provisions of the bill should be deferred until we see what emerges from the Senate Judiciary Committee later this monthand from a conference committee after that. The remaining forfeiture provisions on the DoJ agenda could then be taken up as part of a follow-up package of forfeiture legislation that addresses issues not included in the forfeiture reform legislation I expect Congress to finally pass this year. There are many other reforms I would like to see enacted. I have my own wish list of criminal forfeiture reforms that I would like to share with you. Please ask me for a copy of it if you are interested in that subject. The Hyde bill does not address criminal forfeiture at all. Nor does it address the need to narrow the scope of some our overly broad forfeiture statutes, among which I would place the money laundering forfeiture provisions at the top of the list.
Consider the fact that the money laundering forfeiture provisions have been construedat the government's urgingto authorize the forfeiture of an entire legitimate business simply because some criminal proceeds are deposited in a bank account owned by the company! This is preposterous and must be changed. Congress should clarify the overly broad scope some courts have given to the ''any property involved in'' language of 18 U.S.C. §981(a)(1)(A) and §982(a)(1). If $100 of dirty money is deposited in a bank account owned by General Motors, all of General Motors is not property ''involved in'' the money laundering violation. At most, only the bank account is.
If the government wants to expand its forfeiture (and money laundering) enforcement powers, it should be prepared to try to find common ground with responsible critics who believe that its current forfeiture (and money laundering enforcement) powers go too far in some other respects. In short, it should be ready to negotiate a broader bill that attempts to rationalize and improve the forfeiture (and money laundering) laws and to reduce the grave potential for abuse that will exist even after the Hyde reforms are enacted. Therefore, this bill is objectionable because it tremendously expands the government's already awesome powers in this area without any countervailing, long-overdue reforms to balance the legislation. The days when the DoJ could expect Congress to rubber stamp its one-sided proposals are, I hope, over. The money laundering statutes and their forfeiture provisions have been indiscriminately expanded year after year without adequate considerationand often without any real consideration at all. But the political climate today is quite different and many civic groups are now paying much greater attention to what goes on here. The battle over forfeiture reform illustrates that point. Any further expansions of the money laundering and forfeiture statutes must be accompanied by reforms. It is no longer a question of just satisfying the government's continual demands for more drastic powers.
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Given the short amount of time I had to prepare this Statement, I cannot lay out for you a complete list of reform proposals that I would like to see enacted to compliment the DoJ proposals. I would be glad to provide you with that later. But I can advocate that you take a careful look at the whole statutory framework with a view to fundamentally revising the extremely broad scope of the money laundering laws. For example, instead of tinkering with §1957, as Section 17 of this bill would do, I would ask whether section 1957 serves any rational purpose, and if it does, whether the sanctions for violating section 1957 are not far too severe. Many people believe that section 1957 makes little, if any, policy sense. And there is no doubt that the provision has been used to impose punishment way out of proportion to the offense of engaging in a ''monetary transaction'' over $10,000 at a financial institution with knowledge that the transaction involves proceeds of some unlawful activity. This isn't a money laundering statute at all. It's a law against knowingly depositing or withdrawing more than $10,000 that is the proceeds of some crime. Should that be a crime? If a businessman commits a fraud, and his secretary knowingly deposits a check representing $10,000 of the fraud proceeds in a bank account in the business' true name, with no attempt to conceal anything, the secretary has committed a §1957 offense that is punished much more severely than the underlying fraud committed by her boss. Why? The act of depositing the fraud proceeds in a bank harms no one. Would society be better off if the proceeds were hidden under the fraudster's mattress? But the Sentencing Guidelines treat the §1957 offense as far more serious than the fraud offense. It is obviously far less serious than the fraud. Indeed, it should not even be a crime.
The Sentencing Commission has tried to amend the money laundering guidelines to reduce the tremendous disparity between the punishment for the less serious predicate offenses and the money laundering offenses. But Congress rejected the Commission's proposals at the urging of the DoJ. The Commission is working on another such reform of the laundering guidelines. I hope Congress will not reject this vitally needed change again. I do agree with the DoJ that the sentencing guidelines for fraud offenses are too low and that a reform of the money laundering guidelines should be accompanied by an increase in the punishment for fraud offenses.
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Section 1956 also needs fundamental revision. The provision should be limited to true laundering of very large sums of money that involves either significant efforts at concealment of the proceeds of unlawful activity or the systematic avoidance of a transaction reporting requirement. It should not reach the mere deposit or withdrawal of criminal proceeds in a bank account ''with the intent to promote the carrying on of specified unlawful activity.'' §1956(a)(1)(A)(i). Almost any deposit or withdrawal of criminal proceeds can be shown to have been made with such an intent. Why should a routine deposit or withdrawal of one dollar of criminal proceeds subject the person who makes the deposit or withdrawal to draconian penalties far in excess of the underlying criminal activity? Again, it makes no sense. But the DoJ isn't asking you to change that. It wants line prosecutors to be able to threaten defendants with these draconian penalties for ''money laundering'' in virtually every case, regardless of how inappropriate they are. That makes it easier to exact onerous guilty pleas. Unlike the RICO statute, which is also so broadly written that it can be used in almost any criminal case, the DoJ has never significantly restricted the line prosecutor's ability to charge money laundering whenever he sees fit. Because DoJ keeps a tight, central rein on the RICO statute, there are only about 75 federal RICO prosecutions each year, compared with thousands of money laundering indictments. Yet the money laundering statute is even more easily abused than the RICO statute. That is why it has become the newest darling in the prosecutors' nursery.
It is not only defense attorneys who object to this oppressive, freewheeling use of the ill-conceived money laundering statutes. The courts have also become increasingly concerned about the government's over-use of the money laundering laws. Some courts are allowing steep downward departures from the sentencing guidelines for money laundering or even mandating the use of the guideline for the less severely punished predicate offense to prevent what they regard as a manifest injustice. The best case to read on this important issue is U.S. v. Smith, 186 F.3d 290 (3d Cir. 1999). In Smith, the Third Circuit explains how the money laundering guidelines were written with the most serious, large-scale drug money laundering activity in mindthe type of activity the government told Congress the statute was designed to combat. The actual use of the money laundering statute as an indiscriminate blunderbuss weapon against the typical small-time defendant has been radically different from how the Commission expected the statute to be used. The statute has been misused to impose wildly disproportionate punishment on countless individuals and companies.
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In conclusion, I would not support further expansion of the money laundering lawshowever much some limited expansion of those laws may be needed to deal with problems like foreign money launderinguntil they are fundamentally reformed. There should be a quid pro quo. If the government will not consider any reform, it should not be rewarded with further expansions of the scope of the statute and its enforcement powers.
Mr. CHABOT. Thank you all.
At this time, committee members will have the opportunity to ask questions, and I will begin.
My first question is for Mr. Byrne. You state that the ABA is skeptical about enacting new laws and regulations affecting the banking industry as the Money Laundering Act of 1999 would do, as long as non-bank financial service providers are not required to prevent and report possible violations of the law. You say that money launderers understand this regulatory chasm and direct some of their money laundering activities to non-banks to escape detection.
How difficult would it be, practically and politically, to bring these non-bank financial service providers within the regulatory scheme?
Mr. BYRNE. Mr. Chairman, the current administration has said for a number of years that they support that goal, that is, to make sure thatand I am basically talking about suspicious activity reporting; obviously, that is a mandate that we have had since 1984, that if a crime has been committed against a bank, we report that crime so it gets investigated and prosecutedbut you have the casino industry, you have other financial service providers, money transmitters that do not report crimes. There are proposals floating around that would make them file the same reports.
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I understand the Securities and Exchange Commission is working with Treasury so that there will be suspicious activity reporting requirements on that industry, and yet we are kind of waiting for that. And criminals are smartthey have figured out that while banks are not perfect, we have this mechanism, we have these reporting obligations, but if you go down the street to a competitor who is not going to ask the tough questions and is not going to do the follow-up, well, you are going to go to that particular organization.
So I think it is not a question of different goalsI think everybody shares those goalswe just need to move on those goals. It is in the administration's strategy, and we would like to see members of the committee kind of push the strategy along in that area, because everybody thinks it needs to be done, and it should be prioritized.
Mr. CHABOT. Thank you.
My next question I would like to direct to Mr. Bruton. Would you elaborate on how the Money Laundering Act of 1999 could put a real dent in the black market peso exchange? Will requiring that people purchasing drug dollars on the black market peso exchange be bona fide purchasers for value, that is, without reason to know that the money they purchased was drug money. Significantly weaken black market currency trading?
Mr. BRUTON. Thank you. Yes. In Colombia, the black market peso exchanger knows that the money is coming from drug trafficking. In the paper, I am told, in Bogota, Colombia, they publish the official exchange rate and the black market exchange rate. It is quite common knowledge that the drug dealer is one who is funding if not all of the black market peso exchange money.
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So in System B in the peso exchanger, both the person purchasing the money from the exchanger and the exchanger giving the money to the drug trafficker know that it is going to be drug trafficking money. On several occasions when we have seized the money in the United States from a peso exchanger, he had to pay the drug dealer the money anyway, because he knew where the money was coming from.
In some cases, we will seize the money currency exchanger's account in the United States. He will come in through his representative and say, ''I am an innocent owner. I did not involve myself in drug trafficking.'' And we have a very difficult if not impossible time overcoming the ''innocent owner'' defense.
In many cases, Colombians will purchase these pesos in exchange for dollars, and they know that the money is coming from drug trafficking. There is a second part to this process, though, and it is the U.S. business, which I think should be the next step in the money laundering investigation process. And I think it should start with education.
I have been on occasion asked by U.S. businesses to look at their deposits to see if, in my opinion, these came from the black market peso exchange system. In two examples, they received cashier's checks, and the cashier's checkif I may use a false name, ''Pablo Smith''the person who was actually sending the money was another individual, but they accepted for deposit on the other individual's account even though the check was made payable to ''Pablo Smith.'' Other times, they will receive wire transfers to deposit for further credit to the U.S. business account, but the funds are not coming from the purchaser in Colombia, they are coming from another source.
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I pointed this out to the U.S. business and asked them, How do you know where to put these funds, and they said, Oh, we have to do some research to find out where we have to put the money.
But I think that in some instances, U.S. businesses are not as educated as the banks were in the seventies. When we had the Currency Transaction Report requirement first come up, we educated the banks. I think we should educate U.S. businesses as to what is happening. But as far as the Colombians and the peso exchange people are concerned, they know where the money is coming from, and they know it is drug trafficking, and the new law will help us stop that part of it.
Mr. CHABOT. Thank you very much.
My time has expired, so I will turn to Mr. Scott for 5 minutes.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Smith, in your one dollar example, for them to find money laundering, do they have to prove beyond a reasonable doubt the underlying offense as an essential element of the money laundering case?
Mr. SMITH. Yes, they do, Mr. Scott. Of course, if they were seeking a civil forfeiture based on that money laundering offense, they certainly would not have to do that. Under current law, they would only have to show probable cause to believe that a money laundering offense, including the specified unlawful activity, had occurred.
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In proving the specified unlawful activitylet us say it is drug activitythey do not have to prove a specific drug offense. All they have to prove is that there is probable cause to believe that this is drug money from some drug offense. They do not have to know any of the details of the drug offense, but it is the same kind of evidence they would use in a drug forfeiture case.
Mr. SCOTT. Mr. Byrne, can you look at cash and determine whether or not it is drug money?
Mr. BYRNE. The actual physical cash?
Mr. SCOTT. Yes.
Mr. BYRNE. No. Obviously, if you actually testedI think Customs would tell youif you tested any money in the United States, there will be traces of some drug on all money. So unless it was very obvious, no, you cannot tell from that.
What you can do, though, Congressman Scott, is obviously have some sort of due diligence when the moneys are coming in from a certain account, to assess whether it is common for that account holder. But that is more general, what type of business are they, that sort of thing. But the physical currency, no.
Mr. SCOTT. You mentioned transfers in from foreign governments. I assume you mean wire transfers, not cash transfers.
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Mr. BYRNE. That is correct.
Mr. SCOTT. Where is the exposure on the bank in that transaction if money comes into an account through depositsand I assume, the way I heard it explained, somebody would come in with a warrant and freeze the accountwhere is the exposure of the bank?
Mr. BYRNE. Money comes in, let us say, from a foreign financial institution. It is wired into a bank in New York. We get a subpoena or an order to freeze the account. At that point in time, actually, there are laws under the Office of Foreign Asset Control that require us to actually freeze the accounts until the Government can get in. There is a whole litany of companies and countries that we have to do that for.
There is no liability per se for that particular transaction that you are talking about. The concern we have is are we going to have to try to figure out that the moneys that came in from that foreign institution were derived from a violation of some foreign crime that we are just not equipped to understand.
Mr. SCOTT. But all you have to do is respond to the warrant.
Mr. BYRNE. But if we do not have a warrant, and it is later determined that we were blind to the crime, that we were willfully blind and did not pick it up, then we could be liable.
Page 140 PREV PAGE TOP OF DOC Mr. SCOTT. And what is your liabilitymoney laundering?
Mr. BYRNE. Absolutely.
Mr. SCOTT. I heard someone mention casinos. Who talked about the casinos?
Mr. BYRNE. I did.
Mr. SCOTT. Okay. Casinos, mutual fundsdo they have to report incoming cash?
Mr. BYRNE. They have cash reporting requirements, but they do not have suspicious activity reporting requirements. Now, the casinos have a draft proposal that will require them to do that shortly, and the securities industry is about to face the same thing, but right now, they have to reportalthough most securities firms do not deal in cashcasinos have to report cash; they do not have to report if a crime has occurred just yet.
Mr. SCOTT. How does a casino know whenwhat is a cash transactionbuying $10,000 worth of chips?
Mr. BYRNE. It is $10,000, as it would be for us, for banks, sure.
Page 141 PREV PAGE TOP OF DOC Mr. SCOTT. And if someone buys $10,000 worth of chips, you have to report that transactionwho it is
Mr. BYRNE. We would take $10,000 out of the casino, that is correct, or deposit $10,000 to purchase the chips; that is right.
Mr. SCOTT. And
Mr. COMISKY. Congressman, if I could add
Mr. SCOTT. Let me finish the question. So if you come in with money that looks like it came right out ofyou know, small wads of bills with white powder on top of ityou would not have to report that as a suspicious activity; you would just have to report it as a cash transaction?
Mr. BYRNE. That is currently the case.
Mr. SCOTT. You would have to report it as a suspicious activity?
Mr. BYRNE. That is correct.
Mr. SCOTT. Okay. I am sorry.
Mr. COMISKY. I want to add that I think even the current proposal do not reach mutual funds for the moment; they will just reach broker dealers. There is not even any proposed legislation at the moment that treatshow many billions of dollars are in the mutual fund industrytreating any money going to mutual funds.
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Mr. SCOTT. If you bring $10,000 into a mutual fund brokerage firm, do they have to report the $10,000 transaction?
Mr. BYRNE. Cash transactions they do have to report; that is correct.
Mr. SCOTT. But if it is a wire transaction, they do not.
Mr. BYRNE. They do not; that is right.
Mr. SCOTT. Thank you.
Mr. CHABOT. Thank you very much, Mr. Scott.
Mr. Gekas of Pennsylvania.
Mr. GEKAS. Yes, thank you, Mr. Chairman.
Back to the casinos for a moment. Are we talking about $10,000 in a lump or cumulative transaction? That is, if they begin with $500 and then $800 and then $200 and so forth, nothing is triggered; is that correct?
Mr. BYRNE. I believe it is the same day, so if you were really lucky and won a lot of money in the same given day, there would be that requirement if it aggregated over $10,000. But if it were over the course of a week or several weeks, no, you would not be required to report that.
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Mr. GEKAS. That could be manipulated, could it not?
Mr. BYRNE. Absolutely.
Mr. GEKAS. And back to the one dollar thingbrother Scott and I are intrigued by thatI thought you were saying, Mr. Smith or Mr. Comisky or both, that the suspicious character of the one dollar example you gave was in that the depositor did so in the name of his wife, so that would mean in its basic sense that there was laundering taking place.
Mr. SMITH. Yesconcealment. That is concealment.
Mr. GEKAS. The question, though, is if it is under $10,000, like one dollar, who knows and who reports and what happens? Nothing, in my judgment. Is that correct?
Mr. SMITH. Well, the Government has to find out about it. But let us say they can prove that the gentleman who deposits the one dollar is a criminallet us say he is involved in selling stolen carsand let us say he has no legitimate source of incomethat is his business, selling stolen cars. He takes any of his money that he has got, basically, and puts it in his wife's account. He has just committed a section 1956 andfor one dollar, he has
Mr. GEKAS. He has; we know he has.
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Mr. SMITH. Yes. And what about his wife?
Mr. GEKAS. I thought you were implying that there was a concomitant duty, then, on the part of the depositee, or the bank, to report that.
Mr. SMITH. No. The bank would have no duty to report that unless it was a suspicious transaction that
Mr. GEKAS. Well, that is $10,000, isn't it?
Mr. SMITH. Well, suspicious transactions can be any amount.
Mr. BYRNE. You have currency reporting which is anything over $10,000, regardless of whether it is suspicious or not. Then you have suspicious activity, which could be bank fraud, check fraud
Mr. GEKAS. Well, what was it that raised the hackles of Members of Congress just last year when the banks were put into a different position of reporting everything?
Mr. CHABOT. If the gentleman would yield, that was the ''Know your customer''the FDIC.
Mr. GEKAS. Yes, yes. Then, that went beyond even suspicious activity, did it not?
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Mr. BYRNE. That was certainly a reading of that proposal that frightened all of us, that that could have required reporting of items that really were not inherently suspicious; so that was withdrawn, as you know.
Mr. GEKAS. But there is a general feeling that the bill that we have in front of us exacerbates that problem, because almost anything, then, can result in suspicious or reportable or some activity that would be covered where ordinarily, it should not be covered. Is that what the general purport is?
Mr. BYRNE. I would not go that far, Congressman. I think that our concerns are raising issues on some of the practical effects of these new crimes, and we were just asking the committee to look at those and talk to Justice about some of them. So I think some of those proposals are actually fine and probably work, but there are other issues outstanding, like should we reform the forfeiture laws first, should we just ensure that the foreign crime addition does not add new burdens. So in general, I think it is more a question of looking very carefully at everything and just seeing if there are unintended effects.
Mr. GEKAS. I have no further questions.
I thank the chair.
Mr. CHABOT. I thank the gentleman from Pennsylvania.
The gentlelady from Texas has joined us. Do you have any questions, Ms. Jackson Lee?
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Ms. JACKSON LEE. I do, Mr. Chairman.
Mr. CHABOT. The gentlelady is recognized for 5 minutes.
Ms. JACKSON LEE. Thank you, Mr. Chairman, and I appreciate your kindness.
Let me offer to the witnesses the fact that, being the ranking member on Immigration and Claims, we had two back-to-back hearings, and I apologize for not hearing the entirety of your testimony, but that does not eliminate me from wanting to ask pointed questions.
Mr. Bruton, let me ask you, because I am very interested in the position of the American Bankers' Association. And might I note that I may repeat what this hearing is about inasmuch as I have a number of students from Saint Pius High School involved in the Close Up Program, and this is about the illegal passing of dollars called ''money laundering.''
What specifically, in a concise way, is the position of the American Bankers' Association particularly as to whether or not this is an onerous piece of legislation, if it were implemented?
Mr. BYRNE. Congresswoman, I am here representing the ABA, and in general, we have seen a number of laws enacted since the mid-eighties dealing with money laundering, and we have supported many of those. Our questions today that we are raising are simply by expanding and adding additional statutes and expanding crimes and those sorts of things, we really need to look at the whole financial services industry and, frankly, the whole business community to see if it is just the banks that are doing the brunt of the work reporting criminal activity and cash reports and those kinds of things, and if we can have some sort of a level playing field so that you cannot launder money in any business in the United States.
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Having said that, I think some of the proposals warrant consideration. We just think that we need to review some of those other policy issues first, before the Congress enacts further laws and regulations that will mainly affect our institutions.
Ms. JACKSON LEE. So you are not here to raise a firm opposition or a firm approval; is that my understanding?
Mr. BYRNE. That is right. There are some provisions in there that are perfectly workable and I think will make sense. There are some others we just need some more answers to. So I think that some of what is in there should definitely be considered by the committee and the Congress. It is just more issue-spotting and raising some of the bigger policy questions that I do not think we always look at when we try to pass new money laundering laws.
Ms. JACKSON LEE. So are you suggesting, then, that you do not see any initial implementation problems that jump out at you right now, because you are viewing it as global, meaning, I assume, let me have some input as this bill makes its way through committee and the floorbut are you not raising any concerns today about the difficulty of implementation or the burden on banks of implementation?
Mr. BYRNE. We actually talked earlier about one particular aspect, and that is the very real concern about the Government needsand I think they made a good casethat if you violate foreign law, and it is known in the United States, there should be punishment for that.
Page 148 PREV PAGE TOP OF DOC Our concern is the expansion of foreign crimes. The example that I used before was crime against a foreign government, and the practical example that I used was, for example, if I wanted to move money out of a country whose economy was in jeopardy, and I simply wanted to move it to a safer place like the United States, that that was a violation of that foreign country's laws.
Now, certainly it is not the intent of the Justice Department to prosecute our institution for accepting those funds, but it is in fact a violation of a foreign law. How does that square with our requirements as a bank to report suspicious activities? That is an example of something that we are very concerned about because we do not know what would be the unintended effectshopefully unintended effectsof passing that particular provision.
Ms. JACKSON LEE. That is what I wanted to hear.
Mr. Smith, do I have it correct that you have some very serious concerns about this legislationand you may correct me if that is not accurate.
Mr. SMITH. That is accurate.
Ms. JACKSON LEE. Let us grapple with each other, then. As you well know, we have had in the past asset forfeiture laws in particular that have wound up getting grandmothers and wives and aunts and uncles and others into this web of entrapment, meaning the actor had joint property, and before you knew it, people could not get to work.
Tell me, in this proposal what you see as the elements of horror in terms of a web that draws in other innocent parties who may not be tied to the act of illegal money laundering?
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Mr. SMITH. I am glad that you asked that question, because in my opening statement, I did not really get a chance to address the forfeiture aspect of this bill. I focused on the money laundering aspect. But if you count up the provisions, this is actually a forfeiture bill more than a money laundering bill; more of the provisions deal with forfeiture than with substantive money laundering.
My first objection is that this is not the time to be hearing a forfeiture bill when the Hyde Civil Asset Forfeiture Reform bill that the full committee passed 27-to-3 is before the Senate right now. The Senate may reach agreement on that bill this week or next week. Things are in motion. A lot of attention is being paid to that bill in the Senate right this minute, and some of the forfeiture provisions that are in this bill are in the Justice Department-sponsored Senate billnot the one I support, but the one that Senator Sessions introduced. And there is some give-and-take going on right now, and some of those provisions could end up in the final billI hope not, but they might.
It seems an inopportune time to be considering these provisions which the House and this committee rejected before, when the ink on the Hyde bill is barely dry. Let us give it a chance to see what goes through the Senate, what comes out of conference committee, and then let us step back and see where we are and what else needs to be done. But this kind of seems like putting the cart before the horse, the horse being the Hyde bill which is already there, approved by this committee and the House overwhelmingly.
This bill goes in completely the opposite direction from the Hyde bill. Some of the provisions appear to me, with all due respect, to be sort of an end run around the provisions that this committee adopted in the Hyde bill. A good example would be this $10,000 money courier provision, where any motorist driving across the country with more than $10,000 will have committed a crime if the Government can prove that the money came not from drugs, but from some unlawful activityone of that list of hundreds of Federal crimes. And this goes back to the question that Mr. Scott askedwhat does the Government really have to prove to show that?
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Well, in the civil forfeiture context, practically nothing. Under current law, they have to show probable cause that this would be from some unlawful activity. And the Government will argue, as it has argued even under the current law, that just the fact that somebody is carrying $12,000 in their car and does not have receipts to prove where that money came from shows that it is from some kind of unlawful activity because normal people do not do that.
This is a very culturally biased attitude which unfortunately is common among law enforcement, that honest people do not carry cash of more than a few hundred dollars. It is the notion that, well, if you are not part of the credit card economy and the banking system, you are a criminal.
Judges have recently issued some pretty harsh denunciations of that in opinions, pointing out that there are millions of people in this country, largely recent immigrants and members of minority groups, Hispanics, African Americans, who are not credit card peoplethey carry cash; they still even do large transactions in cash for real estate, for down payments on things that are important. These people are picked up all the time by the State police traveling across the country to do their business deals. The Willie Jones case which you heard so much about is an example of thatthe man going to buy plants for his nursery with cash, because people want cash. If you are from out-of-State, they are not going to take a check.
The Government wants to continue to be able to seize that $10,000 in cash even though the Hyde bill would make it more difficult for them to do so. So they have this new schemewe will call it a new crime, a courier offense. Well, if you look at the statute that they are proposing, it does not say that you have to be a courier. It merely says you have to be a motorist. There is no requirement that they prove you are a courier for anybody. The only requirement is that you be traveling with the money in your car and that it is from some kind of unlawful activity, and the Government is not going to have to prove what kind of unlawful activity it was. They are just going to say, well, it stands to reasonthe person cannot come up with any documents to prove where they got this money, and they are carrying it across the country in a carit stands to reason that it is from some kind of unlawful activity. They even argue today that there is probable cause to believe it is drug money, which is ridiculous, but they get away with it in a lot of cases, because of the kinds of judges we have, who tend to agree with anything a lot of prosecutors present to them
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Mr. CHABOT. The gentlelady's time has expired.
Ms. JACKSON LEE. I thank the chairman for his indulgence, and I thank Mr. Smith for his passion.
Mr. CHABOT. Thank you.
We are done with our normal questioning period; however, Mr. Scott has asked to ask one additional question, which has been granted, so we will defer to Mr. Scott at this time.
Mr. SCOTT. Thank you, Mr. Chairman.
I guess this is to Mr. Byrne. What kind of privacy should law-abiding citizens expect from banks if this bill were to pass or under current law. I assume that your transactions with the bank are not expected to be scrutinized by anybody without some kind of probable cause. Can you just say a word about where individual rights of privacy are now and would be under this bill?
Mr. BYRNE. Congressman Scott, as you have pointed out, this is probably the most difficult balance that we face in the banking industry, and that is to protect customer data but to respond to Government requests for information.
I can say pretty much with 100 percent certainty that all banks in the United States will not disclose account information to the Government unless we receive some sort of due process document, whether it be an administrative subpoena, search warrant, summonsthose types of things. We file suspicious activity reports, but we cannot disclose the fact to anybody other than the Government that we have filed those, and obviously, the Currency Transaction Reports fit into the same category.
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I think there is always some general concern that if we are going to have to ask you more questions, say, about your international travel because we think you may have violated a foreign crime, that you are going to feel that we are invading your privacy because we are asking questions because we think we have this reporting obligation. That is always a general concern. But again I can tell you after working with industry for 20 years, we do not let any records go out to the Government until there has been at least some review by a magistrate, a court, or an agency that has subpoena power.
Mr. SCOTT. But I thought you said if you see suspicious activity, you have to report it.
Mr. BYRNE. That is correct, if we think there has been a violation of law. Even though the term on the form is ''suspicious activity,'' if we just think of it in these terms, there has got to be a particular crime that has occurredbank fraud, check fraud, those sorts of thingsthen we will fill out those forms and send them to the Government because we have done some internal investigating. It will not be based on a one-time transaction; it will be based on an investigation by the bank that they think, after looking at all the evidencewe are not law enforcement, but we made a good determination that we think a crime was committed.
That will go to Treasury, and they will then have to make a determination whether to refer that. So that is the situation with those suspicious activity reports.
Mr. BRUTON. Mr. Scott, if I may also comment, I have been the recipient as a supervisor with the International Revenue Service Criminal Division, of these reports from banks, both CTRs and suspicious activity reports, and I wish to confirm what he said, that we do not getand I have asked the bank to provide it, and we have said they have to have either an administrative summons or a subpoena to get further information not disclosed on that form. So we do not routinely receive from banks unless we do have some type of form.
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Mr. SCOTT. Thank you, Mr. Chairman.
Mr. CHABOT. Thank you.
I would like to thank the members of the panel as well as the members of the first panel, a couple of whom are still here. We do appreciate your testimony this afternoon and your responses to our questions. I think the hearing was very, very helpful to the members who were here, and the members who were not here will have an opportunity to review your testimony which we have in written form.
Again, thank you very much, and at this time, we are adjourned.
[Whereupon, at 3:40 p.m., the subcommittee was adjourned.]
(Footnote 1 return)
Pub. L. 99570, Title I, Subtitle H, Sections 135167, 100 Stat. 320718 through 320739 (1986).
(Footnote 2 return)
It was encouraging to note that the Clinton Administration, in its 1999 National Money Laundering Strategy, has listed as one of it's objectives the need to ''Assure that All Types of Financial Institutions Are Subject to Effective Bank Secrecy Act Requirements.'' We have been waiting for this ''level playing field'' for years.
(Footnote 3 return)
See, ''The Bank Secrecy Act: Do Reporting Requirements Really Assist the Government?'' 44 Alabama Law Review 801 (Spring 1993).
(Footnote 4 return)
Congress enacted the Money Laundering Suppression Act of 1994 (PL 103325), which, among other things, mandated that the Treasury Department reduce ''routine filings'' of currency transactions and establish a central location for the filing of ''Suspicious Activity Reports'' ( SARs) to eliminate duplicative filings.
(Footnote 5 return)
Several bank economists determined that a proper level for the reporting threshold in 1992 would be close to $36,000. See, Alabama Law Review p. 823. Also see, Conference Report accompanying H.R. 3474 (H. Rept. 103652) p. 186 (August 2, 1994). ABA found that a CTR could cost an institution anywhere from $3 to $15 to file.
(Footnote 6 return)
Treasury Department Press Release: ''Treasury Reduces Regulatory Burden on Financial Community and Signals Change in Bank Secrecy Act Strategy, October 15, 1994.
(Footnote 7 return)
William Bruton, CFE has over 25 years experience as a criminal investigator. This report is written from his experience and from articles he has written, articles written by the Dept. Of Justice and Treasury. The opinions expressed are those of the author and not necessarily those of the IRS.