[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE FIRST LINE OF DEFENSE:
THE ROLE OF FINANCIAL INSTITUTIONS
IN DETECTING FINANCIAL CRIMES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 26, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-34
_____
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California DENNIS MOORE, Kansas
STEVEN C. LaTOURETTE, Ohio CAROLYN B. MALONEY, New York
MARK R. KENNEDY, Minnesota STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina EMANUEL CLEAVER, Missouri
TOM PRICE, Georgia DAVID SCOTT, Georgia
MICHAEL G. FITZPATRICK, DEBBIE WASSERMAN SCHULTZ, Florida
Pennsylvania GWEN MOORE, Wisconsin
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
----------
Page
Hearing held on:
May 26, 2005................................................. 1
Appendix:
May 26, 2005................................................. 45
WITNESSES
Thursday, May 26, 2005
Byrne, John J., Director, Center for Regulatory Compliance,
American Bankers Association................................... 33
Cachey, Joseph III, Compliance Chief, Western Union Financial
Services, Inc.................................................. 35
Fox, William J., Director, Financial Crimes Enforcement Network,
Department of the Treasury..................................... 5
McClain, Scott K., Winne, Banta, Hetherington Basalrian, P.C., on
behalf of the Financial Centers of America, Inc................ 37
Morehart, Michael, Director, Terrorist Financing Operations
Section, Federal Bureau of Investigation....................... 8
Taylor, Diana, Superintendent of Banks, New York State Banking
Department..................................................... 31
APPENDIX
Prepared statements:
Byrne, John J................................................ 46
Cachey, Joseph III........................................... 54
Fox, William J............................................... 64
McClain, Scott K............................................. 73
Morehart, Michael............................................ 80
Taylor, Diana................................................ 83
Additional Material Submitted for the Record
Paul, Hon. Ron:
Letter from Center for Financial Privacy and Human Rights.... 89
THE FIRST LINE OF DEFENSE:
THE ROLE OF FINANCIAL INSTITUTIONS
IN DETECTING FINANCIAL CRIMES
----------
Thursday, May 26, 2005
House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:40 a.m., in
Room 2128, Rayburn House Office Building, Hon. Sue W. Kelly
[chairwoman of the subcommittee] presiding.
Present: Representatives Kelly, Paul, Royce, Kennedy,
McHenry, Gutierrez, Moore, Maloney, Davis of Alabama, Cleaver,
and Scott.
Also present: Representative Crowley.
Chairwoman Kelly. The committee will come to order. Today
the committee is going to hold a hearing on The First Line of
Defense: The Role of Financial Institutions in Detecting
Financial Crimes.
The Bank Secrecy Act requires financial institutions across
the United States to know their customers and to keep track of
large cash transactions and suspicious activity. FinCEN is
statutorily responsible for administering the BSA. Through
FinCEN, power is delegated to eight different agencies for
examining financial institutions and determining their
compliance with the law.
Through this system, Suspicious Activities Reports (SARs)
and Currency Transaction Reports (CTRS), are collected by
FinCEN for analysis and distribution to law enforcement and
intelligence units. Unfortunately, the utility and relevance of
these reports has come to be doubted by many in the financial
services industry, and in Congress. FinCEN is still seen by
many as a library of data rather than an active part of our
Nation's defense as our finance intelligence unit and analysis
center.
These views need to change. This skepticism about the
utility of the BSA process has been reinforced by the pendulum
swing responses to failures in the BSA system this subcommittee
has examined in the past. There is a widely held view that
frontline regulators now take an unreasonable, overly
aggressive approach with institutions that they are examining.
Financial institutions feel pressure from examiners to
increase their filing of SARs, and many view this pressure as
creating new burdens for institutions without any real sense of
the utility of the information being provided to the
government. Institutions have felt pressure to drop MSBs as
clients, financial institutions, feel they have lost their
ability to exercise the discretion granted to them in the law
by using their best judgment in identifying potentially
suspicious transaction.
The compilation of these concerns has led many to believe
that there must be a pushback on the regulators so that they
will ease up. There are valid, critical, important points about
undue burdens and about the dearth of feedback from the
government that must be addressed promptly. But our focus must
not dwell simply on the short term, on how we might best pull
back the ratings on the regulators compensating for failures of
the past.
We need to look more broadly at the system we have in place
for ensuring the BSA compliance. We should not focus
exclusively on what may be an overreaction to failures of the
past, but also on how those failures of the past came to be.
Informed by these facts, we can move forward toward a better
clarity in the future.
Our focus should be on achieving a system that is effective
in preventing crime and generating useful intelligence without
placing unnecessary costly burdens on financial institutions
and their customers. It is a difficult balance to strike, but
we must continue working toward this ideal.
I hope this hearing today will help illuminate the
government's efforts in creating a more effective and coherent
regime. In this hearing we will hear from Director Fox and
Agent Morehart about the utility of data collected under the
BSA and improvements within the examination and data collection
system. That will ease the burden on financial institutions.
On the second panel, we will hear from New York State
Banking Superintendent Diana Taylor about the recent MOU
between her agency and FinCEN on the impact of the current
system on New York banks.
We will also hear from representatives of the American
Banking Association, Western Union, the American Financial
Service Centers Association, about their perspectives on the
BSA and ways that the data collection, examinations, and
feedback from FinCEN might be improved.
I now yield to the gentleman from Illinois for his opening
statement.
Mr. Gutierrez. Thank you very much, Chairwoman Kelly, for
calling this hearing. I also want to thank you on the record
for your help yesterday with my amendment providing a liability
shield to GSEs, in which they disclose expected or actual
mortgage fraud to their regulator.
We have worked very well together on issues related to
financial crime and terrorist financing. I look forward to
continuing our excellent working relationship.
I am pleased to see all the witnesses here today, but in
particular, I want to welcome Diana Taylor, the New York Bank
Superintendent with whom I have worked on the OCC preemption
issue. I expect to work with her on this issue in the future.
I am also looking forward to hearing from Director Fox, and
I have to thank him for the work of his very responsive staff,
particularly William Langford and Joyce Lin.
It is good that we are joined today by Mr. Morehart, a
representative of the FBI--an agency we don't often see
represented in this hearing--and from whom we can gather more
help.
As many of you know, I have worked on issues around the
remittances since I was a member of the Chicago City Council
and have offered legislation to provide for fair and full
disclosure of the often exorbitant and often hidden fees
charged by certain money transmitter companies.
Now I know that Mr. Cachey of Western Union and Mr.
McClain, representing the money transmitters, will disagree
with me here, but I think that more of these transactions ought
to be handled directly by banks--why it is certainly preferable
to have people sending money through licensed MSBs than through
underground channels. It is even better to have these
transaction handled by a regulated financial institution. More
banks entering the market means more competition and
disclosure, and lower prices in the end for consumers.
I am not trying to put the money transmitters out of
business, but I think they need competition from banks to bring
prices down. I am pleased that guidance was finally issued on
April 26th for banks regarding money service businesses. While,
as I mentioned, I would prefer that the banks provide these
services directly to consumers, until enough banks and credit
unions enter this market, MSBs will necessarily fill the gaps
and service for many communities. I want you to be able to stay
in business serving populations who send remittances for those
who are currently unbanked.
As MSBs are currently thriving, the top four U.S. nonbank
money transmitters--one of which is Western Union--increased
their global market share from 12 percent in 2000 to 18 percent
in 2003, when they handled 40 percent of outbound remittances
from the United States. This is in spite of the fact that more
than half of the Latin American immigrants hold accounts at
banks and credit unions.
So a significant number of people are still using money
transmitters to send remittances even though they have a bank
account. Clearly, not only do more financial institutions need
to offer this service, but they need to do outreach and make
sure the community knows they offer remittances services. Some
banks have recognized the opportunities in this market,
particularly Bank of America, which is now offering free
remittances to their customers to Mexico. This is not merely
the right thing to do, it is simply good business.
Furthermore, getting unbacked remittance senders into
banking relationships has additional advantages. I have
encouraged the financial services industry to take into account
an individual's documented remittance payments to family
members abroad as evidence of creditworthiness when making
decisions regarding the extension of a mortgage or a credit
line to those without a significant credit history. Frequently,
families are remitting a large portion of their income and
demonstrating incredible financial discipline, but these
payments do not count toward the building of a credit history.
I believe that the entire financial services industry will
soon recognize that the risk is minimal when lending to these
customers. As they demonstrate, say, a record of remittance
sending, their fiscal responsibility and creditworthiness will
become apparent.
Many financial institutions currently offer I-10 loans
because they recognize these customers can be a good financial
risk. I hope they continue to look for nontraditional ways to
give worthy customers access to capital.
In fact, along with Congressman Barney Frank, I have asked
the National Credit Union Administration and several individual
banks to look into the feasibility of offering loan products
that take remittance-sending into consideration. I think that
this will also help greatly in getting the business of
remittances into regulated financial institutions for fees or
generally less--in Bank of America's case, nonexistent.
At the appropriate time I would like to hear from Mr.
Byrne, who has testified before us many times on financial
crimes issue, what the financial services industry and the ABA
is doing in particular to encourage more--into the business of
remittances.
Thank you, Congresswoman Kelly, for calling this hearing. I
yield back my time.
Chairwoman Kelly. Thank you.
Mr. Morehart, I opened this hearing mispronouncing your
name.
Mr. Moore. That is all right, ma'am.
Chairwoman Kelly. I notice my ranking member followed suit.
I want to offer you an apology.
Mr. Moore. None needed.
Chairwoman Kelly. I also want you to know our staffs got it
right. We are the people who got it wrong.
Mr. Moore.
Mr. Moore. Madam Chairperson, I appreciate the opportunity
to make an opening statement here, but I really would like to
hear the testimony of the witnesses, and I think we will just
proceed there.
I would--let me back up 1 minute and say this. I was a
prosecutor, a district attorney for 12 years in my county back
home and in a suburban county of Kansas City, Missouri. I
understand the need for effective law enforcement and I
understand what happened with the PATRIOT Act.
In fact, I voted along with a great majority of Members of
Congress for the PATRIOT Act. I was willing to do that and give
up on a temporary basis some of our individual personal
liberties and freedoms to protect our country from another
strike--and we didn't know what was going to happen. I think a
great majority of Congress felt that way as well.
I am still very supportive of law enforcement measures, but
I want to make sure that in this rush to renew the PATRIOT Act
we don't give up our personal liberties and freedoms, because
those are the things that separate us from almost every other
country in the world to make our country greatest Nation in the
whole world.
So I am here to listen today to what you have to say about
the provisions of the Bank Secrecy Act, provisions of the
PATRIOT Act, and I certainly will consider all of those. But I
certainly think that all of us--and this should not be about
Republicans and Democrats--this is about the thing that sets
our Nation apart from every other country in the world, is our
Bill of Rights and the personal liberties and freedoms we have
in this country.
So with that, I really appreciate your being here. I will
listen with interest to your testimony.
Chairwoman Kelly. Thank you, Mr. Moore.
Mr. McHenry, do you have an opening statement?
Mr. Scott?
Mr. Scott. No, Madam Chair. I am anxious to get to the
testimony.
Chairwoman Kelly. Thank you. Well, I am anxious to get to
the testimony also.
Our first panel consists of Director Bill Fox from FinCEN
and Michael Morehart, who is the Director of the FBI Terrorist
Financing Operations Section.
Prior to his appointment as FinCEN's Director, Mr. Fox
served as the Treasury's Associate Deputy General Counsel and
Acting Deputy General Counsel. Since September 11, 2001, he has
also served as the principal assistant and senior adviser to
Treasury's general counsel on issues relating to terrorist
financing and financial crime.
Michael Morehart has served as Director of the TFOS since
March 2004. He is a 19-year veteran of the FBI and a CPA.
Gentlemen, we look forward to your testimony.
Chairwoman Kelly. We begin with you, Mr. Fox.
STATEMENT OF WILLIAM J. FOX, DIRECTOR, FINANCIAL CRIMES
ENFORCEMENT NETWORK, DEPARTMENT OF THE TREASURY
Mr. Fox. Thank you very much.
Chairwoman Kelly. Mr. Fox, please turn the microphone on.
Mr. Fox. Got it.
Chairwoman Kelly. Thank you.
Mr. Fox. Thank you, Congresswoman Kelly, Congressman
Gutierrez, and other distinguished members of this committee. I
wish to thank you for the opportunity to appear before you to
discuss the Financial Crimes Enforcement Network's
administration and implementation of the Bank Secrecy Act. We
thank you for the support and policy guidance you and the
members of this committee, on both sides of the aisle, have
offered to us on these issues.
I would like to acknowledge the work of your staff that was
very helpful to us in preparing for this important hearing
today. They worked tirelessly and they are extremely well-
informed. The committee is fortunate to have such dedicated and
talented professionals. I have submitted a written statement
for the record that outlines much of what we are attempting to
accomplish at the Financial Crimes Enforcement Network. I will
try to keep these remarks very brief.
I am very happy to appear here today with my good friend
and colleague, Mike Morehart, who is the Chief of the Terrorist
Financing Operations Section in the Counterterrorism Division
of the Federal Bureau of Investigation.
Special Agent Morehart's office is working tirelessly to
keep our country safe from terrorists. Every day the men and
women in the Terrorist Financing Operation Section accomplish
that mission, utilizing some of the most valuable information
to the government--financial information--in the process. I
know--I have seen them at work, and I am aware of the fruits of
their labor.
We have entered into a very deep partnership with the FBI
that is allowing Mr. Morehart's office and other components of
the Bureau to exploit information collected under the Bank
Secrecy Act in a much more meaningful and relevant way.
This partnership, which will become part of our BSA direct
paradigm, will make a significant difference in the way we
interact with our key customers, ensuring that the valuable
information we collect is put to the best use possible.
I hope we get to explore this more today with the
committee, because I believe it is a true success story. In
fact, I believe it is a model that the rest of the government
could follow in sharing sensitive information.
I would also like to acknowledge Superintendent Diana
Taylor from the New York Banking Department, who is appearing
on the second panel this morning. As you know, we have entered
into a very important information-sharing agreement with
Superintendent Taylor's agency that I believe will add a great
deal to ensuring that the Bank Secrecy Act is implemented
properly. Superintendent Taylor exercised outstanding
leadership in ensuring this agreement was reached and signed.
Everyone in this room knows that September 11th changed the
world. What we may not have realized on that bright morning
nearly 4 years ago, we now know for certain: September 11th
revealed a new reality. What we know about this new reality is
that information is the key to the security of our Nation, and
information is what the Bank Secrecy Act is all about.
I believe that through the USA PATRIOT Act, the Congress
recognized this new reality. You broke down walls that
prevented the sharing of information between law enforcement
and the intelligence community. Most significantly to the
issues being addressed today, under the leadership of this
committee on both sides of the aisle, you provided us tools to
better acquire and share information both between the
government and the financial institutions, and between
financial institutions themselves.
These tools highlight a couple of important truths. First,
that information sharing is necessary and important to the
national security of our country; and, second, that these tools
demonstrate the recognition that financial information, in
particular, is highly reliable and valuable to identifying,
locating, and disrupting terrorist networks that mean to do us
harm.
That is why this hearing today is so timely and important.
Your hearing has been entitled ``The First Line of Defense: The
Role of Financial Institutions in Detecting Financial Crimes.''
Since the beginning of the year, I have traveled across the
country and have spoken with bankers, broker dealers, money
services businesses, and other financial institutions. These
financial institutions have expressed candid concern about how
the Bank Secrecy Act is being implemented. I am very grateful
for the opportunity to try to outline for the committee those
concerns, and what we are attempting to do to try to address
them.
From my perspective, nothing is more important, simply
because I do believe that financial institutions are the first
line of defense to the security our financial system. We must
make the partnership envisioned by the USA PATRIOT Act real, if
we are truly to achieve our goals.
The goals of the Bank Secrecy Act are simple.
One, safeguarding the financial industry from threats posed
by money laundering and illicit finance, by ensuring that the
financial industry, the first line of defense, has the systems,
procedures, and programs in place to protect the institution
and, therefore, the system from these threats.
Two, ensuring a system of reporting that provides the
government with the right information--relevant, robust, and
actionable information--that will be highly useful in these
efforts to prevent, deter, investigate, and prosecute financial
crime. We must keep our eye on these goals.
It is my view that the best way to achieve these goals is
to work in a closer, more collaborative way with the financial
industry. This regime demands a partnership and an ongoing
dialogue between the government and the financial industry if
it is ever going to realize its true potential. It is why, for
example, we are working so hard to implement section 314(a) of
the USA PATRIOT Act in a much deeper way, which will result in
a sensitive, yet systematic, two-way dialogue with the
financial industry.
This dialogue will make our financial system safer and more
transparent. I am convinced that the financial industry is
committed to this partnership and dialogue. Our goal is to do
all we can to ensure that the government lives up to its side
of the bargain.
Madam Chairwoman--if you can bear with me, I would like to
bring up one issue that is not directly related to the hearing
today. I am happy to report to you that we have had very good
conversations with the officials of the Kingdom of Saudi Arabia
regarding their efforts to set up a financial intelligence
unit. We are poised to offer whatever assistance the Kingdom
will accept in setting this unit up.
Having an FIU in place in Saudi Arabia will add a great
deal of transparency to the Persian Gulf region. Madam
Chairwoman, I am convinced that we would not be having these
conversations except for your direct, personal efforts on your
recent travel to the Middle East.
I want to thank you for your efforts, and I want you to
know that your efforts are having a real-world effect. I
believe it shows what we can accomplish when our government
works closely together hand-in-hand.
Again, I wish to thank the members of this committee for
inviting me here today. I am happy to answer any questions you
wish to ask.
[The prepared statement of Mr. Fox can be found on page 64
of the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Fox.
Mr. Morehart.
STATEMENT OF MICHAEL MOREHART, DIRECTOR, TERRORIST FINANCING
OPERATIONS SECTION, FEDERAL BUREAU OF INVESTIGATION
Mr. Morehart. Thank you, Chairwoman Kelly, Congressman
Gutierrez, and distinguished members of the committee. I
appreciate the opportunity to appear before you to discuss the
efforts of the U.S. Treasury's Financial Crimes Network,
otherwise known as FinCEN, and the Federal Bureau of
Investigation, particularly as they pertain to the utilization
of information obtained pursuant to the Bank Secrecy Act, also
known as BSA, as amended.
I am honored to appear before you today with William Fox--
Bill, the Director of FinCEN, to discuss how FinCEN and the FBI
work together closely to ensure the appropriate and successful
utilization of BSA information in the war on terrorism. Over
the years, the FBI has enjoyed a longstanding and productive
relationship with FinCEN.
The importance and quality of this working relationship
cannot be overstated. Under the leadership of Director Fox, our
relationship as well as the quality and successes of our joint
efforts have flourished. This mutually beneficial working
relationship serves as a prime example of what can be achieved
when agencies unite in a common effort to ensure the safety of
our financial system as well as our Nation's security.
The critical role that financial information serves in
investigative and intelligence matters cannot be
overemphasized. This underlying premise was enumerated in the
PATRIOT Act of 2001 and an example is as follows: Defects in
financial transparency on which money launderers rely are
critical to the global financing of terrorism and the provision
of funds for terrorist attacks.
Financial information, lawfully acquired, significantly
enhances the ability of U.S. law enforcement and intelligence
community members to overcome defects in financial
transparencies, as mentioned in the previous excerpt that I
just read from the PATRIOT Act.
Likewise, BSA data is of incalculable value in this
important effort. When combined with other data collected by
law enforcement and the Intelligence Communities, investigators
are better able to connect the dots.
More recently, BSA data has proven its utility relative to
matters. For example, BSA data is used to obtain official
information about subjects under investigation and their
methods of operation. Analysis of BSA data permits
investigators to acquire biographical and descriptive
information to identify previously unknown subject associates
and/or co-conspirators--and in certain instances, to determine
location of those subjects by time and place.
The value of BSA data to efforts is reflected in the
results of the review of the BSA data that the FBI has
conducted. In this instance, the FBI, using information
technology, reviewed approximately 71 million BSA documents for
their relevance to, investigative, and intelligence matters.
The review identified over 88,000 suspicious activity
reports and currency transaction reports that bore some
relationship to subjects of terrorism investigations. The FBI
also uses BSA data to identify trends and patterns of relevance
to terrorism financing.
For example, 64 percent of the CTRs associated with cash
deposits were for amounts which totaled less than $20,000.
Conversely, the analysis showed that 75 percent of the CTRs
associated with cash withdrawals were for amounts greater than
$20,000.
This is consistent with traditional money laundering
activity or structuring, which involves a deposit of small
amounts, followed by the withdrawal of larger amounts. Director
Fox and his staff clearly understand the importance of BSA data
to the investigative and intelligence missions of the FBI, and,
in turn, its critical importance to the protection of this
Nation's financial infrastructure as well as its security.
This understanding is evidenced by FinCEN's assistance in
helping the FBI develop new ways to access and to share the BSA
data. As a result, BSA data has been integrated into the FBI's
investigative data warehouse, otherwise known as IDW. By way of
background, IDW is a centralized Web-enabled closed system
repository for intelligence and investigative data.
The system maintained by the FBI allows appropriately
trained and authorized personnel throughout this country to
query information of relevance to investigative and
intelligence matters. In addition to the BSA data provided by
FinCEN, IDW includes information contained in a myriad of other
law enforcement and intelligence community databases.
The benefits of IDW include the ability to efficiently and
effectively access multiple databases in a single query. As a
result of the development of this robust information
development technology, a review of data that might have
previously taken days or months now only takes minutes or
seconds.
In conclusion, the partnership between the FBI and FinCEN
is a model for the effective sharing of information. Director
Fox has accurately identified a process which maximizes the
information collected by FinCEN to be used by the FBI within
the confines of current laws and regulations in the war on
terrorism. The FBI has developed IDW as a tool to find the most
critical pieces of information included in BSA data and other
data sets to ensure that efforts of FinCEN and its banking
partners are utilized as directed by Congress to protect the
United States.
I would like to thank the committee for this opportunity
and welcome the opportunity to answer any questions that you
might have.
Thank you.
[The prepared statement of Mr. Morehart can be found on
page 80 of the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Morehart.
Director Fox, I am going to ask you three questions. Mr.
Morehart, I would be interested in your responses as well.
I am wondering, Mr. Fox, can you discuss efforts over the
last year to strengthen our BSA compliance regime? I have often
spoken with you as well about my concern about the structural
issues, which seemed to be presenting vulnerable areas of
fragmentation and causing inefficiencies.
I know that the finalization last year of--the MOU was
designed to help address some of the concerns so that a more
unified and effective BSA compliance system could be achieved.
But is it enough? It seems to be a highly segmented system at
this point. I want to know what we can do to ensure that it is
an effective, synchronized and capable system providing a
unified message about what is expected of the financial
institutions.
Mr. Fox. Thank you very much, Chairwoman Kelly, for that
question.
I think it is an interesting system in the sense that we
administer the Bank Secrecy Act. Yet, the act is implemented by
no fewer than eight separate Federal agencies that examine for
its compliance. Working to make sure that all the folks
involved are pulling the oar in the same direction is a
challenge from time to time.
I will tell you that we have received outstanding
cooperation from most of the regulators. The Federal banking
agencies and the IRS, in particular, have been incredibly
helpful in trying to coordinate this effort in a better way.
I think we are, today, more coordinated and working
together with a single unified message than we perhaps ever
have been.
I think this is evidenced by the guidance that has been
recently issued. There has been joint guidance to the banking
agencies, and I think that really helps depository institutions
when their regulator joins with our guidance, even though
technically our guidance is the definitive guidance when it
comes to the Bank Secrecy Act.
That being said, I think I would not be completely candid
with you if I didn't tell you that there are issues, and we
hear--one of the things that I have heard from time to time, as
I have discussed these issues with the banking industry in
particular, but with other banking industry sectors as well, is
there does seem to be a disconnect between the actual
examination forces and the policymakers in Washington.
We are doing all we can to close that void. We are training
examiners, together and jointly. We are making sure that there
is no daylight between what we are saying both publicly and to
our own people. We have created a FinCEN Office of Compliance,
with this committee's help, to actually monitor this situation
and to receive from the agencies what is actually happening out
there as they examine--not just from the banking agencies--but
hopefully from the other regulators in the Bank Secrecy Act
milieu as well.
What I can tell you is that folks across this spectrum are
trying very, very hard to make this work. We are doing all we
can to lead this effort and to make sure that the government
speaks with one voice. I think that is the very least that the
industry can expect from us.
I also will tell you that, again, I believe that this
system is critical to the national security of the United
States. We can't get it wrong, and we can't be speaking with
different voices. So we are going to watch this very closely,
and we will certainly continue the dialogue that we have begun
with this committee and other Members of Congress because I
think it is a critical issue.
I am happy to report that folks are really trying, and I
think it is getting better.
Chairwoman Kelly. It is a new system, so the concern is
whether or not we are moving toward a unified message, and I
think that is important.
Mr. Morehart, do you want to comment on that, please?
Mr. Morehart. From the oversight standpoint, obviously, the
FBI has no role in that. However, I can comment on it from this
standpoint. I am often asked, particularly when I go out and
deliver presentations and interact with our partners in the
financial community--whether it be banks or whatever--what are
the indicators of terrorism; financing, particularly? That is a
very difficult question to answer.
They ask that question in this context. How will we know--
how do we know, how are we supposed to know what to report on a
suspicious activity report? And it is a very good question and
a very logical question. Bottom line, it boils down to the same
guidance that was given to financial institutions when the Bank
Secrecy Act was implemented and throughout the past years in
terms of what we call regular financial crimes, for instance,
not terrorism, but know your customer.
The bottom line is if it seems unusual, report it. However,
to address those issues, Bill and I have worked together. We
are constantly trying to identify or provide a definition of
what constitutes suspicious activity in terms of terrorist
financing.
Bill--on the forefront again--we have had conversations,
and he actually delivered to financial institutions a
somewhat--not complete, but a start as to what indicators they
might look for, so that they can appropriately comply with BSA
requirements in terms of SARs specifically.
So we are making every effort, together, as a team to try
to identify whatever information we can and provide it to the
financial institutions and entities affected by BSA so that
they know what to report, they know how to report it, when to
report it, and what is appropriate.
As always, through our contacts, we make it clear that if
there is a question, they should call.
Mr. Fox. Madam Chairwoman, if I could, I forgot one element
of this issue.
Chairwoman Kelly. All right.
Mr. Fox. The States are a huge part of this. Each State has
its own regulatory regime and bank regulator or regulatory
services. I think our efforts to coordinate better with the
States--which is our MOU within New York--is a real key aspect
to this as well.
Chairwoman Kelly. As you know, the concern is an
overabundance of information and sifting it out to get accurate
appropriate information.
Mr. Gutierrez.
Mr. Gutierrez. Thank you.
I want to ask Director Fox, is FinCEN consulted by banking
regulators when a bank has committed a Bank Secrecy Act
violation? In other words, are you consulted in the
determination of enforcement actions on BSA matters? How much
input do you have in the final determination of what violations
merit disciplinary action?
Mr. Fox. Thank you, Congressman. We are now, as a result of
our MOU that we have executed with the Federal banking
agencies, notified whenever the agencies determine, discover,
or uncover a significant violation of the Bank Secrecy Act. The
art, of course, is defining the word ``significant'' but I can
tell you that the agencies have been very good about providing
the information to us when they uncover it.
This is a brand-new system. We are very pleased with the
responses so far. The fact is agencies will--the agency has a
responsibility that relates to safety and soundness--decide
whether or not to issue a consent decree along those bases. But
we are engaging with them in a fair way to determine what the
appropriate enforcement action is.
Certainly, any action that rises to the point where simple
monetary penalties are contemplated, it is our view that
actually it must be a coordinated effort on behalf of the
government. So we are working very, very hard so that when that
extraordinary case happens, we do it together. We don't think
it is fair to whipsaw the industry with separate enforcement
actions that are based essentially on the same facts.
So if a regulator--one of your co-managers of the
industry--will let you know if they believe it is substantial,
then you will work together.
Mr. Fox. Yes, we do work together. If a conversation is
started--in fact, I don't want to mislead you either. I don't
think that agencies, particularly the banking agencies and
certainly the SEC and CFTC all have their own enforcement
capabilities through their safety and soundness
responsibilities, and technically they can go forward without
us on those issues.
But the reality is, at least so far, I am happy to report
that this is not occurring, that we are enjoying the
conversation that is occurring. I think we are having valuable
input to it, we know about it, and it helps us to address the
administration of the system as a whole.
Mr. Gutierrez. I asked the question, because--I mean, I
understand it from a processing point of view. The financial
institution would probably prefer, as you said, you just not
get whipsawed. But at the same time, when more people are
looking at it, let us say an OCC or someone sees something and
they consult with you and others in terms of saying here it is,
a substantial--and everybody is looking at it--I just think the
public is better served. Our security and soundness is better
even though you don't have that issue at FinCEN.
Mr. Fox. I agree. I will tell you it is critical that we
make sure our enforcement actions are geared to achieving the
policy goals of the statute. So I couldn't agree with you more.
Mr. Gutierrez. Let me ask you, following up on that same, I
would like to ask Mr. Moore and you, Director Fox and Director
Morehart, does the FBI also share information with FinCEN or is
it a one-way street? Specifically, does the FBI provide
information regarding situations where, perhaps, a crime hasn't
been committed but the bank may be in violation of some
regulatory statute? Do the regulators get this information so
they can act on it?
So I understand what you might do, I guess I would like to
hear what Mr. Morehart and his team might do if it is not a
crime in the sense, but it is a violation, it is a regulatory
violation.
Mr. Morehart. Certainly. Obviously we comply with our
guidelines in terms of the classified information and how it
can be disseminated in terms of a nonclassified investigation,
if you will, a typical fraud. As one might expect, we provide
as much information as necessary to obtain the information we
require.
In other words, if Bill and I were working together on a
particular investigation, it might be necessary for me to
provide him certain parameters, certain guidelines, that would
allow him to respond to my questions.
So the answer to that generally is yes. But obviously
within the laws and within the guidelines as they pertain to,
for example, 6(e) material, grand jury secrecy and so forth, as
well as the classification requirements on information.
Does that answer your question?
Mr. Gutierrez. Yes. Let me just--in the spirit of clarity--
so let me just ask you this question. Has there been an
example, a situation, where the FBI is examining something,
looking for fraud, but then finds regulatory flaws; that is, if
they didn't respond? There was no fraud, but the financial
institution didn't carry out all its responsibilities in terms
of regulatory issues.
Mr. Morehart. Honestly, I can't think of one off the top of
my head, sir, but logic would dictate that if we did run across
that type of violation, we would contact the appropriate
regulatory body that would handle it.
Mr. Fox. I can tell you, Congressman, that we would work
closely as well, not only with the Counterterrorism Division of
the FBI, but also with the Financial Crimes Division. We have
received such referrals from the FBI indicating that it appears
something is going on here and you, FINCEN, ought to look at
this. I think that this is really the important part of this
partnership.
I would also like to emphasize that while we have picked
the Bureau to be the first one to enter into this extraordinary
relationship with the data because of their terrorism
responsibilities, our goal is to have similar arrangements with
other key Federal law enforcement agencies. We really do have a
terrific relationship with those agencies.
The Bureau of Immigration and Customs Enforcement just
announced a big action on unregistered MSBs this past week. We
helped and supported that effort at ICE and it is that sort of
information sharing that occurs all the time. It is part of
what we try to make ourselves, and that is a network of
information, and we try to be a hub for financial information.
Mr. Gutierrez. Thank you both, gentlemen. Thank you very
much.
Mr. Fox. Thank you.
Chairwoman Kelly. Mr. Crowley.
Mr. Crowley. Are you recognizing me for questions? Or
recognizing me to be on the committee? I am not a member of
the--standing member of the subcommittee, so is that okay?
Thank you.
Chairwoman Kelly. I am sorry. They would like--I have been
asked by Mr. Gutierrez to allow you to ask questions. You are
welcome to do that.
Mr. Crowley. Thank you very much, Ms. Kelly, I appreciate
that very much. I represent a very, very diverse district in
New York City, Queens and Bronx. I may have one of the most
diverse districts in the country. I have many, many immigrants
from various parts of the world.
Very recently it has come to my attention that a major
bank--I won't mention the bank--was considering suspending the
remittance program, where moneys that are derived here in the
United States through work--more likely than not--from
undocumented workers who are sending those funds back to their
homelands. Their families, many of those families rely upon
those dollars to get by in those developing countries.
But due to the fear that they possibly could be prosecuted
under the PATRIOT Act, money laundering issues, etc., that they
may be somehow financing unwittingly someone who is on the
suspected terrorist list, that they are no longer providing
those services. It is a real concern that we have.
On top of that has been what has been described as
arbitrary enforcement, where some are being told this and
others aren't necessarily getting that same direction.
Could you, either one or both actually, answer what actions
you have taken and what will you be doing in talking to these
companies or these banks to address the concerns about
arbitrary enforcement and uneven regulation?
Mr. Fox. Thank you, Congressman. I actually think you know
that this is clearly--this has clearly been one of the issues
this past year in the area of the implementation of the Bank
Secrecy Act relating to money services businesses and also
remittances generally, and possibly a misperception on the part
of the financial industry on the risks associated with that.
As you may know, we have implemented the Bank Secrecy Act
through what we call a risk-based regulatory approach. We think
that this is a very smart way to do it, just because of the
nature of the problem. But it requires institutions to
essentially study the risk that may be associated with its
business lines or its customers, and then take appropriate
safeguards to make sure that those risks are addressed.
I think there were a couple of problems. One, I think there
was a lot of confusion about what was actually required under
our regulations. We attempted to address that by issuing
guidance, which we issued last month, that I believe--at least
the feedback that we have initially received has been very
helpful in sort of calming the waters, or at least gaining some
understanding, some better understanding about these issues.
Now, I will tell you to the extent that we have not
completely covered that field, we will work very hard and try
to, because I agree with you that--I think it is certainly the
position of my agency, the Department of Treasury, that
remittances are an incredibly valuable part of the world's
economy, an incredibly important part of the world's economy.
So, I believe that they can be managed with the appropriate
level of attention and risk by institutions.
What we hope to do, sir, is to make sure that folks
understand clearly what we are expecting of them in the
financial industry and to the extent that we can do that, these
decisions will become business decisions for the institutions
and not based on sort of misperceptions about what the risk may
be.
Mr. Morehart. Thank you, sir. I can't speak as to the
uneven regulation, obviously. I am going to have to defer to
Mr. Fox for that.
However, may I ask a question, sir, in terms of arbitrary
enforcement? I assume you are talking about criminal laws as
opposed to regulatory?
Mr. Crowley. Correct.
Mr. Morehart. With that clarification, thank you, I would
not characterize what the FBI does in terms of law enforcement,
whether on the criminal side, or, if I may distinguish, on the
terrorism side as arbitrary. Obviously we have to have
appropriate predication to initiate an investigation. SARs,
obviously, can be used for informational purposes, but not as
probable cause, if you will, on a legal action. Nevertheless,
they are of value. We rely on that information in terms of
initiating investigations.
As you I am sure understand, sometimes those investigations
lead to prosecutions, sometimes they don't. But our
determination on whether to initiate an investigation is
largely dependent upon what area of the country we are in. As
you know, every United States Attorney's office has different
persecutive guidelines in terms of dollar amounts and so forth.
So that offers us some guidance as to what we look at and what
we don't.
In terms of terrorism, obviously, it is a little different,
if we are looking at threats as opposed to dollar values; if it
poses a credible threat and if there is significant information
to initiate an investigation into terrorist matter, potential
terrorist matter, we will do that. But, again, it is based on
threat. Does that answer your question?
Mr. Crowley. It does. I appreciate it. I think what puts
the chilling effect on it is the potential criminal aspect. Not
necessarily regulatory, because regulatory we can work through
those issues and ask questions. When it is a threat of a
criminal prosecution, it is a totally different subject.
One quick question, just for the record and not for
response.
Mr. Fox, I am currently working on drafting some
legislation that would require the Treasury Department,
especially FinCEN, to conduct a feasibility study to force the
greater consistency, greater transparency, and to improve
accuracy and deliverability of information in a form that is
more amenable for subsequent analysis by regulatory law
enforcement agencies. May I request your assistance as I
develop that information?
Mr. Fox. Yes.
Mr. Crowley. Thank you very much. I yield back.
Chairwoman Kelly. Yes. Mr. Royce.
Mr. Royce. There was a story today--there was a hearing
yesterday, I think it was the Government Reform Subcommittee
that was--the Homeland Security on the Senate side had a
hearing on remittances and especially on financial crimes that
are occurring in the United States. For example, just to take
one segment of that, 20 to 30 million a year is the sum of
financial crimes committed by Hezbollah, and admittedly we view
it as a terrorist organization. Many of those who participate
in this view it as a legitimate arm of Islamist liberation
struggle.
But the fact is that these crimes are being committed in
the form of identity theft and in the form of credit card fraud
and other forms of financial crimes. Then our wire agencies are
used to remit that money that then goes to fund Hezbollah.
The Bureau of Immigration and Customs Enforcement this week
announced some significant action related to unregistered money
remitters. In previous testimony, I think it was you, Mr. Fox,
who stated that you believe there are as many as 250,000 money
service businesses in the United States. But we only have
23,000 registered?
Mr. Fox. Approximately.
Mr. Royce. A quarter million. That gap is cause for
concern. So I want to ask you, to what do you attribute that
gap and what are you doing to address it?
Then my other line of questioning has to do with what can
be done in terms of the user regulation on the problem with
three States. Delaware is of particular concern to me, because
we have Interpol officers who come over here looking to track
money for companies that claim to be U.S. corporations, all
right?
They set up in Delaware or one of these other two States
that permit the formation now of what I think you and I would
call shell corporations. The States collect, in these cases, no
information about the identity of the officers, about the
directors, no information about beneficial ownership.
So if we allow anonymous corporate shells, how are we going
to be able to pressure other jurisdictions around the world to
clean up our act?
I know a lot of what Congresswoman Sue Kelly and I work on
is how to figure out how we bring pressure to bear
internationally on some bad actors, some other State
governments, but, you know, using your view that our treaty
commitments and our international commitments on the proceeds
of crime should make what these States are doing illegal here
in the United States, and can you do that by regulation?
I would like you to look into that. Isn't it a fact that
these issues have been raised against the United States when we
have meetings with the FATF that our colleagues in the
international community are bringing this up? Do we have
similar problems with trusts and with some types of omnibus
trust accounts? Are they also being set up under this same
shell corporation system in Delaware and these other two
States?
Mr. Fox. Thank you, Congressman Royce.
If I can address your second question first, it is a very
timely and very good question. Yes, I believe, without speaking
about the policies associated with the setting up of LLCs and
other sorts of corporate mechanisms, from my perspective, which
tends to be a perspective with blinders on, these entities pose
great difficulty for us. I mean, it is a fact that we criticize
other governments for similar-type activities, yet we are
running into the same sort of problems here in the United
States. It is just a simple fact.
What I can tell you is we are studying this issue pretty
closely from an analytical perspective to try to determine what
is required, what is not required, and also, the problems that
those entities are causing for our law enforcement.
Mr. Royce. Have you put these three Governors on notice and
asked them--
Mr. Fox. No, sir, we have not at this point.
Mr. Royce. I would think that would be one of the actions
you would want to take, given the enormity of the significance
of getting compliance on transparency with respect to some of
our--some governments in the Middle East. When we are trying to
track the flow on terror finance, it is enormously helpful to
have our local jurisdictions complying with Federal law.
I would argue that they are out of compliance. I would give
them the opportunity, these Governors, if I were you, of
contacting the Governors, bringing this to their attention,
explaining the consequences. I am sure you are aware also, if
some of the meetings over here from Interpol and others who are
hot on the trail of some very dangerous people, and asking them
if they would like to be part of the solution by suggesting to
the president pro tems and the speakers of their house of
delegates and State senates, that they quickly move legislation
to correct this.
Mr. Fox. I think that is actually a very good strategy,
Congressman. I think what we are trying to do is make sure we
fully understand the issue before we actually go and engage in
some way like that. I want to make sure our ducks are in a row,
if you will.
Mr. Royce. Line them up.
Mr. Fox. You have got it. So I think that this is an
incredibly important question. I don't know whether Mike has
any comments on that issue or not.
Mr. Morehart. No, sir, I don't; not on that.
Mr. Fox. But it is a very important one that I think we
need to address. Going back to your first question?
Mr. Royce. Please.
Mr. Fox. Yes, this is a very serious issue that we have
identified and we realize we have to do something about it. Now
the 200,000-plus number that you have comes essentially from a
study that was conducted, I think if I am correct, in the late
1990's as we were beginning to think about how to regulate the
money services business sector. It was a study that was done by
one of the consulting firms, one of the big six or four or
however many of them are left. The number actually includes
outlets of the U.S. Postal Service, certainly every outlet of
Western Union, MoneyGram and others, that are not required
presently to register with FinCEN because of their agency
relationship. There is an exemption for the U.S. Postal
Service, so that can account for some of the gap but certainly
not all of it.
Mr. Royce. Right.
Mr. Fox. We are convinced that there is a gap. How big the
gap is, I am not sure. But I think what we are doing, and we
are doing with some alacrity, is we are reviewing our
regulatory scheme that was implemented in 2001, I believe,
before September 11th, to determine whether or not that
registration scheme makes sense. Because I think one of the
very first things we need to do for law enforcement and for our
purposes is to know where these businesses are conducting their
business.
I think if we make the registration requirement easy; in
other words, Web-based, or make it a very simple form, at least
we will know where they are and then we can reach out and help
them comply and add greater transparency to this important
financial services sector.
So I think you can expect from us very soon regulatory
action to address this issue. It is a very serious issue.
Mr. Royce. In closing, Mr. Fox, there is some urgency to
this as well. $20 to $30 million in the hands of Hezbollah,
that is a lot of dynamite.
Mr. Fox. It keeps me from sleeping at night, sir.
Mr. Royce. Thank you, Mr. Fox.
Chairwoman Kelly. Thank you, Mr. Royce.
Mr. Morehart. May I comment on that, Madam Chairwoman?
Chairwoman Kelly. Yes, please.
Mr. Morehart. Let me add this if I might, Congressman.
One of the databases that was provided to us by FinCEN is
their money services database, which is a listing of all
registered MSBs. In an open forum I can't go into great detail
but I will add this comment, that we have a number of
interagency initiatives with ICE and IRS, Treasury, you name
it, ongoing to identify those types of businesses.
This is a perfect example of the value of the data provided
to us by FinCEN on the BSA. It is important from the standpoint
that we can immediately evaluate whether or not a subject of an
investigation who may be involved or suspected of an
involvement as an MSB, either witting or unwitting, is
registered or not.
In addition, we have a number of proactive efforts
underway, again interagency efforts, to identify these types of
entities so that appropriate regulatory and legal action can be
taken to resolve that issue.
We recognize the import of that. We recognize that these
individuals may be being used to move money to facilitate
terrorists whether it is Hezbollah, Hamas, PIJ, al Qaeda or any
of them, quite candidly, and we take it seriously.
We are working every day, day-to-day, with Mr. Fox and his
staff to utilize that information to exploit it to the
interests of our country, to make sure that the financing that
is out there is not being sent for terrorism purposes.
Chairwoman Kelly. Thank you, Mr. Morehart.
Mr. Scott.
Mr. Scott. Thank you very much, Chairwoman Kelly.
Mr. Morehart, may I start with you? Critical to the success
of your job is being able to collect the transaction data, the
BSA data, to be able to use that, is that not correct, as well?
Mr. Morehart. That is correct, sir. Utilize it but not
collect it, other than through FinCEN.
Mr. Scott. From what we hear from the banking community and
the banks and the financial institutions, they are very
critical that it is too much information, that it is
overburdensome to them. Do you question why so much
information, what is the Federal Government doing with that
information, and are they in the eye of the storm as well? Can
you address this conflict of opinion and share with us why you
need this much information, and secondly, where is that burden
with the banking finance community?
Mr. Morehart. Start with the latter aspect of that
question, sir. I am not sure I can answer where the burden
would be with the community in general. That might be better
addressed--
Mr. Scott. I meant why they feel that it is this burdensome
and too worrisome and too much, and of course, you can address
why, just the opposite, you need it.
Mr. Morehart. The information we receive, the BSA data we
receive and have received has been invaluable, as I mentioned
in my opening comments. The information is not too much. I
would wholly disagree with that.
I think the question here is perhaps that the financial
sector of our country probably doesn't realize and in certain
instances we can't tell them how we utilize that data nor would
I think it prudent.
I can give you some examples of how we use that information
and how valuable it is, and I will emphasize that our use of
that information, in conjunction with FinCEN and the forward-
thinking approach that Mr. Fox has worked with us to develop,
has been critical. The information technology we have developed
has allowed us to do things to exploit that data, to look at
it, to use it like never before.
As I mentioned, in the old days, and I shouldn't say the
old days, 20 years ago, as long as I have been in the Bureau,
when I first joined, when we got information, back then they
weren't SARs, and I forget what the documents were, 567s or
whatever they were, we would actually have to flip those
documents and look through them. A real person would look
through those to identify a name or something of import.
That is no longer the case wholly. What we do is we take
IDW, our Investigative Data Warehouse as I described, if I
could characterize it as a Google on steroids, that is
essentially what it is, and it is amazing. We can actually take
millions of documents, BSA documents, and query them for a
specific set of metrics within hours, within minutes sometimes,
and even seconds.
For example, we may be interested in identifying CTRs or
SARs, identifiable with a particular subject that we have
intelligence that suggests they may be money laundering,
whether for what I call typical crimes or terrorism purposes,
we can run against all those billions of documents and in a
very short period of time identify every document associated
with that individual and pull them up.
After, we can analyze them and we can determine information
quickly, very quickly. For example, we can identify the pattern
of activity. We can identify what banks they have dealt with.
We can identify the dollars and where they have been sent and
biographical data that may help us locate that individual and/
or an address, and those are just certain examples of the
things we are able to do.
As to the volume of information provided, all things must
be reasonable. We recognize that, and that is why there are
limitations on dollar amounts with CTRs and things like that
because it would be truly overburdensome if we had to report on
every transaction.
I will point this out, however. SARs are very subjective in
nature. What I mean by that is what is suspicious to me may not
be suspicious to you. Nevertheless, it comes back to what we
have always discussed with our banking partners or partners in
the financial sector, is know your customer. If it is unusual,
report it.
I would like to give you a couple of statistics in a moment
that kind of prove what I am saying.
On the CTR side of the house, the Currency Transaction
Reports, the current limit is $10,000--I know there has been
some discussion as to whether it should be raised to $20,000.
We are opposed to that. We think it is a huge mistake, and I
think the numbers that I will give you will explain why.
Those are objective in nature. That is, there is no
decision, either the amount of money is either deposited or
withdrawn, i.e., $10,000 or more, or it is not and the
information included on there, name, address, biographical
information and so forth, can be extremely valuable in an
investigation, whether it relates to terror or otherwise.
Let me just give you a couple of examples of some numbers
that may bring this home.
The total BSA documents in IDW now are about 63 million,
and they constantly increase as the banks send in data, and
they in turn give them to us and we enter them into the
database. We did a search that I would characterize as main
hits; that is, all the subjects of current and closed FBI
investigations were compared to that BSA data. Out of 63
million documents, there were 1.5 million hits.
Now, it is incumbent upon us to evaluate that information,
particularly on those more threat-based cases that are of
import, and that we send that information out to the field and/
or they access it themselves through IDW. We have some 5,000,
if I am not mistaken, users trained in FBI offices to access
that data, which is immediately available to the investigator
and can be of significant import.
Mr. Scott. My time is about up. I did have one follow-up on
that when I set that question up because we want to make sure
that the system of data collection that is in place is exactly
what you need. I do think that we need, because the banks have
to give it to you, but maybe there is some things we can do to
make sure there is nothing too burdensome that prevents us from
giving you the information.
Do you think that the system of collection of this data
that we have with the BSA is sufficient to catch, say, what I
think is one of the main sources, the hawalas; are we okay with
that?
Chairwoman Kelly. Mr. Scott, we are running out of time
here.
Mr. Scott. Just give me a response.
Chairwoman Kelly. Can you give a quick response to that,
please?
Mr. Morehart. It is difficult for me to assess whether it
is perfect or not, by any stretch of the imagination. I think
that is a very subjective measure. However, I would say that
the BSA data we get is critical, and I repeat that, critical to
the identification of those types of activities, whether
witting or unwitting, in support of terrorism or otherwise.
Chairwoman Kelly. Thank you.
Mr. Davis.
Mr. Davis of Alabama. Thank you, Madam Chairwoman.
Mr. Fox, I direct these questions at you. As you may know
in the last several years, various States, I think about 17,
have entered into voluntary alliances that are loosely called
FraudNet and what happens is that financial institutions within
the member States or the partner States agree to share
information regarding suspicious credit activities.
There has been some controversy and some discussion since
the renewal of FCRA last year as to, number one, the utility of
alliances like FraudNet, and number two, of whether or not they
somehow violate FCRA.
I recognize that obviously other agencies will make the
determination as to whether they are violative. Let me get you
to comment for a moment.
Do you perceive the FraudNet alliances as being in any way
in violation of FCRA?
Mr. Fox. Congressman, I am sorry I have not analyzed
FraudNet from the FCRA, but we would be happy to do that in a
question for the record and at least give you our view of it.
We have not looked at FraudNet, in particular, against that
standard.
Mr. Davis of Alabama. Well, moving beyond the legal
interpretation of whether or not there is a collision with
FCRA, can you a comment for a moment just on the utility of
alliances like FraudNet?
Mr. Fox. I think if I understand FraudNet correctly, I
believe that Gramm-Leach-Bliley sort of made FraudNet capable
or enabled it, so to speak, and I am somewhat familiar with it.
I have seen it. And I believe, frankly, that it is a very
useful--it is kind of a bulletin board where folks post--I
think if I'm not mistaken it has been sponsored by the Florida
Bankers Association, or underwritten by them. I know that they
have significant instances where fraud has been either halted
or stopped as a result of the sharing of that information, and
from that perspective it seems to me to be quite valuable.
I will tell you that one of the things that we must do a
better job of is living up to the mandate that you all gave us
in section 314(a) of the USA PATRIOT Act and that is to create
a conversation with the financial industry on issues relating
to money laundering and terrorist financing, and I am very keen
to do that at FinCEN.
In my view, we have not done enough there, and I think it
is important that we do much more. In fact, we have created a
secure Web site that may form the platform for the sharing of
some of this information that might be valuable in this
context. To be very candid, FraudNet's idea or concept was one
that we utilized when we thought of how to do this platform. It
is not fully implemented yet, but we are working very hard to
get there.
Mr. Davis of Alabama. Let me go for a moment back to Mr.
Scott's questions and Mr. Royce's questions. One of Mr. Scott's
questions regarding the FCRAs, do we have any indication, even
an approximate, of how many SARs are filed in the United States
in a given year?
Mr. Fox. The number has been roughly between, if I could
just correct my statement later if I need to, but I think
roughly around 400,000 has been the number. We have, however,
seen a significant spike in that during the past year.
Mr. Davis of Alabama. Do we have any ability to quantify
how many of those 400,000 lead to a detection of either
domestic or foreign illegal activity?
Mr. Fox. Currently, no. It is our hope, sir, with the
development of our BSA Direct system, and this is why we are so
excited about the partnership with the FBI, that we will be
receiving feedback on the utilization of these reports and will
be able to report back, not only to the Congress but to the
industry as well, in a much more robust way about the value of
those reports, almost on an individual basis.
Now, we are never going to see a situation I think where
every report results in some action. It is just not going to be
the way that we do things, but I think that, frankly, we know
how valuable this information is because a lot of that data is
being used as a basis for investigation.
Mr. Davis of Alabama. Let me ask you one quick follow-up.
Do we have any sense of how much time or how many manpower
hours are consumed on chasing what amount to false positives or
chasing what amount to misreads that come out of SARs because
obviously, as I wrap up, clearly we have a concern about you
having enough data, but the consequence of sometimes having too
much data is that time is wasted chasing false leads? So can
either of you briefly comment on that?
Mr. Fox. I don't have any metrics for you today. What I
will tell you is this is a great concern of ours, and there are
a number of ways to address it.
I think we have a problem here in this country,
particularly over the last year, with a phenomenon that we are
calling defensive filing. It is where institutions are filing
to protect themselves from any regulatory or reputational risks
that is associated with some adverse action.
I think it is very important for us also from a regulator's
standpoint to try to point the institutions in the right
direction.
If I can give you a trite example that I am not prepared to
implement yet, but I am just about ready to, I think, every
morning on my machine at FinCEN I get an e-mail from a Nigerian
fraud scam. I am sure we have all seen them, and we have a
number of suspicious activity reports that relate to Nigerian
fraud scams. It is clearly suspicious activity. It would fall
within the bounds of our current regime for reporting, but I
think law enforcement generally, particularly at the Federal
level, has decided that unless there is some real pecuniary
loss on the part of a person, that we are just all going to get
smart about it by educating our public who these messages are
aimed at. You know, it is kind of a financial literacy issue to
be honest with you.
I would think we would get much better bang for our buck if
we educate the public about these scams, tell them to ignore
them, tell them to delete the e-mail, and then tell
institutions don't waste your time reporting on Nigerian fraud
scams; we would rather have information about X, Y, or Z.
I think we have to get much better at sharpening the
reporting on suspicious activity and I think it will only make
it more relevant and more robust, and we will get more reports
that are of higher value.
Mr. Davis of Alabama. Thank you.
Mr. Morehart. May I add to that, please?
Chairwoman Kelly. Please do.
Mr. Morehart. I think I can give you at least a metric that
will sort of answer the question, sir, in terms of SAR usage
and how we view that. We haven't done a study in terms of how
many cases have been opened, how many cases have been advanced
as a result of that.
However, of the data we have, as I mentioned, we have about
63 million BSA documents in our Investigative Data Warehouse.
For SARs specifically, we have approximately 1.7 million
documents in that database. We ran that database against the
FBI's databases for references and main subjects. We came back
with 5.7 million hits, i.e., IDENTS against 1.7 million
documents. Again, I cannot specify which ones of those resulted
in case openings or resolutions or that kind of thing, but I
strongly suggest that that information is of great value.
Let me just define hits again. It is for example an
individual compared to the BSA data, you would get a hit or
not. So there may be more than one individual listed on a SAR
for example. That is why you might have more hits than there
are actual documents, but these statistics in metrics would
tend to suggest that that information is of extreme value to
our investigators out in the field.
Chairwoman Kelly. Thank you very much, Mr. Morehart.
Mr. Cleaver, have you any questions for this panel?
Mr. Cleaver. No.
Chairwoman Kelly. Thank you. As you know, gentlemen, this
subcommittee has been looking very closely at actions taken by
the OCC with regard to the Arab Bank's New York City branch.
In respecting the limitations on what can be said at the
moment because this is an ongoing investigation, I would like
to hear more about how our government is responding to some of
the serious concerns that have been raised there. In this
subcommittee's last hearing, Under Secretary Levey talked in
detail about the issue and said that OCC and FinCEN were
working together on the case.
So I am wondering if you could elaborate as to how the
different entities within the Treasury are working together to
address the issue.
In addition to OCC and FinCEN, I have read reports that
OFAC has been involved, and it might be useful for us to hear
which entities are involved and what they are doing and how
they are working together to make sure that there is a fair and
effective response from the government, yet we as the citizens
are protected.
I would also like to hear your perspective as to where this
particular situation might fall within the context of our
ongoing efforts to combat money laundering and terror finance.
What does it mean to the important issue that we are really
addressing here today? Does it illuminate any of the systemic
weaknesses in our regulatory regime and are we working, having
found that information, to fix those?
I know those are several questions. I'll start with you,
Mr. Fox.
Mr. Fox. Thank you. You are right, Madam Chairwoman. There
is really not much I can say at the table today in this forum
about this matter because it is an active and ongoing matter
with our office. The only thing I can tell you is that we are
working very closely with the agencies that you identified to
ensure, as we have said previously this morning, that if an
action is actually taken, it will be coordinated and it will
achieve the purpose of the action, which is compliance with the
regime, greater financial transparency, and to ensure that the
U.S. Financial system is at least protected from the threats of
money laundering and terrorist financing.
So we are working very hard to resolve the matter. We think
it is in everyone's interest to resolve it quickly or as
quickly as possible, and we are working very, very closely
with, and again I am happy to report we have received very good
cooperation from, all the agencies that you mentioned.
Chairwoman Kelly. Thank you. Mr. Fox, during the 1990's,
FinCEN was described fairly or not as the elephant graveyard of
the U.S. Treasury Department. I have had the opportunity to
work with a number of very talented and very intelligent FinCEN
employees who are so smart, I really am very impressed with the
quality of what has been happening at FinCEN. I wonder if you
would describe for the committee your agency's recruitment
process and your work on building a sense of mission.
Mr. Fox. Thank you, ma'am. I will take that compliment. We
are trying very, very hard to develop FinCEN into what I
believe it can be, and that is a model of a financial
intelligence unit as that concept is conceived.
FinCEN is a relatively young organization. It began in 1990
as sort of a law enforcement fusion center. In fact, it is not
odd that FinCEN is new. Our money laundering laws have only
been around since 1985. The Bank Secrecy Act has only been
around since 1970. So I think the issues revolving around
financial crime have been relatively new developments in this
area.
FinCEN has worn some different hats and I appreciate your
characterization because I have heard that as well. Again, it
started out as sort of a fusion center. During the mid-1990's,
FinCEN was instrumental frankly in the development of the FATF
as a robust, international body. Also, FinCEN was one of the
six founding members of the Egmont Group, which has now
expanded to 102 members from around the world of financial
intelligence units sharing key, relevant information to further
the investigation and detection and prevention of financial
crime. I think those were incredibly noble efforts and very
important.
Recently, one characterization I have heard about FinCEN is
that FinCEN is a library. It houses BSA data and its analysts
are essentially librarians that help law enforcement sort of
get at the data but do not do much else.
I have to tell you we are changing that. I have redefined
the mission at FinCEN to safeguarding our financial system from
the abuses of financial crime, and that is a very hard mission
to reach but it is one that I think is worth a stretch. And I
think what we are really trying to do is to make FinCEN a fully
functioning financial intelligence unit.
It is starting to pay off, I think. First of all, we have
to remember that FinCEN is also, and maybe the key thing that
it is, is the administrator of the Bank Secrecy Act and it is a
regulatory agency. If you think about this in intelligence
terms, our whole regulatory effort, in many respects, is that
of managing the collection of the information that the Bank
Secrecy Act mandates, the reporting that it mandates. I think
that is why we have to exercise leadership on the regulatory
side and make sure that we are collecting information that is
relevant and robust for law enforcement.
On the analytic side, ma'am, I will tell you that it is my
goal to make our analysts the best financial analysts in the
world. I have with me today something that we published
recently. It is a document that I think some of your staff may
have. It is not a document for public consumption outside the
government, but it's a reference series on wire transfers. I
will tell you that we have developed this manual for the
benefit of law enforcement and other policy-makers on issues
relating to a very key method of moving money, and that is,
funds transfers. The feedback we have received has been
terrific and we are actually quite proud of it.
I think you will see similar analytic product from us, and
we are doing our very best under the constraints of the system
to attract the most energetic, highly talented people that we
can to try to move the agency into a better place.
Chairwoman Kelly. I thank you for that. You do have a high
energy level. It is tough, hard work, but your people are very
smart, and I have enjoyed working with them. I hope that
continues.
Mr. Morehart, I have a question for you about what this
committee has been doing on the Terror Finance Task Force in
Congress, and I have been following, we have all been
following, the career of Charles Taylor very closely. We are
concerned that he has not been brought to justice. The FBI
promised to establish an office to help us bring Charles Taylor
to justice and to stem the flow of terrorists in West Africa,
but our information so far is that this office has not been
established.
I want to know if you can tell the committee whether you
are actively assisting in the effort to bring Charles Taylor
and that criminal conspiracy that he is in charge of to
justice.
Mr. Morehart. Yes, ma'am. In terms of the LEGAT, if you
will, the legal attache that is to be established, I am not
familiar with the status of that, but we can find that out for
you. That is in a different section, if you will, a division
than is under my purview.
In terms of the investigation of terrorists, if you will,
on the whole, from public documents obviously I have kept up
with this issue and otherwise, and I think the suggestion is
that Mr. Taylor is perhaps not a terrorist in and of himself
but somewhat of a facilitator if you could characterize it that
way, other than perhaps obviously the war crimes and those
kinds of things, if you would define those as a terrorist, but
there have been allegations obviously publicized that he has
been facilitating, for example, al Qaeda's negotiation of
conflict diamonds and those kind of things.
Obviously, we are very interested in any information that
anyone would provide us that would allow us to further that
type of investigation to bring that individual to justice. I
cannot say that I am involved in every aspect of what might be
going on in that realm. However, I will say from a terrorist
financing standpoint, my section, my division, the
Counterterrorism Division, obviously is very, very concerned
with any terrorists, any facilitator, or any individual and/or
entity that wittingly supports those types of individuals. So
we are making every effort to do everything we can, not only in
that realm but quite candidly every other realm where there is
a threat.
Chairwoman Kelly. Well, thank you, Mr. Morehart. I am
extremely concerned about the Charles Taylor case. We have good
people who have put their lives on the line whose lives are
really literally under the gun, and until we move Charles
Taylor to justice those people are under great threat. We owe
them a debt of gratitude for what they have done. It is
extremely important, and I would like very much to have you
give me back that information. This committee is very
interested in this issue.
I would like to go back to you, Director Fox, and ask you a
question about what steps--first of all, let me just say, I
want to know if you can discuss the completion of BSA Direct
and how that is going to improve the security of the SARs but
also what steps you are taking in response to the IG report on
data security. That is a big issue we need to quickly address.
Mr. Fox. Thank you, ma'am. BSA Direct, as the committee
knows, is probably the highest priority for my agency because
it will form the platform through which we will eventually
collect all of the BSA data, house it, analyze it and
disseminate it, even in the extraordinary circumstance of some
key law enforcement partners like the FBI.
It will house feedback and information about how the data
is being used, and it will also provide us with the security to
ensure the data so that we know who is hitting it.
This system will provide law enforcement, at the State and
Federal level, with a very modern and robust data query and
mining system. So we are moving very, very quickly. We are
building the heart of that system now, a modern data warehouse
that will be completed this October, and that will take care of
sort of the dissemination end of the data.
We have also an E-file system that will connect to BSA
Direct. We are building BSA Direct in a way that all of these
different components, whether it is our E-file system, or what
we used to call Gateway, where we captured information about
those people who are hitting the data, all of those components
will be knitted into one solid project.
I think having the entity that is responsible for
administering the act, for collecting the data, for
disseminating the data, in charge of the data, makes perfect
sense. If there is then a problem, you can hold me directly
accountable and you should because this data is very sensitive
with serious privacy concerns. I think it is not something that
should be dispersed across agencies of the government.
We are moving with all speed that we can muster, based on
funding and other issues, to get this system completely built
so that we can then control the data from collection all the
way through to dissemination.
Chairwoman Kelly. I want to thank you very much for
responding with great strength to that. That security is
extremely important.
I also want to thank you for the guidance that you sent out
to the delegated examining agencies and the work that the BSAAG
is doing to make the BSA process more effective and user
friendly. I am concerned that OFAC is not a member of the
BSAAG. Given the complementary nature of their missions and the
institutions that are affected by their missions, I am
wondering why OFAC is not a member of this.
Mr. Fox. The Bank Secrecy Act Advisory Group, as you know,
is a statutorily created body. It is really a gift from this
committee and the Congress. I will tell you I think it is one
of the most effective government/private partnerships that I
have ever been a part of. I served on some other advisory
committees and because of the exemption from the FACA you
actually can have robust conversations, real conversations,
candid conversations on key policy issues.
One of the things the BSAAG is tackling, ma'am, is this
issue about CTRs and whether or not we have too many of them
and how we can get rid of the obvious ones that none of us are
really interested in, the McDonalds and the Wal-Marts.
Turning to your specific question about OFAC, I know in the
interest of time we would be happy to expand on this too if you
want for the record, but the BSAAG was technically created to
address issues relating to the Bank Secrecy Act, and OFAC does
not have any direct responsibilities relating to the Bank
Secrecy Act.
I suspect, ma'am, if you ask Director Warner about whether
or not he would love to have a similar entity to deal with
issues relating to sanctions, I think he would be very keen to
do that. I don't want to presume to speak for him, but I think
we all recognize the value of having the government as a whole,
regulators, policy-makers, law enforcement, meeting with
affected regulated industry and working.
So I think we are actually probably constrained from having
OFAC participate on that issue, but we can look at that as
well.
Chairwoman Kelly. You know, yesterday, this committee voted
for legislation that required the GSEs to report suspected
activity or financial crimes that they thought they were
experiencing. Are you working with OFHEO to provide the kind of
necessary assistance for that, and are you going to be working
with the new Federal housing finance authority if it is passed
into law to establish a robust system there. Will you be
working with them?
Mr. Fox. Yes, ma'am, absolutely. I think we have in the
past and I think we will continue to do so. I will tell you
that none other than the Deputy Attorney General has brought
this to my plate about the concerns that the Justice Department
and the FBI have about mortgage fraud, as does the industry by
the way.
I think the key thing about that provision of law is that
we make sure that reporting, when it does occur, is accessible
to all of law enforcement and we can actually put that to good
use. So we would be happy to work with the committee, and
OFHEO, and the new regulator if it is created to make sure that
this happens. It is a very important problem that we are aware
of and it needs to be addressed.
Chairwoman Kelly. Good. I am glad to here that. Mr.
Cleaver, you have a question now.
Mr. Cleaver. Director Fox, I apologize for coming in late.
I am a new Member and still trying to find my way around, and I
ended up at the Spy Museum. So excuse me.
Is EDS now under contract to build BSA Direct?
Mr. Fox. Yes, sir.
Mr. Cleaver. Now, is there any concern over the cost? The
IG found that Treasury's HR Connect is up and running at $173
million, and I mean the cost is Herculean compared to the work
they have done for the Coast Guard and Agriculture. Is there a
reason for this?
Mr. Fox. Well, sir, I can't comment on the HR Connect
issue. I am vaguely aware of it, being a Treasury official and
being a user of the HR Connect system. It actually works pretty
well now, gladly. I am not sure that EDS was the contractor for
HR Connect, it may have been, I don't know whether they were or
not.
Mr. Cleaver. Does anybody?
Mr. Fox. We can get back to you certainly with that and let
you know that.
I will tell you that we are pleased so far with the
progress on our BSA Direct project, and we believe that we are
building this system at a very reasonable price. I think to
build the heart of this system, just to build the heart of it
is less than $10 million. That is still, to me, an awful lot of
money but I think when you compare it with other systems, it is
a pretty reasonable deal and we are on target, sir.
So I think the system as a whole over 5 years, including
maintenance and operations, I think is a little over $18
million. I think we all agree, in fact we have gotten a lot of
push back from folks saying you are trying to do this too
cheaply, and I think we can do it well and do it keeping in
mind that we are stewards of the taxpayers' money here.
Mr. Cleaver. Well, is there anyone from your staff here--I
mean, maybe you will have to get back with me to find out
further--to talk about the HR Connect.
Mr. Fox. What I can do, sir, is we can certainly--we don't
actually own that system but I think the Treasury's Chief
Information Officer, Ira Hobbs, is the owner of that system. I
am more than happy to let Mr. Hobbs know you are interested in
this and maybe they could come up and provide you a briefing. I
am more than happy to convey your question.
Chairwoman Kelly. Mr. Cleaver, we will follow up on that
and get the appropriate person to respond to that question.
Mr. Cleaver. Thank you.
Chairwoman Kelly. Mr. Scott, you have another question?
Mr. Scott. Yes, I do, Chairwoman. Thank you.
I want to talk for a moment, Mr. Fox, about the situation
over at Treasury. First of all, you are doing a great job.
Mr. Fox. Thank you, sir.
Mr. Scott. But there has been a failure to make some key
personnel appointments over there. I think you have an
Assistant Secretary Zarate, I believe is his name, who is
leaving soon. There is an Assistant Secretary under the Under
Secretary that has not been appointed. I am wondering what
impact is this having on your being able to do your job and is
help on the way here?
Mr. Fox. Without knowing, sir, because it is a process that
I am not intimately involved in or even familiar with, but I
will tell you that it is my understanding that help is on the
way, and it will be welcome help. It is a big loss for the
Treasury Department to lose Assistant Secretary Zarate. He has
been a leader on issues relating to terrorist financing and
financial crime.
I worked shoulder-to-shoulder with Juan after September
11th, and I think actually the country will be served well by
him as Deputy National Security Adviser. I think he is really a
significant talent.
Having said that, I know that Under Secretary Levey, who is
the leader for terrorism and financial intelligence and we
report to, he is doing an outstanding job of keeping everything
together, even given the vacancies. I believe Janice Gardner,
who is the current Deputy Assistant Secretary in charge of
intelligence has been nominated for the position of Assistant
Secretary for Intelligence. Janice is wonderful and we are
working very closely with her and coordinating her office's
work with our office's work. So, actually, from our little
corner of the Treasury Department things are going well.
I used to be at Treasury and I know that there are
vacancies, and those vacancies do cause concern, but I think
the Secretary is doing everything he can to get them filled as
quickly as possible, and I know he is working very hard to move
that process forward.
Mr. Scott. I think you are, too, and I want to take a
moment, before I finish my last part of my question, to
compliment our chairwoman here, Mrs. Kelly, for taking the
leadership. I think that we are at the front line on this fight
on terror because the only way we are going to end this war is
to get our hands around the financing of it, and so Chairlady,
I certainly want to compliment you for the excellent job we are
doing on this committee.
Let me go back to you, Mr. Morehart. I left off with the
last part of my question on the hawalas, and since I have been
on this committee I have been trying to follow that. I have
been trying to illuminate more information because I believe
that therein with the hawalas and that sort of cultural way for
many years of many of the Arab speaking people who are here and
other parts of the world are transporting funds back, they have
been doing it sort of for their families, but tell us how
serious that is. We know there is a serious element to it. It
appears to me that there is some sensitivity to handling it
because there is some legitimacy to the Arabs' argument that
that is used as a way of getting moneys back to the families,
and as a matter of fact, many of their leading spokespersons
are saying that this is harassment against us.
Wherein lies the truth here? How serious is the hawala
problem, and as much as you can share with us--we don't want
you to give too much information. We are not the only ones
paying attention here, but do we have a handle on it? Is it the
threat that it is and what is the FBI doing about it? And in
that line, what kind of cooperation are we getting from the
Arab world?
Mr. Morehart. Well, I think the first thing that needs to
be recognized is that a hawala is not necessarily an illegal
thing. A hawala is simply a method to informally transfer
value; i.e., money, and those have been in existence under
different names and different regions of the world for hundreds
if not thousands of years to conduct that business.
Now I think the issue, of course, here, sir, is what threat
does that represent to us in terms of terrorism, if I might
characterize it that way. That is difficult to answer candidly.
I think there are a lot of issues that we are attempting to
resolve, and one of those issues we brought up a little while
ago was in terms of MSBs and you might consider an hawala an
MSB, is it registered or not.
A lot of times I think that people would assume those type
of activities are illegal and, as I mentioned, they are not
necessarily illegal. Those things have been established for
many, many years and have worked very well for those particular
cultures that use them.
Now are they of concern? Certainly they are of concern. Any
type of value transfer system that might be used by terrorists
or their facilitators is of concern to us. They can be used for
laundering perhaps. They can be used to transfer money if they
are not registered.
Mr. Scott. Let me just ask this point because we have a
vote to get to. You are using words like might, maybe, they
are. Do we have any concrete evidence that any hawalas are
being used to finance terrorist operations?
Mr. Morehart. Sir, I hesitate to answer the questions in
open forum because I probably would have to give examples. I
will say this. I don't know the characterization that they are
being used to finance is accurate. Being used to move money to
facilitate is probably a more apt description. I know it is
somewhat semantics, but it is important because typically these
are middleman who move money or middlewomen who move money
depending upon the circumstances.
As in any other situation, I think the key here is, one,
are they registered in accordance with our laws? If not, they
should be. We are concerned if there are methods of moving
money out there obviously that we have not detected, and I
think that is the more important issue for us to discover,
whether it is through hawala or through cash couriers or
through some other method. That is the primary issue we are
concerned about.
Are we working towards identifying those things? Certainly.
Every single day. We have a number of projects underway where
we are trying to identify those things, and I will emphasize
again, as I mentioned earlier, the Bank Secrecy Act data which
we are given allows us to do that analysis, allows us to do
that patterndetection which might then identify that type of
activity which then might either wittingly or unwittingly be
utilized to move money to terrorists.
Mr. Scott. Thank you.
Chairwoman Kelly. Thank you. We have been called for a
vote. I want to remind this panel that, without objection, your
full written statements will be made part of the record and the
Chair notes that some members may have additional questions for
the panel which they may wish to submit in writing. So, without
objection, the hearing record will remain open for 30 days for
members to submit written questions to these witnesses and to
place their responses in the record.
I appreciate very much your time, your patience here,
gentlemen. I hope that the financial industry has an ear into
what you have said. It appears to me that this is beginning to
be effective, and I appreciate the hard work on the part of
both of you but also the people in your agencies. We are all
safer because of it, I believe.
With that, this panel is excused, and I am going to recess
this committee until we are able--we have two votes. It will
possibly be 20 to 30 minutes before we will reconvene for the
second panel.
[Recess.]
Chairwoman Kelly. Our second panel this afternoon consists
of Superintendent Diana Taylor of the New York Banking
Department, John Byrne of the ABA, Scott McClain of the
Financial Service Centers of America, and Joseph Cachey of
Western Union.
Chairwoman Kelly. Ms. Taylor, I am delighted to have you
here. You represent my State of New York, and you have served
as Superintendent of Banks for New York since 2003.
Ms. Taylor has more than 20 years of experience serving in
both the public and private sectors. She most recently held the
position of Deputy Secretary for Finance and Housing to
Governor Pataki. Prior to that she served as Chief Financial
Officer for the Long Island Power Authority, a company with
annual revenues of $2.4 billion and assets of approximately $8
billion.
I think we will start with you. I can't find the rest of
what I have here. I am just going to go ahead and say we will
start with you, Ms. Taylor.
Without objection, your written statements will be made
part of the record. You each will have 5 minutes in which to
make a summary of your testimony. Let us start with you, Ms.
Taylor.
STATEMENT OF DIANA TAYLOR, SUPERINTENDENT OF BANKS, NEW YORK
STATE BANKING DEPARTMENT
Ms. Taylor. Thank you, Madam Chairwoman. Good morning,
Chairwoman Kelly and other members of the committee. Thank you
for holding this hearing on an issue that is of great interest
to us, those who oversee the financial services industry at the
State level.
It is interesting being on a panel with some of those we
oversee as opposed to being on a government panel. We are all
very concerned about the sometimes conflicting priorities of
regulation, law enforcement and the ability of necessary
businesses to operate. I would like to address the three points
you mentioned in your letter.
First, as you heard earlier this morning, FinCEN and the
Federal banking servicers have received crucial guidance on
BSA/AML compliance for banks doing business such as MSBs, such
as check cashers and money transmitters. This welcome
development promises a strong step in the direction of
clarifying for the banks their BSA/AML requirements with
respect to money service customers.
One very important issue that was made clear in the
guidance is that banks are not expected to become or act as MSB
regulators. At the same time, separate guidance was issued by
FinCEN to MSBs clarifying their BSA/AML requirements.
Significant progress has been made toward a plan to achieve
a coordinated approach among the regulators. Over the winter,
the Conference of State Banking Supervisors worked diligently
with all of the States, our Federal bank regulatory
counterparts, FinCEN and the IRS to produce two model memoranda
of understanding setting forth procedures for the exchange of
certain BSA information between the States and FinCEN and the
IRS concerning bank and MSB examination and information
respectively. This is great progress.
New York was the first State to sign on. On June 1st, more
than 30 States plan to take part in an MOU signing ceremony at
the CSBS annual meeting.
A very important aspect of our agreement is that the States
will receive analytical tools from FinCEN that will maximize
resources and highlight areas and businesses with higher risk
for money laundering. The agreement with the IRS will allow for
examination sharing to reduce duplicative efforts and establish
an ongoing working relationship. This is an unprecedented
cooperative agreement, as it acknowledges that State regulators
are an important part of the solution. We have all recognized
that no one of us can be effective in this area without the
others.
Both FinCEN and the IRS have been exceptionally cooperative
in this endeavor, and I will be happy to keep you and your
committee informed on how this cooperation continues.
With regard to the second issue you highlighted in your
letter--challenges we are facing with regard to BSA/AML
compliance in the MSB area--you are, of course, already aware
of the fact that many banks have decided not to do business
with MSBs as a result of the BSA compliance issues. The
guidance and MOUs I just referred to will hopefully ameliorate
this issue. We will keep you informed on this also.
But there are other challenges. One that is particularly
worrisome to us is the issue of who, if anyone, should regulate
the agents that the MSBs employ to do their business; and if
so, what should that regulation entail? Mr. Fox touched on this
a little bit in his answer to Mr. Royce's question earlier this
morning.
In New York State, there are approximately 73 money
transmitters, but there are 29,000 agents. Clearly, regulating
them would be an enormous task, not to mention what to do about
the hundreds of thousands of nonbank ATM machines in the State.
Then there is the issue of SARs. In the current
environment, financial institutions are worried that they will
be punished severely for seemingly minor infractions, even when
they have a history of operating responsibly and have or are
developing state-of-the-art compliance systems. We need to
realize now that there is no system in the world that is going
to catch every single instance of illegal activity. The only
way to do that is to shut down the whole system.
For regulators, the goal is to prevent and detect criminal
activity, not to close down financial institutions. We
regulators have a long way to go in coordinating and
communicating with law enforcement. We need to make sure that
everyone understands the standards to which we are being held
and that those standards make sense.
We are all united in our concern over choking off the
supply of money to terrorists and other criminal elements. This
is a critical task.
We need to work together to make sure that the laws are
having the intended consequences, which are to stop and punish
criminal and terrorist activities but at the same time to allow
our financial system to operate efficiently and effectively.
The third issue that you mentioned was interaction with the
IRS when monitoring MSBs. We are looking forward to building
our relationship with the IRS with regard to MSB supervision.
As we are just now beginning this cooperative arrangement, I
cannot give a progress report at this point, except to say, so
far so good. However, I am looking forward to giving you a
progress report of our accomplishments and mutual achievements
when we have developed a track record.
The lesson that is learned is that to have a real and
lasting effect on illegal activity it is essential that the
agencies involved in the regulatory, investigative and
enforcement framework for banks proactively cooperate with each
other.
Just as we have forged an MOU between the States, the
Federal banking agencies, FinCEN and the IRS, I think we need
to come to an understanding, perhaps an MOU, with the
Department of Justice so that its actions and those of the U.S.
attorneys are not at cross purposes to those of the regulators.
We must brainstorm together to find a way to allow our
financial system to operate efficiently and effectively while
also preventing its use for criminal purposes. To achieve this
crucial goal we must all work together.
Thank you.
[The prepared statement of Ms. Taylor can be found on page
83 of the appendix.]
Chairwoman Kelly. Thank you, Ms. Taylor. I in particular
want to applaud your working with FinCEN in a very forward
thinking manner.
We turn to you, Mr. Byrne.
STATEMENT OF JOHN J. BYRNE, DIRECTOR, CENTER FOR COMPLIANCE,
AMERICAN BANKERS ASSOCIATION
Mr. Byrne. Subcommittee Chairwoman Kelly, members of the
subcommittee, ABA appreciates this opportunity to discuss how
the financial industry is addressing many of the compliance
issues with suspicious activity reporting and the challenges of
providing bank services to money services businesses. As we
told this subcommittee on May 4th, there has been clear
movement and commitment for further action from the highest
levels of the Federal banking agencies for a uniform approach
to BSA compliance.
However, ABA would again remind the subcommittee that the
industry remains concerned about the quality of communication
that exists between these same agencies and the field
examiners. In fact, we will highlight one particular issue that
occurred after the May 4th hearing to emphasize our concern. We
do, however, remain optimistic that the commitment mentioned
above is real and will resolve the issues quickly.
Your May 20th letter of invitation asks us to address three
issues, an update on what is being done to standardize BSA
compliance challenges, why the industry is engaged in defensive
filing of suspicious activity reports and what BSA compliance
concerns are associated with MSBs.
I will take the three issues together. The pending
interagency exam procedures will provide an opportunity for
both the industry and the Federal banking agencies to work
together to prevent confusion and second guessing. We urge
Congress to seek an update on the practical effect of these
procedures in early 2006.
As we told the subcommittee earlier this month, it is
counterproductive to label an entity high risk without also
issuing guidance on how to mitigate that risk. The agencies
finally agreed with us and produced an interagency guidance on
working with MSBs.
I must take issue with my friend, Mr. Fox, who said it was
a misperception on the part of the banking industry. It was no
misperception, it was comments from field examiners who told us
to eliminate these accounts because they were in fact high
risk. The good news is we have the interagency guidance. While
it is early for a complete assessment, the direction of the
guidance is a strong first step for clarity.
Defense of SAR filings are the result of the dearth of
useful guidance and the lack of a balanced approach to examiner
oversight. The Federal banking agencies must insist that their
field examiners not second guess SAR decisions made by the
financial sector or the volume of SARs will continue to
skyrocket.
Madam Chairwoman, the uniform exam procedures scheduled for
a June 30th release date will assist the industry concerns
about exam inconsistency and the continued threat of zero
tolerance by these same errant examiners. We strongly urge
Congress to ensure that all banking agencies engage in industry
outreach when the procedures are made public. The agencies
appear committed to this outreach, and we believe that a
nationwide series of town hall meeting events will ensure that
both sides will know what to expect in this complicated
compliance area.
A major challenge facing the banking industry has been how
to fulfill our obligations regarding appropriate relationships
with MSBs. We understand and appreciate the need to analyze the
level of risk involved with maintaining these relationships. We
know the importance of providing services to all segments of
society.
For some, the remittance services that MSBs frequently
provide are an essential financial product. Remittance flows
are an important and stable source of funds for many countries
and constitute a substantial part of financial inflows for
countries that have a large migrant labor force working abroad.
The problem, however, is how much analysis is sufficient.
At times banks appropriately exit relationships due to the
risks inherent with the particular MSB. At other times we want
to continue those valued relationships. The agencies again did
issue an interagency policy statement on March 30th and sorely
needed guidance on April 26th. The guidance now must be clearly
communicated to the examiners.
I would like to report that at least one large southwestern
bank reported to ABA that its current BSA exam showed that that
oversight agency was well versed in the MSBs guidance. This is
indeed a positive sign.
Finally, with the increased number of entities required to
file SARs as well as a heightened scrutiny on SARs regulators
and programs, it is essential for the regulatory's law
enforcement and FinCEN to assist filers with issues as they
arise.
As stated above, there are several problems affecting banks
and the AML process related to SARs. ABA has previously
mentioned the many examples of examiner criticisms received by
our members during reviews of their SARs programs. Whether it
has been criticized for the number of SARs filed or the second
guessing by examiners as to why a SARs was not filed, we remind
Congress that this situation demands immediate attention.
Regulatory scrutiny of SARs filings has caused many
institutions to file defensively to stave off unwarranted
criticism or second guessing. In fact, The American Banker
reported that in March of 2005 the industry filed 43,000 SARs,
a 40 percent increase from a year earlier. That is not because
there is more criminal activity.
We would like to commend Director Fox for addressing our
previous recommendations made in 2004 by creating a Bank
Secrecy Act subcommittee to look at SARs issues. I would note
that we have already held the first meeting, and the defensive
issue of filings is a top priority. Our members continue to
express their concern on the rampant second guessing that
continues.
For example, just last week a bank told us that it had
extensive documentation on why it had not filed a SAR, only to
be told by the examiner that it must file. This example--which
is not isolated--is a major reason why banks feel they have no
other option but to err on the side of filing. Our hope
continues to be that the exam procedures and additional
interpretation on SAR issues will result in returning SARs to
their original place, forms filed only after careful analysis
and investigation with no second guessing by regulators.
We commend the Treasury Department, the banking agencies
and FinCEN for their recent efforts to ensure a workable and
efficient process. We will continue to support those efforts,
and we would be happy to answer any questions.
[The prepared statement of Mr. Byrne can be found on page
46 of the appendix.]
Mr. Paul. [presiding] Thank you, Mr. Byrne.
We will move next to Mr. Joseph Cachey, Compliance Chief,
Western Union Financial Services, for your statement.
STATEMENT OF JOSEPH CACHEY, III, COMPLIANCE CHIEF, WESTERN
UNION FINANCIAL SERVICES, INC.
Mr. Cachey. Thank you. Good morning, I would like to thank
this subcommittee on behalf of Western Union for the
opportunity to address this important topic. Since the use of
suspicious activity reporting regulations took effect for money
services businesses just 3 years ago in January of 2002,
Western Union has created an industry leading compliance
program in a relatively short period of time.
Today I would like to discuss an important part of that
anti-laundering compliance program, suspicious activity
reporting and our dealings with law enforcement based on those
reports which we filed.
Western Union files tens of thousands of Suspicious
Activity Reports, or SARs, each year, representing a small
fraction of our total number of transactions. We know that SARs
lead to investigations, because there is direct follow-up from
law enforcement for a number of these reports that we file. The
filings may lead to a number of actions taken in conjunction
with law enforcement. I would just like to cite a few examples.
Last year, Western Union, based on our internal suspicious
activity filing criteria, filed six SARs on four customers who
were receiving transaction in what most of us would consider
higher risk countries. These SARs resulted in the opening of an
expansive investigation, now being conducted by two Federal
agencies.
Western Union continues to support these investigative
efforts by responding to subpoenas targeting the identified
customer transactions, and in addition we share emerging
insights on these customers' money transfer patterns involving
the investigation subjects.
Western Union also cooperates with Federal law enforcement
efforts through agreements that assure certain agent locations
are kept open during an ongoing investigation. For example, the
owner of a Western Union agent location in the Midwest was
indicted this past April on 43 counts of money laundering after
a 5-year investigation. It was Western Union's agreement to
keep that location open and not terminate our relationship with
that agent, which would have been our typical business practice
that allowed law enforcement to gather sufficient evidence to
come forward with these indictments.
As is typical though with money laundering schemes, risks--
and these are all risk-based programs, as Director Fox
mentioned earlier this morning--may shift as we all obtain more
information and analyze that information.
For the industry to better focus its resources, the
regulator in this case, FinCEN, must provide ongoing
communication to industry about emerging risks and money
laundering patterns so that we can direct our compliance
efforts towards the most critical areas of risk.
By not giving us the guidance, we do tend to overfile on
things that may not be helpful with law enforcement and create
a lot of ``noise in the system''.
One primary example of this potential noise is the
reporting of simple structuring. The majority of SARs Western
Union files report low-level structuring activity, that is
individuals that come in--and we suspect--are trying to avoid
information at the $3,000 transaction level which is required
by the Bank Secrecy Act.
Frankly speaking, we believe that most of this activity
does not result from an evil intent, but from the average
American's unwillingness to share their Social Security number
and other sensitive personal information with a third party.
Together, we need to question whether financial institutions
reporting activity at this low level is helpful to law
enforcement.
A word on defensive filing of SARs. As we discussed, a big
issue for MSBs is the filing of a SAR to report low-level
structuring. Such filing is not defensive because structuring
for any reason is technically a crime.
But while such a reporting is not defensive, it may not be
all that helpful to law enforcement. There has to be a better
approach. Much of the guidance given on filing SARs is too
broad in today's regulatory environment. Creating gray areas
leads to more SARs filings. One example of this is what we call
high-volume customers, individuals that send significant
portions of money through our system. Western Union strives to
identify and learn more about these customers, typically
telephonically.
But what do we do if a customer doesn't return our phone
call. Should we file a SAR not knowing anything else about that
customer activity? Many State examiners' position appears to be
if you can't prove that the consumer is wholly innocent, then
they are guilty, file the SAR. This attitude leads to excessive
SAR filings because it follows the more equals better approach.
Western Union is attempting to build a more surgical
approach in its SAR filings to provide quality information, not
more information. We hope that law enforcement and the
regulatory community would support that approach. Thank you
very much.
[The prepared statement of Mr. Cachey can be found on page
54 of the appendix.]
Mr. Paul. Thank you, Mr. Cachey.
We will move to the next panelist, Mr. Scott McClain from
Financial Service Centers of America.
You can go ahead with your statement.
STATEMENT OF SCOTT K. McCLAIN, WINNE, BANTA, HETHERINGTON
BASRALIAN, P.C., REPRESENTING THE FINANCIAL CENTERS OF AMERICA,
INC.
Mr. McClain. Thank you very much. Members of the
subcommittee, I am very grateful for the opportunity to be here
today to discuss BSA compliance issues involving the community
financial services and check cashing industry.
FiSCA is a national trade association representing over
5,000 neighborhood financial service providers throughout the
United States. We provide a range of services and products to
our customers, including check cashing, money order sales,
money transfers and utility bill payments.
Our members are classified under the Bank Secrecy Act as
money services businesses. U.S. Treasury Secretary John Snow
acknowledged in a recent address to the Florida Bankers
Association that MSBs are key components of a healthy financial
sector, and it is very important that they have access to
banking services.
In short we serve the local communities of the United
States, we serve the working man and woman, and we are very
much a part of the mainstream of a healthy financial industry.
We are committed to the fight against money laundering, and our
industry has committed significant resources in this regard.
In 1993, we issued the first compliance manuals for its
nonbank financial services industry. Following passage of the
USA PATRIOT Act, FiSCA issued an anti-money laundering
complaints program to assist the industry in meeting new
requirements under the PATRIOT Act. Most recently in 2004,
FiSCA launched an Internet-based compliance training and
examination program which includes courses for both MSB tellers
and compliance officers. To date, approximately 6,000 MSB
employees in more than a dozen States have sat for the online
courses and examination. We hope to double the program's
performance in 2005.
The check cashing and MSB industry suffers greatly from the
perception that we are inordinately high-risk as compared with
other financial institutions or businesses. It would appear
that this conclusion has been reached by Federal bank examiners
and adopted unfortunately by banks with little attention to the
actual compliance record. This has resulted in a staggering
number of banks terminating services to the entire industry and
has caused thousands of check cashers to scramble to find new
banks among an already limited number. As we had witnessed time
and again, when banks have terminated their check cashing
customers due to compliance problems, it is more likely that
the compliance problem is with the bank than with the MSB
customers.
This point was underscored by the recent enforcement
actions against AmSouth and Beach Bank in Florida. In each
case, the bank was cited for substantial regulatory violations
unrelated to the activities of its check cashing customers. Yet
in each case the bank responded by terminating all of their
check casher accounts. The fact is check cashers are simply not
good vehicles for money laundering. They do not take deposits
and the dollar amount of the transactions are typically low.
They are subject to stringent and far-reaching controls.
In our experience the current BSA reporting system has been
largely effective. Certain reporting issues should be
addressed, and we are happy to work with the committee in this
regard.
First with regard to suspicious activity reporting
requirements, we recognize that reliable MSB SAR data is key in
the battle against money laundering and financial crime. We are
concerned that the current SAR form may be unduly complicated
for the typical business. Better guidance is also required for
the SAR narrative section in order to maximize the data
collection. As well, the SAR reporting thresholds should be
reconsidered.
Office of Foreign Assets Compliance continues to be a
confusing problem. There is need for OFAC guidance concerning
risk assessments in regards to this industry. Although IRS has
greatly improved the level of education of its agents relating
to MSB examinations, there is clearly a need for consistency in
the examination process. Most importantly, there must be a
process for communication between the community financial
services industry and the banking industry.
They are subject to many of the same AML requirements yet
seem to be operating in separate tracks. Although the FinCEN
guidelines concern services to MSB, MSBs are a step in the
right direction. We know of no banks which have reconsidered or
are willing to entertain the service industry. We attempted to
bridge the gap in this regard. Obviously, it is in our best
interest to cause the banking industry to be reassured that
servicing check cashers is both safe and profitable.
Additionally, it is critical that the recent FinCEN
guidelines be evaluated. FiSCA will be hosting on September
26th the forum to discuss the guidelines and to determine
whether they have stanched the flow of banks leaving the
industry and hopefully reassured the others to return.
We intend to invite not only MSBs but also the banks, key
banking regulators and decisionmakers, who will ultimately
determine whether the guidelines have achieved their purpose.
We ask for your support in this process.
In conclusion, it is critically important that we protect
the integrity and legitimacy of our industry. It is equally
critical, however, that our industry be recognized as being
part of a healthy financial industry and a partner in the war
on financial crime. We again thank you for your time today, and
I am happy to answer any questions you may have.
[The prepared statement of Mr. McClain can be found on page
73 of the appendix.]
Mr. Paul. Thank you very much for your statement. Before I
make a brief statement and ask a brief question, I would like
to ask unanimous consent enter into the record a statement for
the Center for Financial Privacy and Human Rights.
From what I hear from the testimony, this is not exactly
cost free. There is a cost for what we are doing, a burden
placed on the financial industry. I also hear that there is a
bit of inefficiency in doing what we do, too many reports being
filed and overburdening law enforcement. Then we do talk about,
sometimes, the question of law enforcement benefit that we get
from this, assuming--it is generally assumed when we talk about
the law enforcement benefits that we would not have those if we
didn't have this burden and that this is a permissible cause.
The one issue that I think that we are careless about--and
I want to get your opinion about this--is the concern for
privacy, true privacy. You know, there was a time in this
country when we could go to a bank and open up an account and
fully assume that this was a private account, that they were
like our personal papers held in our household and that we
deserved it and our Constitution protects this privacy. I don't
think anybody believes that any more, because these are broad
nets placed out, all these reports put out. It seems to me like
too often it is sort of a bureaucratic overkill in what we are
trying to do.
My question is whether or not you think we have gone too
far and what would happen if we followed what I consider the
rules very strictly. When law enforcement agents suspect there
is a problem any place, especially before the PATRIOT Act--you
know, one of the things we did was we went to a judge and we
asked him permission, and there had to be reasonable cause, and
then we went and looked for the evidence that we might need.
Today that isn't even considered. It means that we have to look
at everybody, everything they do, hoping that we will put it
together and catch some criminals, and we sacrifice a bit of
our personal liberty.
Is that something that anybody on the panel thinks about,
or do you think that--what would happen if we did approach
these problems this way? Does anybody care to comment?
Ms. Taylor. Yes. Thank you very much for asking that
question. I think that, as in all things, there is a balance
between the reality of the situation and personal privacy. I
totally agree with you that people's financial records ought to
be kept as private as possible. That is one reason that SARs
are incredibly sensitive, confidential documents. We are not
even allowed to say publicly that we are looking at a SAR from
a particular institution.
So one of the pillars, if you will, that regulatory
oversight is based on is confidentiality. That is one of the
reasons why these agreements that we have put together with the
Federal agencies have been so painstakingly constructed.
Privacy has been at the absolute forefront of everybody's
minds, and we need to make sure that private information
remains private and that only under circumstances when there is
probable cause or some reason to suspect wrongdoing do we
actually look into those particular records. Thus, that is
something that we are very, very concerned about.
On the other hand, there are terrorists out there, there is
money laundering, and we need to have the tools to be able to
ferret it out and prosecute it.
Mr. Paul. Thank you very much. I am a physician, and I
think about the responsibilities--I have to keep records
private. In some ways your argument would say to the physician,
well, you know, there is an important reason--as a matter of
fact, this is occurring these days--I can be a little bit
careless because if I spread this information about disease we
might do some good by doing more research, and we are moving
into that direction where medical records aren't very private
any more.
So I would suggest that sometimes I think we get rather
careless.
Anybody else care to make a comment?
Mr. Byrne. Congressman, the only point I would make is
obviously the banks are somewhat caught in the middle. We
obviously have a strong history, we believe, of protecting
data. Obviously there are issues with that. We are working hard
to address those issues.
But the only point I would make regarding some of the
forms, I certainly don't think all of the information is
valuable, although we have made that clear. But sometimes the
reporting is done on behalf of the bank, so that it can protect
itself and the shareholders from the fraud committed against
the institution. So in some instances if you left it all to law
enforcement, we would lose some of the ability to help our own
account holders if they have been defrauded.
There is a balance, but I certainly can recognize your
point that the balance seems to have shifted to some degree.
Mr. Paul. Thank you very much. I now defer to the
gentlelady from New York.
Mrs. Maloney. Thank you, Mr. Chairman. I would like to
welcome all of the panelists today and thank you for your
testimony very much, but in particular I welcome the
superintendent, Diana Taylor, from the great State of New York.
As the financial center of the Nation, New York has been on
the leading edge of regulation and enforcement in this area. So
your insights and testimony are especially welcomed. Good to
see you again, Diana.
Ms. Taylor. Thank you.
Mrs. Maloney. I welcome all the members from the public and
private sector in the financial services industry.
I would like to express how pleased I am that the State
Banking Department of New York has signed an information
sharing agreement with FinCEN. I understand that FinCEN will
try to forge similar agreements with the other States. They are
trying hard to do in other States what we have done.
In the meantime, will you work together to share
information with the banks about matters such as the wide
disparity between States on regulation of money service
businesses, the MSBs. I understand that about half a dozen
States do not regulate businesses at all, while other States
like ours, Superintendent Taylor, have very stringent
requirements.
Does your agency directly regulate MSBs, and how do you
communicate to banks whether an MSB is in good standing?
Ms. Taylor. Thank you for asking that question. It is a
very good one, actually. Yes, we do regulate MSBs. We regulate
money transmitters and check cashers in the State of New York,
among others. We also regulate the mortgage industry, budget
planners, in addition to the banks.
We have taken great pains over the last couple of years to
beef up our regulation of those entities. We have come up with
a new system of looking at them. We have gone from just
licensing them and doing minimal examinations to actually
looking at them from more of a safety and soundness point of
view. Do they have a business plan? Are they financially sound?
What are their IT systems like? Are they complying with all of
the rules and regulations in the Bank Secrecy Act? What is
their management like?
We, through CSBS and through direct efforts with the other
States, have worked with the other States on a lot of these
things. Anybody who wants to partake of our knowledge of this,
we are more than willing to work with them.
We think it is very important that we have standards
throughout the country for MSBs that are reasonably consistent,
so that MSBs operating in one State don't have advantages,
shall we say, over those operating in other States.
Mrs. Maloney. Have you shared with other States what the
standards are that you have for MSBs? Are you working with
other States on this? How many other States have followed New
York's lead in regulating MSBs?
Ms. Taylor. I don't know the answer to that question, but I
can certainly get it for you.
Mrs. Maloney. Thank you so much. It is so good to see you.
Ms. Taylor. Thank you.
Mrs. Maloney. I would like to ask Scott McClain--but I
would like to preface it by the fact that at one point I
represented a very poor district. It was parts of the South
Bronx and East Harlem. Many of the banks left the neighborhood.
It is a free enterprise system, but in many cases did not even
leave an ATM machine.
I am very supportive to check cashers, really, and to
credit unions and anyone who will provide financial service
industries in needed neighborhoods. I think that as we work
together we can make sure that these services are there for all
people throughout our country.
I wanted to ask you, Mr. McClain, in the financial services
sector we need to be extremely careful that in the process of
combating money laundering we don't unduly burden any sectors
of our financial services industry or unfairly advantage one
sector over another. I know that your association has been a
good citizen in this respect. You have worked with Treasury's
Financial Crimes Enforcement Network, FinCEN, to set up the
registration system for the check cashers and the FinCEN
website, and your members are registered. You have implemented
a four-part anti-money laundering program for your programs
that include policies and procedures such as customer
verification procedures and the SAR and CTR reporting
requirements.
Second, a compliance officer, third, an employee compliance
training program and, fourth, an independent audit function.
Each of these steps demonstrates that the check cashers you
represent are willing to make serious efforts to prevent your
businesses from being knowingly used to facilitate money
laundering and the financing of terrorism, and that is
critical.
In light of these efforts, I can understand your concern
and frustration at the increasingly critical problem of banks
discontinuing check cashers accounts. This issue came to a
crisis point in the city that I represent, when J.P. Morgan
Chase announced that it was terminating all check casher
customers. This decision really threatened most of the check
cashers in New York City to shift their businesses to the sole
remaining bank that does business with check cashers, North
Fork, or go out of business.
I know that along with others I wrote a letter, you know,
to FinCEN, and they have responded to that situation with new
guidance. Has that had a positive effect, or what further steps
are needed?
I just wanted to add, we certainly want to combat
terrorism. We want to combat money laundering. We want to crack
down. But at the same time, we don't want to cut off financial
services. In some neighborhoods the check cashers are vital, in
some cases the only source of financial services that are
there.
So could you respond to the new guidances that came out of
FinCEN and what else needs to be done?
Mr. McClain. Thank you very much, Congresswoman Maloney. I
appreciate your perspective on the issue.
Initially to respond, I would say that we are extremely,
extremely grateful for the amount of attention and diligence
that has been given this by FinCEN. They initially held on
March 8th a fact-finding session on the problem. We had some 43
speakers from industry, both the MSB industry and also bankers,
speak on the issue. We learned at that time, as we had known
internally for quite a period, that the problem is truly
critical, and to our not necessarily surprise, but to our
satisfaction, we heard from the bankers who expressed a
tremendous amount of frustration over the problem and the fact
that in many cases they have been banking check cashers for
decades and in some cases generations. It was with much dismay
that they had to terminate their long-standing check cashing
customers. It was largely due to some misguided pressure from
some Federal banking examiners who essentially caused them to
terminate their accounts.
The guidance materials we think are certainly a step in the
right direction. We feel at this point--they were just replaced
April 26th-- it is too early to assess whether or not they are
going to sort of stop the flow of banks exiting the industry
and whether or not it is going to cause some to return. That is
certainly our hope.
But key for the guidelines to be effective, I think, is
advocacy on the part of government, advocacy on the part of the
same Federal agencies that in some part, maybe indirectly,
caused the situation to develop. We need essentially the high
risk assessment to be critically examined and the guidelines to
do that in some measure.
Additionally, in terms of the additional advocacy we would
like to see some sort of an advisory board created, preferably
some statutorily created body to essentially monitor the
situation and create a forum for industry, both the check
cashing MSB industry and also the banking industry, and also a
forum for the Federal banking regulators to be heard as well.
But as I said, it is too early to see whether or not the
guidelines have been effective. But without that added
attention from government, we are somewhat circumstance expect.
As I mentioned in my presentation, we are going to be
convening a forum on February 26th. Hopefully at that point in
time we will have a better assessment as to the ultimate
success of the guidelines.
Mrs. Maloney. My time is up. But if you will allow me for 2
seconds to be parochial--and since the superintendent is
sitting here--I don't think we want to close down services in
neighborhoods. We have a wonderful Federal system where we can
come up with new creative ideas. This might be a way that you
could have some form of oversight that says that this is okay.
Because we certainly don't want to lose our financial services
or the access to it. In some neighborhoods in New York, check
cashers are the only form of financial services that are there,
in some cases credit unions.
So I thank you. It is great to see all of you.
Mr. Paul. I thank the gentlelady.
The Chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
I want to thank the panel, and the panel and the committee
hearing is now adjourned.
[Whereupon, at 12:32 p.m., the subcommittee was adjourned.]
A P P E N D I X
May 26, 2005
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