[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



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