[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
H.R. 5341, THE SEASONED CUSTOMER
CTR EXEMPTION ACT OF 2006
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 18, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-95
U.S. GOVERNMENT PRINTING OFFICE
31-041 PDF WASHINGTON : 2006
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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 Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina, Vice Chairman CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
TOM FEENEY, Florida STEVE ISRAEL, New York
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey JOE BACA, California
GINNY BROWN-WAITE, Florida AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin
RICK RENZI, Arizona WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
May 18, 2006................................................. 1
Appendix:
May 18, 2006................................................. 45
WITNESSES
Thursday, May 18, 2006
DelliColli, Kevin A., Deputy Assistant Director, Financial and
Trade Investigations, Office of Investigations, U.S.
Immigration and Customs Enforcement, U.S. Department of
Homeland Security.............................................. 12
Meyer, F. Weller, Chairman, President & CEO, Acacia Federal
Savings Bank, on behalf of America's Community Bankers......... 36
Morehart, Michael F.A., Chief, Terrorist Financing Operations
Section, Federal Bureau of Investigation, U.S. Department of
Justice........................................................ 8
Rock, Bradley E., Chairman of the Board and President & CEO, Bank
of Smithtown, on behalf of the American Bankers Association.... 39
Rowe, Robert, Regulatory Counsel, Independent Community Bankers
of America..................................................... 38
Werner, Robert W., Director, Financial Crimes Enforcement
Network, U.S. Department of the Treasury....................... 7
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 46
Bachus, Hon. Spencer......................................... 49
Hinojosa, Hon. Ruben......................................... 52
DelliColli, Kevin A.......................................... 53
Meyer, F. Weller............................................. 70
Morehart, Michael F.A........................................ 78
Rock, Bradley E.............................................. 87
Rowe, Robert................................................. 99
Werner, Robert W............................................. 107
Additional Material Submitted for the Record
Letter from B. Dan Berger, NAFCU, in Support of H.R. 5341.... 112
GAO Testimony Before the U.S. Senate......................... 114
Letter from the Financial Services Roundtable in Support of
H.R. 5341.................................................. 128
Hon. Sue Kelly:
Responses to Questions Submitted to Michael Morehart......... 130
Responses to Questions Submitted to Bradley Rock............. 132
Responses to Questions Submitted to Robert Werner............ 133
H.R. 5341, THE SEASONED CUSTOMER
CTR EXEMPTION ACT OF 2006
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Thursday, May 18, 2006
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:10 p.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Kelly, Ryun, Biggert,
Tiberi, Feeney, Hensarling, Garrett, Neugebauer, McHenry,
Maloney, Sherman, Moore, Hinojosa, Clay, Israel, McCarthy,
Matheson, and Green.
Also present: Ms. Wasserman-Schultz of Florida.
Chairman Bachus. Today the Subcommittee on Financial
Institutions and Consumer Credit meets to consider H.R. 5341,
the Seasoned Customer CTR Exemption Act of 2006, which I filed
with the ranking member, Mr. Frank, and 16 other members of the
committee, both Republicans and Democrats.
It is identical to a provision in H.R. 3505, which passed
the House on a vote of 415 to 2. The intention of the
legislation is to reduce the number of CTR's on seasoned
customers. Seasoned customers are individuals who operate a
well-established business and make routine deposits of large
amounts.
That provision was not included in the Senate reg relief
bill. Mr. Hensarling, I see, is here today, and he was the
primary sponsor, along with Mr. Moore, of the reg relief bill.
The Senate, it's my understanding, removed the CTR provision
upon the request of FinCEN. FINCEN actually testified
specifically before this committee on two occasions about the
need for the provision, the credibility of the provision, and
the fact that the provision would not impede law enforcement,
but would actually be of value to law enforcement.
So, today's hearing, as much as anything, is simply to go
back--because I think we all agree that GAO, back in 1994,
studied this issue at the request of the Senate. Now, the
Senate has requested another GAO report, basically asking the
same thing that it asked in 1994, which was answered by GAO in
testimony before the committees. In response to an almost
identical question posed in the GAO report requested by the FBI
and FinCEN through the Senate, that question was answered. And
the answer was--reading directly from the GAO report--``The
CTR's filed on routine deposits by well-established businesses
could and should be reduced. They impose cost on the government
and the Nation's banking industry, and are unlikely to identify
potential money laundering or other currency violations.''
The same question, which was answered by GAO in 1994, has
now been asked again. And part of the hearing today is to
determine why we have had all these hearings, and why we have
had one answer, why all of a sudden, some may say another
answer may be appropriate today. I'm not saying that it's not.
But we want to know what's changed in the past--not only in the
past few months, but from all the other testimony that we have
taken in the past.
I do know that FinCEN--and this is quite disturbing to me--
Mr. Werner, you are going to testify before the committee
today, but a month ago--at least in an interview, and I hope
you were misquoted--you said that, ``The banking industry needs
to prove that these CTR reports are not a burden on them.'' Yet
FinCEN has testified before these committees that it is an
unnecessary burden in the past.
We have all sorts of government reports concluding that
these reports are a burden. The U.S. Money Laundering Threat
Assessment determined that they were an unnecessary burden on
the financial industry. FinCEN, their own conservative estimate
was that the cost of 25 minutes per report for filing and
record keeping--per report, we're talking about 15 million
reports, 25 minutes a report--5.5 million staff hours if we
take your estimate as to the amount of time consumed. A cost
approaching $200 million, just on reports on seasoned
businesses such as Wal-Mart, Macy's, Cracker Barrel, and on and
on.
And on a positive note, I believe your testimony that you
submitted, unlike maybe what was said a month ago, I think--and
I never hold people to what I read in the paper, because I'm
often misquoted, and often taken out of context--but according
to your testimony today--and I want to compliment you on your
written testimony--is that these can and should be reduced, and
that this legislation is a step in the right direction.
What I am hearing is that you are acknowledging that--and
correct me if I'm wrong in your opening statement--but that you
absolutely agree that we could reduce these reports by 30 or 40
percent. They are an unnecessary burden on the industry and
many of them are of absolutely no value to law enforcement, and
finally, that you believe this legislation is--I think, as you
described it--a step in the right direction.
I do want to close by pointing out that the Secretary of
the Treasury, according to the legislation sponsored by them
that passed this Congress in 1994, required the Secretary of
Treasury to submit an annual report to Congress for 5 years
running about their attempts to reduce the overall number of
currency transactions, and that the Secretary of Treasury, in
this Act, is tasked with the job of reviewing, on an annual
basis, and submitting suggestions for reducing the number of
CTR's.
So, I would be very interested, and I think FinCEN was
tasked with that--to find out whether you all are, in fact--and
I think Mr. Fox was doing this when he worked with this
committee, and we fashioned this legislation, sat down and all
agreed on it, is to how we can go forward with that.
So, with that, Mr. Moore, do you have an opening statement?
Thank you.
Mr. Moore. Thank you, Mr. Chairman. Welcome to the
witnesses, and I look forward to your testimony. I would like
to thank my good friend, Chairman Bachus here, for convening
today's hearing and for introducing H.R. 5341, the Seasoned
Customer CTR Exemption Act, of which I am an original co-
sponsor.
The Financial Services Committee has a strong record of
bipartisanship, and I am glad that it is extended to this
proceeding and this bill, as well. H.R. 5341 has 21 bipartisan
co-sponsors from all different--all ends of the political
spectrum. And I think I can speak for the bill's co-sponsors
when I say that we all want to protect our country from money
launderers, from terrorists, and from anyone else who wants to
do harm to our country.
As a former district attorney for 12 years, I certainly
understand and appreciate the value of information that could
aid in an investigation and eventually lead to prosecution. At
the same time, I believe there is a way to strike a reasonable
balance between ensuring our country's safety, and providing
our financial institutions with a sensible regulatory framework
in which to work. Waging a strong war on terror and providing
reg relief to our financial institutions are not incompatible
goals.
As the agency charged with administering the Bank Secrecy
Act, FinCEN received over 12 million CTR's from financial
institutions in 2005, according to my information. I think
Chairman Bachus covered this, so I'm going to skip part of my
statement and--he covered this in his opening statement, so I
will just skip some of the information and move right on to say
that the banking industry estimates that the industry paid just
under $200 million in wages for the staff time that it took
last year alone to file CTR's.
Nine years ago, in 1997, FinCEN promulgated new rules
establishing categories of entities that are eligible for
exemptions from CTR filings. But the process by which an
exemption is granted to a financial institution is confusing
and difficult to comply with, and consequently, many financial
institutions end up filing unnecessary CTR's that strain
resources.
I look forward to hearing Director Werner's testimony today
on the exemption process, in particular. And finally, I would
note that under H.R. 5341, even when financial institutions
receive an exemption from filing a CTR, if a particular
transaction either above or below the $10,000 CTR trigger does
not seem like a normal transaction to the bank, that
institution is still required to file a suspicious activity
report. Thank you, and I look forward to your testimony.
Chairman Bachus. Mr. Ryun? Mr. Feeney? Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman. I want to thank
you again for holding this hearing, although I must admit that
I am a little disturbed that we have to be here in the first
place. There are other things that I wish I could have been
doing this afternoon.
I am disturbed because I thought this was a matter that had
already been settled. I thought that when we negotiated the
financial services regulatory relief bill, I thought FinCEN was
at the table. I thought ICE was at the table. I thought the FBI
was at the table. I thought we negotiated something that,
although perhaps no one was particularly enthused about, that
it was something that was a balance that met the cost benefit
test, and everyone could live with. And I think I'm waking up
to the fact that either I was incorrect, or people are walking
away from the negotiation.
I mean, clearly, I didn't put everything in the legislation
that I would have liked to have seen. Left to my own devices,
we would have indexed CTR's to inflation. There are a lot of
other things I would have done, but I thought I was sitting
down with people and trying to negotiate a reasonable
settlement here.
Certainly we need not go back and re-cover the ground about
the burden that BSA imposes on our banking industry,
particularly our community banks. Clearly, some of that is
necessary. But the question is, what is the proper balance? It
is a question of balance.
There is no doubt that, clearly, we need to do everything
that is reasonable to ferret out money laundering, and
terrorist financing. Clearly, they are among our Nation's
greatest priorities. But we have to remember that these costs
that are imposed upon our financial services industry are
ultimately borne by the customers. And it's borne by the
customers in having less credit and more expensive credit. That
means fewer people can go and send their children to college.
Fewer people can buy their first homes. Fewer small businesses
are capitalized. Fewer jobs are created.
And so, it again is a question of balance. I believe that
the House, in a vote of 415 to 2, decided that the seasoned
customer exemption struck that proper balance, which was a
very, very strong affirmation by this body, that particularly
when you juxtapose the CTR requirements against what's going on
in SAR's with know-your-customer, that maybe we're not quite
meeting the cost benefit test, and that maybe we're not quite
meeting with the 14 million-some-odd SAR's that all of these
reports have a high degree of usefulness in the prosecution of
criminal activity.
I have an open mind. It is not an empty mind, but it's an
open mind. So I look forward to hearing from the law
enforcement community in figuring out what has changed since
the last time we met. So I do look forward to hearing that. But
again, the seasoned customer exemption strikes me as a very,
very reasonable approach to this situation that strikes the
proper balance, frankly, between our physical security and our
fiscal security. And with that, Mr. Chairman, I yield back.
Chairman Bachus. Thank you. Mr. McHenry?
Mr. McHenry. Thank you, Mr. Chairman. I just want to
commend you for taking the leadership on this issue. I think
it's important that we strike the proper balance of both safety
and national security, along with what is necessary and proper
for the private sector.
And I want to echo what Jeb Hensarling, my colleague from
Texas, said in this regard, that is our role in this committee
to make sure that both protection in the market place is
available for the customers, the consumers, those institutions
that have to provide the data, as well as providing law
enforcement with the means to ensure the safety of the American
people.
And so, to that end, I think this is a proper step in that
role, and I look forward to an eventful hearing. Thank you,
Chairman Bachus, for your leadership on this important issue,
as well.
Chairman Bachus. Thank you, Mr. McHenry. And Mr. Garrett,
do you have an opening statement?
Mr. Garrett. Yes. Thank you, Mr. Chairman. And again, also
I applaud the chairman for holding this hearing on this
important topic. I also appreciate the members of this panel
for their work in keeping this country safe through your
efforts.
I do share Mr. Hensarling's comments about the concern
about revisiting this issue. For that reason, perhaps we do
need to revisit and once again point out the need for
addressing the topic.
And so, for the members of the second panel, I will say
right now I appreciate right now their anticipated testimony as
pointing out the complexity and also the burden of the current
situation.
You know, I think most people in the room know, as it goes
back to the 1970's, when we realized the complex nature of
financial products and the way the criminals were using
finances in our banking industry, that this Congress realized
that we needed to pass the BSA to try to reign in the criminal
element, how they use our banks. But that was 36 years ago, and
a lot has changed in all our lives--I was this big 36 years
ago--but a lot has changed in the financial markets and
elsewhere.
So, why do we revisit today? Back then, of course, it was
dealing with a fixed number in an original threshold of $10,000
and $10,000 isn't what it was worth back in the 1970's. The
criminal element, obviously, has changed their focus. They have
changed their methodologies, they have changed their practices.
And so we need to revisit it, and once again look to see
whether we need to change things, as well, for the reason that
we don't want people to be inundated or drowned in paperwork.
For that reason, earlier this week I drafted a letter and
sent it out to the Secretaries of Treasury and of Homeland
Security, and to the Attorney General, asking if they could
provide, with some specific questions and answers, the numbers
regarding how the data is collected, and how specifically it is
used, how it is kept, and also what we may hear today, exactly
just how useful it is.
At the end of the day, I think everyone on this panel from
both sides of the aisle have the same objective in mind, and
that is to gather data that is useful for deterring the
criminal element, but not in a way that is going to be a
tremendous burden or a regulatory burden, nor--on financial
institutions--nor should it be cause of a significant privacy
interest invasion, as well.
We all have the same interests in mind in that regard, and
so once again I look forward to your testimony, and likewise
look forward to the testimony of the next panel, as well. And I
yield back, Mr. Chairman.
Chairman Bachus. Thank you. Mr. Sherman?
Mr. Sherman. I think it makes sense for banks to be able to
exempt some of their well-known customers from the reporting
requirements, and it probably makes more sense for bank
regulators to specify, through regulation, exactly how that
process will work, rather than a system now that we have in
statute, which makes it less than flexible, hard to amend, and
at the same time, seems to lack the kind of workability that we
would like to see in this area.
So, I look forward to trying to make our system of banking
and dealing with cash transactions work better, while at the
same time achieving all of the security objectives we are
trying to achieve.
Chairman Bachus. Thank you. Mr. Neugebauer?
Mr. Neugebauer. Well, thank you, Mr. Chairman. And I
appreciate you bringing this issue back up, because like my
friend from Texas, Mr. Hensarling, I am a little surprised that
we have to be here today.
You know, I was in the banking business in the middle--the
early 1980's. And one of the things that--I know that things
have changed since then. But unfortunately, some things haven't
changed. And the fact that we are still dealing with a $10,000
limit nearly 30 years later, and secondly, at a time when we
have such tremendous technology available to us, you know, I
think we need to have policy in this country that fosters and
encourages us to use that technology today, and to identify
those transactions that are suspicious, yet use the common
sense approach that we have bankers and banking, and people in
the financial services business all over this country that have
knowledge of their customers, and they know the types of
businesses they're in and the types of transactions they're in,
and to rely on their ability and the technology that we have
available to us today to be able to make common sense choices.
Our national security is of utmost importance to every
member of this panel. But we also understand that we can't put
unreasonable burden on our businesses to do our law
enforcement. Yet what we want to foster is a partnership with
law enforcement, using common sense and the technology that we
have today to focus on the information that may be most
meaningful, and not to judge a financial institution's
cooperativeness by the numbers of reports they file.
And quite honestly, I have had bankers tell me--community
bankers--that they have been written up because they just
didn't have enough of those. Well, the fact is that maybe their
customer base was such that they didn't have a lot of cash
transactions. Or, in many cases, they knew the customer. And so
I think we need to get away from this quantitative thing and
look at the qualitative ways that we can monitor transactions
in our country.
And so I appreciate the chairman bringing this back up. And
I thank you for the time, and I appreciate these witnesses
coming today.
Chairman Bachus. Are there other members who wish to make
an opening statement?
[No response]
Chairman Bachus. If not, I would like to welcome our first
panel, made up of Mr. Robert Werner, Director of the Financial
Crimes Enforcement Network, U.S. Department of the Treasury;
Mr. Michael Morehart, Chief, Terrorist Financing Operations for
the FBI and U.S. Department of Justice; and Mr. Kevin
DelliColli, Deputy Assistant Director, Financial and Trade
Investigations, Office of Investigations, U.S. Immigration and
Customs Enforcement, U.S. Department of Homeland Security.
And at this time, we will hear your opening statements. Mr.
Werner?
STATEMENT OF ROBERT W. WERNER, DIRECTOR, FINANCIAL CRIMES
ENFORCEMENT NETWORK, U.S. DEPARTMENT OF THE TREASURY
Mr. Werner. Chairman Bachus and distinguished members of
the subcommittee, I appreciate the opportunity to appear before
you today to discuss H.R. 5341, the Seasoned Customer CTR
Exemption Act of 2006.
Balancing the regulatory burdens imposed upon the financial
services industry under the Bank Secrecy Act, while at the same
time ensuring an unimpeded flow of useful information to law
enforcement officials, is an ongoing challenge that requires
the attention of law makers and regulators alike.
As the recently appointed Director of the Financial Crimes
Enforcement Network, which is responsible for administering the
BSA, I take this issue seriously, and I look forward to working
with the members of this subcommittee in our ongoing fight
against illicit financial activity.
I am happy to be here today with my law enforcement
colleagues. Both of these agencies work tirelessly to keep our
country safe from terrorist activity, and I am gratified that,
in part, they accomplish their missions by utilizing financial
information provided to FinCEN under the Bank Secrecy Act.
Our partnership with these law enforcement agencies allows
for the seamless flow and effective utilization of this
critical information in our united fight against terrorist
financing and money laundering. The BSA's recordkeeping and
reporting requirements provide transparency in the financial
system, and help create a financial trail that law enforcement
and other agencies can use to track criminals, their
activities, and their assets.
Relevant to this hearing is the fact that reporting by
financial institutions of CTR's has been a foundation of the
Bank Secrecy Act since its inception. In fact, prior to 1996,
when regulations issued by FinCEN and the Federal banking
agencies required banks to file SAR's, CTR's were the primary
BSA tool used by law enforcement to identify activity
indicative of money laundering. Those SAR's have been required
to be filed by a growing number of financial institution
industries since 1996. These reports have augmented our ability
to stem the flow of illicit financial transactions by providing
different but often complementary types of data to CTR filings.
Despite the efforts of FinCEN and industry groups to
encourage use of the CTR exemption system that exists today,
financial institutions have remained hesitant to do so. H.R.
5341, like section 701 of H.R. 3505, which passed the House of
Representatives in March, is an attempt to address this concern
by reducing CTR reporting requirements for seasoned customers.
My predecessor offered technical assistance to this
committee on the CTR exemption language contained in H.R. 3505.
Although we support the intent of this provision, which is to
reduce unnecessary CTR filings, as well as the effort and
expertise behind the assistance we provided, as we all
recognize, it is imperative that we avoid undermining law
enforcement's efforts to combat terrorist financing and money
laundering.
As such, we must be very attentive to reasonable concerns
raised by law enforcement regarding the potential loss of the
investigative value of CTR data presently collected. The
ability of law enforcement to utilize BSA data has been
improving at a rapid pace, in light of advances in technology
and analytic practices. This has led to a concern on their part
that we will end up losing data that, once excluded, we will be
unable to assess the value of through subsequent data mining.
Given the concern expressed by our law enforcement
partners, we believe it would be prudent to permit further
study of the issue before making any changes to the current
exemption system. Such a study provides both the financial
services industry and law enforcement an opportunity to define
clearly, through an empirical study, those areas that represent
either a compliance burden or the potential loss of benefit
from useful data.
Through such a cost benefit analysis, we may be able to
highlight opportunities for the regulators, law enforcement,
and the regulated community to achieve a balanced and workable
alternative to the current regulatory regime.
In conclusion, Mr. Chairman, we stand ready to assist you
in reducing the number of CTR's that provide little or no value
for law enforcement purposes. Like H.R. 3505, we believe that
H.R. 5341 is a step in the right direction, but we share
responsibility with you and law enforcement in considering any
potential loss of BSA data law enforcement considers important
to their investigations.
Thank you for the opportunity to appear before you today. I
look forward to any questions you have regarding my testimony.
[The prepared statement of Mr. Werner can be found on page
107 of the appendix.]
Chairman Bachus. Thank you.
Mr. Morehart?
STATEMENT OF MICHAEL F.A. MOREHART, CHIEF, TERRORIST FINANCING
OPERATIONS SECTION, FEDERAL BUREAU OF INVESTIGATION, U.S.
DEPARTMENT OF JUSTICE
Mr. Morehart. Thank you, Mr. Chairman, and distinguished
members of the subcommittee. On behalf of the FBI, I am honored
to appear before you today to discuss the FBI's efforts to
disrupt and dismantle national and international money
laundering operations, and the operational impact of the
successful utilization of information obtained from the
financial sector.
Chief among the investigative responsibilities of the FBI
is the mission to proactively neutralize threats to the
economic and national security of the United States. Whether
motivated by criminal greed or radical ideology, the activity
underlying both criminal and counterterrorism investigations is
best prevented by access to financial information by law
enforcement and the intelligence community.
In the criminal greed model, the FBI utilizes a two-step
approach to deprive the criminal of the proceeds of his or her
crime. The first step involves aggressively investigating the
underlying criminal activity, which establishes the specified
unlawful activity requirement of the Federal money laundering
statutes, and the second step involves following the money to
identify the financial infrastructures used to launder the
proceeds of criminal activity.
In the counterterrorism model, the keystone of the FBI
strategy is countering the manner in which terror networks
recruit, train, plan, and effect operations, each of which
requires a measure of financial support. The FBI established
the terrorist financing operations section--or, as we call it,
TFOS--of the counterterrorism division on the premise that the
required financial support of terrorism inherently includes the
generation, movement, and expenditure of resources which are
oftentimes identifiable and traceable through records created
and maintained by financial institutions.
The analysis of financial records provides law enforcement
and the intelligence community real opportunities to
proactively identify criminal enterprises and terrorist
networks. And more importantly, to disrupt their nefarious
designs.
Money laundering has a significant impact on the global
economy. The International Monetary Fund estimates that money
laundering could account for 2- to 5 percent of the world's
gross domestic product. In some countries, people avoid formal
banking systems in favor of informal transfer systems such as
hawalas, or trade-based money laundering schemes, such as the
Colombian black market peso exchange.
There are several more formalized venues that criminals use
to launder the proceeds of their crime or crimes, the most
common of which is the United States banking system, followed
by cash-intensive businesses like gas stations and convenience
stores, offshore banking, shell companies, bulk cash smuggling
operations, and casinos.
Money service businesses, such as money transmitters and
issuers of money orders or stored value cards serve an
important and useful role in our society, but are also
particularly vulnerable to money laundering activities.
The FBI currently has over 1,200 pending cases involving
some aspect of money laundering, with proceeds drawn from a
variety of traditional criminal activities, as well as
terrorism-related activities. By first addressing the
underlying criminal activity and then following the money, the
FBI has made significant inroads into the financial
infrastructure of domestic and international criminal and
terrorist organizations, thereby depriving the criminal element
of illegal profits from their schemes.
In recent years, the international community has become
more aware of the economic and political dangers of money
laundering, and has formed alliances on several fronts to share
information and conduct joint investigations. Members of the
Egmont Group, a consortium of financial intelligence units, of
which the United States is a member, can access a secure Web
site developed by FinCEN, the United States' FIU, to share
vital information on money laundering between participating
countries in a further demonstration of international
cooperation, the international recommendations and the nine
anti-terrorist financing recommendations of the Financial
Action Task Force, otherwise known as FATF.
Access to financial information significantly enhances the
ability of law enforcement and members of the intelligence
community to thwart terrorist activity. The lack of complete
transparency in the financial regulatory system is a weakness
on which money launderers and financiers of terrorism rely to
reap the proceeds of their crimes and to finance terrorist
attacks. Limited access to financial records inhibits law
enforcement's ability to identify the financial activities of
terrorist networks.
Efforts to detect terrorist activity through financial
analysis are further complicated by the fact that the funding
of terrorism may differ from traditional money laundering
because funds used to support terrorism are sometimes
legitimately acquired--for example, charitable contributions
and the proceeds of legitimate businesses. Overcoming these
challenges so we can prevent acts of terror has increased the
importance of cooperation with our partner law enforcement
agencies, the intelligence community, and the private financial
and charitable sectors. Records created and maintained by
financial institutions pursuant to the Bank Secrecy Act are of
considerable value to these critical efforts.
As I previously testified before this subcommittee, the FBI
enjoys a cooperative and productive relationship with FinCEN,
the broker of BSA information. FBI cooperation with FinCEN has
broadened our access to BSA information, which in turn has
allowed us to analyze this data in ways that were not
previously possible.
When BSA data is combined with the sum of information
collected by the law enforcement and intelligence communities,
investigators are better able to ``connect the dots,'' and thus
are better able to identify the means employed to transfer a
currency or move value.
Sometimes the investigative significance of BSA data--a
filing, if you will--cannot be appreciated until the BSA data
is compared to predicated law enforcement or intelligence
information that may not be in the public record. Such critical
information can be biographical or descriptive information, the
identification of previously unknown associates and/or co-
conspirators, and in certain instances, the location of a
subject in time and place.
The value of BSA data to our anti-money laundering and
counterterrorism efforts cannot be overstated. The importance
of access to that information has already proven invaluable on
both the micro or individual case level, as well as the macro
or strategic level.
BSA data has proven its great utility in counterterrorism
matters. And any contemplated change to the underlying
reporting and recordkeeping requirements of the BSA should be
measured very carefully and very, very carefully considered
before such action is taken. Either increasing the transaction
amount at which currency transaction reports would be
generated--currently at the $10,000 level--or abolishing the
reporting requirement all together, or changing the seasoned
customer exemption for that matter, would deprive law
enforcement of a valuable investigative tool.
Recent macro-level analysis of the impact of BSA data
provided by FinCEN to the FBI reinforces the investigative
significance of that data. Some of the examples are as follows.
For the years 2000 through 2005, 38.6 percent of all CTR's
filed reported transactions in the amounts between $10,000 and
$14,999. For the same time period, 18.5 percent of all the
CTR's filed reported transactions in amounts between $15,000
and $19,999. 10.8 percent of all CTR's filed during that same
time period were for amounts between $20,000 and $24,999. 6.2
percent of those CTR's were for transactions between $25,000
and $29,999, and so forth.
Less than 2 percent of all the CTR's filed in that period
involved transactions of $100,000 or more.
Chairman Bachus. Mr. Morehart, if you could, wrap up and
then we--
Mr. Morehart. Yes, sir.
Chairman Bachus. Thank you.
Mr. Morehart. I am almost done, sir. To determine the
operational impact of BSA data relative to the FBI
investigations, a sample of the FBI's records for the years
2000 through 2005 were matched by the exact name and date of
birth, or by exact social security number to almost 13,000
CTR's reported in that same time period.
This statistical example, when extrapolated to the
universal CTR's, concludes that an excess of 3.1 million CTR's
were pertinent to FBI investigations during that time period.
And Mr. Chairman, in deference to your request, sir, I will not
go into the statistics, but it is in the written record.
The CTR reporting threshold is set by regulations, and has
been fixed at $10,000 for more than 25 years, as was mentioned
here earlier. In that time, technology associated with the
movement of money has advanced significantly. The movement of
funds through electronic means has now become the standard. It
should be noted that CTR's are not required for the electronic
movement of funds. The practical effect on law enforcement
activities of an increase to the CTR threshold reporting amount
would be to severely limit or even preclude law enforcement
access to financial data associated with cash transactions that
are not otherwise documented.
In other words, the filing of CTR's at the current
reporting threshold ensures a degree of transparency in the
financial system that would not otherwise be available.
My attention now turns to the important issue of the so-
called seasoned customer CTR exemption.
Chairman Bachus. Mr. Morehart?
Mr. Morehart. Yes, sir?
Chairman Bachus. Actually, they are 5-minute opening
statements, and you have gone 10 minutes.
Mr. Morehart. I apologize.
Chairman Bachus. If there is any way you could just wrap
up--
Mr. Morehart. Yes, sir. I will do my very best.
Chairman Bachus. And I know this is valuable information,
so I do want to give you some leeway.
Mr. Morehart. Thank you, sir. If I can, Mr. Chairman, I
have got about one page left, if I may go through that. My
attention now turns to the important issue of the so-called
seasoned customer exemption.
As you are aware, the BSA allows financial institutions to
seek CTR filing exemptions pursuant to the designated persons
exemption protocol. However, certain types of businesses
considered most susceptible to abuse, such as money service
businesses, are ineligible for such exemptions. We are not
opposed to such exemptions for long-term, well-established, and
documented customers, as has been previously stated during this
hearing.
While the SAR is an extremely valuable tool, the suggestion
that a SAR requirement could effectively substitute for the CTR
misunderstands the differences between the requirements for the
two documents.
In contrast, CTR's are only available on select matters
where a bank official has made the subjective--and I emphasize
subjective--determination that a particular transaction or
activity is suspicious.
And in closing, sir, any decision to change the working of
the current CTR customer exemption should be undertaken with
great care. This is particularly so because of the steadily
increasing ability in the Bureau to use these data points to
meaningfully track national security threats and criminal
activity. Though information on the evolution of this
capability is not appropriate for public discussion, we would
be happy to provide information on a non-public hearing, and
have done so for some of the members of your staff already.
In conclusion, BSA data is invaluable to both our
counterterrorism efforts and our more traditional criminal
investigations. Our experience shows that terrorism activities
are relatively inexpensive to carry out, and that the
majorities of CTR's of value to law enforcement and
intelligence communities are typically those that are prepared
at or near the current reporting requirements.
To dramatically alter the transaction reporting
requirements without careful, independent study would be
devastating, and would be a significant setback to the
investigative intelligence efforts relative to both the global
war on terrorism and traditional criminal activities. Thank you
for your forbearance, Mr. Chairman.
[The prepared statement of Mr. Morehart can be found on
page 78 of the appendix.]
Chairman Bachus. Let's see, Mr. DelliColli?
Thank you.
STATEMENT OF KEVIN A. DELLICOLLI, DEPUTY ASSISTANT DIRECTOR,
FINANCIAL AND TRADE INVESTIGATIONS, OFFICE OF INVESTIGATIONS,
U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF
HOMELAND SECURITY
Mr. DelliColli. Chairman Bachus and distinguished members
of this subcommittee, my name is Kevin DelliColli, and I am the
Deputy Assistant Director for Financial and Trade
Investigations at U.S. Immigration and Customs Enforcement, or
ICE. I appreciate the opportunity to share with you today how
ICE is applying its financial investigative authorities to
track criminal enterprises that violate our Nation's borders
and homeland security.
ICE is the largest investigative component within DHS.
Working overseas, along our borders, and throughout the
interior, ICE agents are demonstrating that our unified customs
and immigration authorities constitute a powerful tool for
combating international money laundering and trans-national
crimes.
During Fiscal Year 2005, ICE investigations led to the
seizure of nearly $1 billion of currency and assets and the
arrest of over 23,000 individuals. As highlighted in the U.S.
money laundering threat assessment, ICE is addressing bulk cash
smuggling, unlicensed and illegal use of money service
businesses, trade-based money laundering, abuse of U.S.
financial systems by politically exposed persons, the use of
stored value cards, and other schemes.
Because of ICE's expertise in customs matters, our special
agents are highly effective at combating trade fraud and trade-
based money laundering.
Trade can be used to transfer proceeds in a variety of
ways, including: over-valuing the cost of imported goods to
disguise illegal proceeds as legitimate payment for those
goods; converting proceeds into merchandise, which is then
exported and sold for local currency. Even hawalas use trade
transactions as a way to balance their accounts.
To detect and combat trade-based money laundering, ICE
established a trade transparency unit, or TTU. The ICE TTU
initiates and supports investigations related to trade-based
money laundering. The ICE TTU analyzes trade data to identify
anomalies indicative of money laundering and trade fraud.
In addition, ICE found that the TTU analytical software is
very effective at analyzing BSA data, Bank Secrecy Act data,
either to enhance the analysis of the trade data, or just the
BSA data alone. ICE is just beginning to exploit and realize
the potential of this expanded capability.
The TTU, though, is just one area ICE is utilizing BSA
data. ICE has a long history of analyzing and utilizing BSA
data in criminal investigations. ICE's use of CTR data is a
valuable analytical tool for detecting illegal activity,
developing case leads, and furthering investigations.
The so-called ``placement'' of funds into the financial
system is the most vulnerable stage of the money laundering
process for criminal organizations.
Generally, individuals and businesses conducting legitimate
transactions have no reason to structure deposits or
withdrawals to avoid the current $10,000 threshold for the
filing of a CTR. The CTR requirement leads criminals to
deliberately structure deposits into the financial system in
order to avoid the reporting requirement in the hopes of
evading suspicion and detection.
Because criminals must structure their illicit proceeds,
they are forced to make multiple financial transactions to
place the illicit proceeds into financial institutions. This
forces the criminal organization to expend additional time and
effort, and provides law enforcement with indicators used to
detect the illegal activity. In an effort to circumvent the CTR
reporting requirement, international criminal organizations
have employed numerous peripheral employees to structure
transactions for them.
U.S. law enforcement has learned to exploit the inherent
weakness created by this process. As it provides law
enforcement with a greater number of targets for interdiction
efforts, undercover opportunities, and confidential source
development, it also causes criminals to engage in other, more
costly and time consuming methods, such as bulk cash smuggling
and trade-based schemes to move their proceeds.
In the course of our investigations, CTR's are used to
establish links between persons and businesses to identify co-
conspirators, potential witnesses, and to reveal patterns of
illegal activity. CTR information has been utilized to meet the
probable cause requirement necessary to obtain search and
arrest warrants. CTR's link individuals and businesses to
financial institutions, and provide this information so the
investigator can utilize the information for subpoenas.
Most importantly, as mentioned above, the CTR requirement
causes violators to deliberately structure deposits or
otherwise behave in a manner that arouses suspicion.
To illustrate how important CTR's are to ICE, ICE special
agents queried CTR records over 454,000 times in just Fiscal
Year 2005. ICE has many examples of investigations that were
initiated, enhanced, or perfected because of access to the Bank
Secrecy Act repertoire of documents, including CTR's.
ICE will continue to aggressively apply our authorities to
combating international money laundering and the methods and
means used to move illegal proceeds across our borders.
This concludes my remarks, and I thank the subcommittee and
its distinguished members for their continued support of ICE's
investigative endeavors. I would be pleased to answer your
questions.
[The prepared statement of Mr. DelliColli can be found on
page 53 of the appendix.]
Chairman Bachus. Thank you. Mr. Werner, the conclusion of
your statement says, ``We stand ready to assist you in reducing
the number of CTR's that provide little or no value for law
enforcement purposes.''
Do you agree that there are a large percentage, whether
it's 15, 20, 25 percent of CTR, which are of no value to law
enforcement?
Mr. Werner. Mr. Chairman, I don't know what the percentage
is, but I would agree that, in light of the fact that the
existing exemptions are not being taken advantage of by
financial institutions, there are CTR's being filed that are of
little value to law enforcement.
Chairman Bachus. Do you realize that--as, I think, Mr.
Moore and Mr. Sherman both said, and several members on this
side--that those exemptions, while well meaning, seem to be so
complex that financial institutions have advised you that it's
hard to implement that? Do you understand that there are
problems with the--
Mr. Werner. I do understand that, Mr. Chairman. There are
different kinds of exemptions available under the existing
scheme. And for example, the fact that banks continue to file
CTR's on--you mentioned a host of companies--like the Wal-Marts
of the world is a little mystifying to me, because those are
under a phase one exemption, which are clearly articulated, as
a publicly-traded company, would be exempt. And the phase two
exemptions tend to be more complicated, in terms of
administering them.
But it appears that many banks find it easier just to file
automatically all SAR's en masse, rather than even to take
advantage of the phase one exemptions.
Chairman Bachus. That being the case, you all are being
flooded with 15 million of these CTR's, is that right?
Mr. Werner. We receive--
Chairman Bachus. Let me say this. You say you share
responsibility with law enforcement in considering any
potential loss of BSA data law enforcement considers important
to their investigations.
Now, in your testimony--and I'm going to direct you to page
five--you say that H.R. 5341, like section 701 of 3505, is an
attempt to address this concern by reducing CTR reporting
requirements for seasoned customers. And then you acknowledge
that your predecessor worked with the committee to offer
technical assistance.
In fact, he did sit down and we worked out exact language.
You're aware of that, are you not? And he testified in favor of
the provision.
Mr. Werner. Yes, sir.
Chairman Bachus. Okay. And then it says this, and this is
what I want to focus on. And Mr. Morehart has talked about
terrorist financing, and countering terrorism, and it says,
``Although we support the intent of this provision, as well as
the effort and expertise behind the assistance we have
provided, we recognize it is imperative that we avoid
undermining law enforcement efforts to combat terrorist
financing.'' Okay?
``As such, we must be very attentive to reasonable concerns
raised by law enforcement regarding the potential loss to
investigative value.'' Okay, we're talking about terrorist
financing in your statement here.
Mr. Werner. Although my oral statement broadened that, sir,
to say terrorist financing and money laundering.
Chairman Bachus. Okay. But, you know, a lot of what--even
Mr. Morehart, you talked about counterterrorism, you talked
about terrorist financing. That's what you focused on, not just
these other activities. And that's a lot of what you all have,
at least publicly, talked about, how to undermine those
efforts.
But let's just focus on terrorist financing--because this
is what your written statement says--for a minute. It says,
``In that regard, law enforcement has significant concerns with
the proposed language of this provision that would permit the
exemption of certain businesses that are presently ineligible
for CTR filing exemption under the current system,'' and then
you list four: car dealerships; attorneys; physicians; and
accountants.
Now, is it law enforcement's experience that we have car
dealerships or accountants or physicians that are aiding
terrorists, that you've caught some with the--
Mr. Morehart. Is that being addressed to me, Mr. Chairman?
Chairman Bachus. And we're talking about that make deposits
in the ordinary course of business of large cash transactions,
yes.
Mr. Morehart. Well, sir, I will say this. I can't
specifically say terrorism related, nor would I want to do it
in this open forum, but we could discuss that, or perhaps it
could be the subject of a QFR.
But I will say this, Mr. Chairman, it has been the FBI's
experience that those types of entities, particularly those
that are currently listed as not available for DEP exemption
under current BSA regulations, are frequently utilized by
criminals, whether wittingly or unwittingly, to launder money.
Chairman Bachus. Okay.
Mr. Morehart. If I may say this, sir, terrorist financing
oftentimes fails to include a very important aspect. The
financial aspect of cases does not necessarily mean the funding
of terrorism.
There were, in my testimony, three different steps that I
characterize--and forgive me, I cannot remember the page, but
basically we're talking about the origination, which would be
the funding or financing aspect, and the movement and storage
of funds.
Chairman Bachus. Well, yes. I noticed here you said--you
talked about transfer of funds to foreign bank accounts.
Mr. Morehart. I--
Chairman Bachus. That's part of what you're talking about?
Mr. Morehart. Yes, sir. Part of what I am talking about--
Chairman Bachus. You identify one of the most common
destinations for international fund transfers as Mexico.
Mr. Morehart. I don't know. Is that in my testimony, sir?
Chairman Bachus. Yes, on page two, the bottom line. It
indicates the most common destination of international fund
transfers are Mexico, Switzerland, and Colombia.
Mr. Morehart. Yes, sir?
Chairman Bachus. Do you find that these money transfers to
Mexico are terrorist-related? Have you found any instances of
that?
Mr. Morehart. Well, sir, again, I would prefer not to
discuss those types of issues in public forum, and I would--
Chairman Bachus. I'm just saying, wouldn't most of that be
immigrants wanting to remit money home?
Mr. Morehart. I can't answer that question, sir. I am sure
that there is some of that.
Chairman Bachus. Well, you actually say 73 percent of money
service business filings involve money laundering or
structuring.
Mr. Morehart. That's what statistics show, sir.
Chairman Bachus. What?
Mr. Morehart. That's what our statistics show, yes, sir.
Chairman Bachus. So, 73 percent of the money ordering
businesses, you believe, are money laundering activities?
Mr. Morehart. Yes, sir.
Chairman Bachus. And so, Mexico is the primary--I mean one
of the primary--points that that money has been sent back to?
Mr. Morehart. Yes, sir.
Chairman Bachus. And you believe that's money laundering?
Mr. Morehart. I believe it is, yes, sir. And I would also
add--
Chairman Bachus. Do you think any small fraction might be
the 12 million illegal immigrants and probably 20 million legal
immigrants who are sending money back home?
Mr. Morehart. Well, sir, again, I cannot answer that
question. I would suspect, yes, logically speaking, that might
be the case.
Chairman Bachus. Sure. Okay, thank you.
Mr. Morehart. Yes, sir.
Chairman Bachus. Mrs. McCarthy?
Mrs. McCarthy. Thank you, Mr. Chairman. I guess the only
question I have--and I've read the testimony, and I can
certainly understand your concern--but when we were writing
up--when the committee was considering this regulatory relief,
we didn't hear any objections from anyone when we were going
through all this.
So, is this something new that came up after the relief,
you know, was going through, when we were having the committee
hearings in the past?
Mr. Morehart. Yes, ma'am. I can say, from the FBI's
standpoint, I testified before this committee--I guess it was
about a year ago--with the then-Director, Mr. Fox. And the
FBI's position on this data has remained the same, at least
since that time, when I testified, in terms of the value of BSA
data.
Mr. DelliColli. May I answer as well?
Mrs. McCarthy. Absolutely.
Mr. DelliColli. This is the first opportunity that ICE has
to testify before this subcommittee on this matter. However, we
have, you know, met with subcommittee staffers and expressed
some concerns that we had with the seasoned customer exemption
back in the summer of 2005.
Mrs. McCarthy. Thank you. No further questions, sir.
Chairman Bachus. Mr. Feeney?
Mr. Feeney. Mr. Chairman, actually I have another meeting,
but I really am perplexed. I mean, when we asked questions
about why this overzealous, overburdensome regulation has been
constantly imposed by--we thought we had a compromise last
year. We are told that, because of sensitive information, we
can't get the answer.
And it really is disturbing that the automatic assumption
is that every businessman that has more than $10,000 worth of
deposits to make must somehow be subject to, you know, Federal
oversight every day, 10 times a day, if that's when he or she
makes their deposits. And I just find it insufficient, in terms
of trying to meet with this effort.
And if somebody is trying to support the President on the
Patriot Act, indicating that we felt like the FISA courts and
secret courts were available, that there wasn't any
surveillance on domestic activities--and, of course, now we
find out that may not be accurate--and we're constantly told
that the reason that we can't get information to do appropriate
oversight, to protect the privacy of Americans in legitimate
business activity, is because there is secret stuff that, if we
knew, we would be totally supportive.
And even your supporters are becoming frustrated that
that's not sufficient. The trust-me argument, ``We know better,
and we can't tell you why,'' only goes so far. And if we can't
find a way for people who have had business relationships for a
long-standing period of time, that have legitimate reasons why
they may be making a deposit of more than $10,000, without
having 3 or 5 different agencies of the Federal Government
involved in every single transaction, then it comes time to
rethink the question of all of what we're doing with respect to
privacy.
It's just incredibly frustrating, and this is one
Congressman who has been as sympathetic and supportive as
possible, because we do live in a day and age when the threats
are here and they're real. But by gosh, if every shadow is a
threat, and every businessman making a deposit of $10,000 and
everybody making phone calls is a threat, then I live in a
different country, one I don't recognize from pre-9/11.
And fundamentally, I think that you guys need to be
cooperative when you get a chance. And maybe individually
you're trying to, and when you try to do it collectively it
doesn't work, but it's very, very frustrating.
And I don't really have any questions, other than to say
that at some point we may--without the benefit of all this
secret stuff that you know--we may simply instruct you what to
do. If you can't work with us, we're going to work without you.
Mr. Chairman, I yield back.
Mrs. McCarthy. Would the gentleman yield before he yields
back?
Mr. Feeney. I will yield to the gentlelady.
Mrs. McCarthy. I can't remember which testimony I read, but
actually in one of the testimonies they said that they would
meet with us privately in our office, or work with staff to
give us some of that information.
Mr. Feeney. Well, I appreciate that. But here is the
problem with that. At that point, you're put in the box. Once
you get secure information--and it may be appropriate for us to
have it--but once you get that secure information, then it
becomes very difficult for you to articulate the reasons why
you're making decisions.
And to the extent that people can cooperate with us, and we
can come to compromises--and a lot of these discussions were--
had behind closed doors, perhaps where they should have
occurred, and then we come back and find out that what we
expected and intended was deliberately unraveled, or that there
has been foot-dragging, then we have that Catch-22: go behind
closed doors, and whether you agree or disagree with the
conclusions, you're precluded from coming out and explaining
why you do or don't--I would never leak information.
And I have, up to this point, been very trusting on a host
of issues--I serve on the Judiciary Committee--and want to
continue to be trusting. But the deliberate foot-dragging--at
least it appears to be deliberate foot-dragging--is perhaps
changing my confidence and increasing the frustration level.
Mr. Chairman, having reclaimed my time, I yield back.
Chairman Bachus. Thank you. So, Mr. Hensarling?
Mr. Hensarling. Well, Mr. Chairman, I am very tempted to
yield my 5 minutes to Mr. Feeney.
[Laughter]
Mr. Hensarling. But knowing that he has yielded back, I
will go ahead and use my 5 minutes.
First, gentlemen, notwithstanding what you have heard from
many of us, I do want to thank you for what you do. I want to
thank you for your service to your country. I know that my
four-year-old daughter and two-and-a-half-year-old son go to
sleep in a safer Dallas, Texas, USA due to your efforts. And
so, I want to thank you for that.
But again, I want to go back to a question of balance. And
I want to go to a question, really, of cost. I am sure there is
a lot I can learn about law enforcement. I have a brother who
is a Federal prosecutor; I learn a little bit from him. I do
know a little something about economics.
And let me ask this question. One, how much do your
organizations pay to the financial services industry for their
filings under BSA? Mr. Werner?
Mr. Werner. We don't pay for those filings.
Mr. Hensarling. The other gentlemen?
Mr. Morehart. I'm not aware that we pay for them, sir. We
get them--
Mr. Hensarling. Well, that was my impression, as well. We
have testimony that the banking industry is paying somewhere in
the neighborhood of $200 million, give or take, just for their
CTR filings. If I did the math correctly--I think I got this
information from the Congressional Research Service--that for
$200 million, you could hire another 1,000 special agents for
the FBI.
You are receiving a lot of information that you don't pay
for. Things that I don't pay for I have an unlimited demand
for. Things I pay for, well, all of the sudden my demand
becomes a little bit more limited. I'm kind of curious at just
how valuable this information is to you, on top of the SAR's,
on top of the know-your-customer.
So, if you had a choice of continuing what many view as a
fair amount of redundancy in CTR reporting, Mr. Morehart, would
you rather have that information or would you rather furlough
1,000 agents?
Mr. Morehart. Sir, that is a conundrum I hope that I am
never actually faced with. That would be a difficult one.
I will say this, sir, if I might. We understand that, from
everything I have heard, that it does place a burden on the
industry, in terms of the filing requirements. As I have
testified before, most recently before the Senate Banking
Committee about a month ago, we stand ready--although we're not
a regulatory entity--to try to help in any way we can to reduce
the burden on the financial services industry. Because, quite
candidly, it makes our job more difficult.
The more data that is there, the more it populates, and the
more fuzzy the field becomes, if you will. So we stand ready at
any time to try to assist with that. As I previously testified,
there is data that is provided to us that is of very little
use. And as the chairman spoke earlier, we're talking about
CTR's associated with Wal-Marts, with various well-known
companies and well-established customers.
The concern we have, however, is this: Not that we oppose
any logical change to the regulations or the legislation, but
that it be done in a very careful and measured way, which we
would be more than happy to participate in and help in any way
we can--
Mr. Hensarling. If I could, let me come at it a different
way.
Mr. Morehart. Yes, sir.
Mr. Hensarling. As far as the opportunity cost for your
organization, let's look at another--$200 million is coming out
of our economy, principally in--I think mainly in terms of our
community banks.
We have had testimony in this committee before that it
takes roughly $25,000 to capitalize a small business. The
average small business employs 10 people. I don't recall whose
testimony it was, but there was something there about
protecting the economic security of Americans. If I did the
math right, 425,000 to launch a small business, 10 employees,
$200 million is roughly 80,000 jobs, 80,000 people who might
have a paycheck, versus having a welfare check.
Now, again, if the information is highly useful in
prosecution, maybe it's worth that. Maybe it's worth the 80,000
jobs. But Mr. Werner, is it worth that much?
Mr. Werner. When you try and quantify the exact value of
every piece of data we get, I think it's difficult for all of
us to assess that and make those kinds of judgements. What we
can tell you is that through over 30 years of collecting Bank
Secrecy Act data, we know that we have had an enormous amount
of value.
My two law enforcement colleagues have spoken to some
specifics, in terms of deterring certain kinds of financial
activity, all the way to detecting very serious criminal
activity. And to date, we have a lot of anecdotal evidence of
that.
My whole view here is that there is clearly a burden on the
industry. And, clearly, there is a benefit from the data. We
ought to try and get that cost-benefit analysis correct, we
ought to try and really hone in on it in a truly empirical
study.
And based on what I have seen in my 2 months as Director of
FinCEN, I haven't seen a study that has really done that, to
date. So it's very difficult to answer your question when we
haven't really dug into the data in an empirical way to allow
us to do that cost benefit analysis.
On both sides of the equation, we have a lot of anecdotal
issues. The question isn't whether there is burden. The
question is whether there is an unreasonable burden. The
question isn't whether there is benefit. The question is
whether the benefit justifies the cost to the industry. And
those are the kinds of issues I would be very interested in
obtaining a more comprehensive understanding.
Mr. Hensarling. I see I am out of time, but you do have the
burden of convincing 415 of us that it does meet that burden
test. With that, Mr. Chairman, I yield back.
Chairman Bachus. Mr. Garrett?
Mr. Garrett. Thank you again, Mr. Chairman. And again, I
thank the panel. Just a couple of questions.
But first, I just want to follow off of a line of
questioning that the chairman had raised. And the point that
you raised, Mr. Chairman, with regard to testimony on page two,
Mr. Morehart, maybe I am reading more into that one paragraph
than I should be. But if I am, then can you clarify for me?
When the chairman elicited the information with regard to
your paragraph or sentence which says, ``A recent review of
SAR's filed with financial--with FinCEN, indicated that
approximately 73 percent of money services involved money
laundering or structuring.''
Just sitting here and hearing your testimony, that sounds
like an astonishing number, even if it's off by 10 percent.
Now, first question is that's talking about money services, as
opposed to banks, correct?
Mr. Morehart. Yes, sir.
Mr. Garrett. Okay. So, looking just now at money services,
again, not being law enforcement, it sounds like an astounding
number and it sounds like an area that should rise to the level
of huge interest from your part, bringing it to our attention
not just as a footnote, but as a major point prior to this,
saying--and this seems to be an area that we should be
investigating even further, from a Congressional point of view,
as to what these money services agencies are doing if three-
quarters of all--not all transactions, but all of the SAR's
transactions going through are involving money laundering. Any
comment?
Mr. Morehart. Well, it is an area of concern for us,
Congressman. I'm not sure exactly where you're going, or what
response you're attempting to seek from me, but it is an area
of concern.
And I don't want to suggest that we're not doing anything.
Quite to the contrary. Actually, money service businesses are
required to file with FinCEN, as any financial institution is.
And we are working jointly together on projects to address that
issue.
Mr. Garrett. Do you--
Mr. Morehart. Yes, sir?
Mr. Garrett. Well, I guess where I was going, contrary to
where I was coming into this meeting today, was saying whether
we need less regulation--but on this area, if three-quarters of
all of them are money laundering, is there something more we
should be doing in that area--but how does that number compare
to the rest of the financial marketplace? Do you have a number
that you can give us?
Mr. Morehart. No, sir. I don't have that number off the top
of my head. We could try to get that to you.
Mr. Garrett. Okay. I think that would be a relevant number
that I would be interested to hearing about.
Also, in your testimony on page six, I guess--this was your
footnote, and I know you weren't able to dig into all this
during your testimony--you were talking about doing the
investigation, and it said 3.1 million CTR's directly impacted
FBI investigations. What does that exactly mean, that 3.1
million dealt with an investigation?
Mr. Morehart. Sure--
Mr. Garrett. Would that mean without that information, that
those investigations would be significantly encumbered, or that
just because in any investigation there is a whole collection
of data that you get, and each one of them has something to do
with it, but is it significantly, actually, to the outcome of
the investigation?
Mr. Morehart. Yes, sir. Let me try to explain. That 3.1
million is a statistical extrapolation of a smaller sample,
first of all.
Mr. Garrett. Sure.
Mr. Morehart. So, what that means is--let me try to explain
it this way. We are working very diligently with FinCEN to try
to provide the answers to the questions that you have, in terms
of how useful that data is.
To date, we have been able to do that, I believe,
strategically. And what I mean by that is we have been able to
give you these types of statistical samplings. For example, the
terrorism watch list. We ran all those names against BSA data,
including CTR's, and we came up with some 83,000 or 84,000--
please don't quote me on that exactly; it's off the top of my
head.
But let me provide one quick example, and then I will
explain further what I mean. Of those 83,000 hits, if you will,
against CTR's associated with the terrorism watch list that now
can be exploited for further information, if the seasoned
customer exemption, as suggested under 5341 is applied, and
those entities were given that exemption, we would lose 82,000
of those documents.
Now, having said that, we have not fully vetted each of
those documents, so I can't tell you exactly what value they
would be. But I will say this. Not every single document is
going to result in an arrest, either for a traditional crime or
for terrorist activity. However, the way we view this data is
much different than the lay person might view it. We view it as
a dot. That dot may bridge to pieces of information that we
would not have been able to connect before.
For example, we may not have been able to make the
connection between two individuals that was critical to
identifying a terrorist cell, for example, or two individuals
that are involved in some type of narcotic money laundering
activity.
Mr. Garrett. Well, I appreciate that, and my time is
growing short. And my last portion of the question is this. Do
you not have the ability, just through your normal
investigatory powers, your subpoena powers, whether or not a
crime has occurred, you still have the ability for subpoena
powers, just on the contemplation that there is a crime out
there, to obtain the necessary information in any one of these
investigations to connect all the dots, even if you didn't have
the CTR's that were providing the information?
In cases where there is less than the $10,000 threshold,
doesn't that authority in the Justice Department already exist,
and allow you the ability to get that information?
Mr. Morehart. It exists, sir, but it does not allow us to
get the information that we might not otherwise be aware of.
And what I mean by that, sir, is if we know the name of a
target, we can see their records. If we don't, we can't. And
the CTR offers us an objective method to identify potential
targets.
That is, somebody who is involved in money laundering or
suspicious activity that pops up on a CTR may not pop up on a
SAR, because it's a subjective measure. They--we wouldn't know
to subpoena that individual's records, or whatever. So, no,
sir. The answer is no.
Mr. Garrett. I see my time is up. Thank you very much.
Mr. Morehart. Yes, sir.
Chairman Bachus. Mrs. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman. Mr. Morehart, of the
CTR's that have been used in criminal prosecutions, how many
were filed on business transactions and how many on
individuals?
Mr. Morehart. Ma'am, we have not kept metrics on exactly
how they were filed, or what types. As I mentioned just a
moment ago, much of the information we have now--we have only
recently, as Mr. Werner suggested, developed the investigative
data warehouse, which I testified to before, and which I'm sure
you have seen in other testimony and perhaps in the media. That
is an IT capability that allows us to exploit this information
like never before. We have only been using that for a little
over a year.
We have metrics at a strategic level, and quite candidly,
we are struggling at the moment to try to develop and acquire
that type of information at a tactical or case level, so that
we can provide it to you, so that you will understand how
valuable the data is. So I apologize.
Mrs. Biggert. Yes.
Mr. Morehart. I do not have that information available, and
it's not likely I can get it quickly. But we are working on it.
Mrs. Biggert. Yes.
Mr. Morehart. And as a matter of fact, Mr. Werner's staff
and my staff are actually forming what we call a BSA working
group, and we are using that group for a number of purposes.
One is to try to identify how to collect those metrics, so
that we can show you, in a more definitive way, how valuable
the data is. Another way we're using that is to identify
methods and ways and ideas on how to exploit that data in order
to protect our national security, much like the comparison I
mentioned between the terrorism watch list individuals and the
BSA data.
Mrs. Biggert. Well, I am glad that you're working on that,
because I think that this committee probably believes that the
routine business transactions are not as relevant for the law
enforcement as transactions from individuals. But we can't
really make that final decision until we have the data to--
Mr. Morehart. And with all due respect, ma'am, I would say,
based upon my anecdotal knowledge of ongoing investigations, I
would have to disagree with that.
Mrs. Biggert. Okay. So Mr. Werner--and maybe you can't
answer these questions, either--but how many CTR's did FinCEN
receive in 2005? Is that--
Mr. Werner. I came--
Mrs. Biggert. Is it 12 million?
Mr. Werner. I actually came prepared to answer that for
you. In 2005, we received 14,210,333 CTR's--
Mrs. Biggert. Okay, thank you. Then how many of those CTR's
were filed on reoccurring customer transactions?
Mr. Werner. That data I do not have.
Mrs. Biggert. Okay. Well, wouldn't it be valuable to know
how many--
Mr. Werner. It would be valuable, which, Congresswoman, is
why I think, really, to have a comprehensive study that permits
us time to go into that kind of data mining would be of
terrific use to all of us.
Mrs. Biggert. Okay, thank you. Then, Mr. DelliColli, in
your testimony you state that every dollar of criminal proceeds
seized is one dollar--one less dollar that criminals can use
to--in their business. And I realize this, and how--and
understand how difficult your job is with defending our
country, and thank you for your efforts.
But I want to turn the statement around, and point out that
every dollar spent on complying with filing CTR's is one less
dollar that banks can use to lend to people and the businesses
of this country, and in effect, hurt the economy.
And in addition, I think it doesn't help our businesses
compete in the global marketplace. So I would ask you to look
at the entire picture and ask how we can solve this problem as
it specifically pertains to the burdensome and costly filing of
CTR's.
Mr. DelliColli. My response to that would be that, you
know, an ounce of prevention is worth a pound of cure. And I
believe the discussion here today is to try to figure out how
many ounces of prevention do we need to find the right cure.
With respect to, you know, the burden and the cost that the
law enforcement efforts have on drug trafficking
organizations--and money launderers and criminals in general--
you know, part of the strategy is to raise the cost of doing
business for the drug trafficking organizations.
The efforts that the U.S. anti-money laundering efforts
undertake contribute greatly to that, raising the cost. I mean,
these other methods that I referred to, the cost of structuring
transactions in the U.S. financial institutions puts a great
cost on drug trafficking organizations. To the extent that they
actually sell their money at a great discount to peso brokers
in Colombia, just to walk away from that difficulty.
So that, obviously, raises their cost. The cost of drugs
may increase as a result of their cost, their profits being
reduced. If drugs were much cheaper coming into this country,
there may be more costs associated with health costs, and
things of that nature. I'm not a sociologist or health
professional. But I think you have to look at the whole
situation.
Mrs. Biggert. Do other countries have similar CTR
requirements?
Mr. DelliColli. Other countries do have similar reporting
requirements, mainly because the United States leads the way.
And I would yield that question to, you know, Mr. Werner, with
FinCEN. But Treasury actually leads the U.S. delegation on the
financial action task force, actually does try to find
standards.
And you know, if we don't have standards, you can rest
assured that the rest of the world is not going to have those
standards as well.
Mrs. Biggert. Mr. Werner, would you like to comment on
that?
Mr. Werner. Yes, I would. Thank you very much. We do push
the standards for cash transactions. Not just CTR's, but also
what are called CMIRs, which are the export and import of cash
into and out of the country. And we are part of the Egmont
Group, and a leader of the Egmont Group, in which financial
intelligence units of countries around the world mine that data
and share it with each other. So it's of great value to us, in
that sense.
Mrs. Biggert. Thank you. I yield back.
Chairman Bachus. Thank you. I would like unanimous consent
for Ms. McCarthy to ask a follow-up question.
Mrs. McCarthy. Thank you, Mr. Chairman. Just a couple of
things that I need to clarify. And I also want to thank you for
your work.
And I happen to agree with you. Holistically, when you look
at what you're spending and what hopefully we save on
healthcare costs, whether it's drugs or anything else, I happen
to think makes--and I also believe that the work that you're
doing, taking away money from those that might be terrorists
that want to do our country harm, or even drugs--and I know
we've been doing a better job on getting the drug money, and I
hope we're doing a good job getting the money not going to the
Taliban, or whoever it's going to.
The clarification--and I was thinking about this when the
chairman asked the question--you indicate that 73 percent of
money services' business filings involve money laundering or
structuring. But the truth of the matter is--and I think this
is where the chairman was supposed to go--we're not looking at
the little guy that's here in this country, because most of
them--you only look at those deposits that are over $10,000. Am
I correct on that?
So we're actually not looking at someone who is sending a
little bit of money to home to support their family back home
or anything else like that.
Mr. Morehart. Yes, ma'am. That would be accurate.
Mrs. McCarthy. Okay. And the only other thing I thought of,
Mr. Chairman, as this debate was going on--and it is a burden
to the banks, and I understand that--maybe somewhere down the
way we can have a discussion on giving them some sort of tax
credit or something, because they're doing their part.
That's enough for our committee or whatever, but that is a
thought, because I think the work that you're doing is
important. We need to support it. And if we can help the banks
not have that financial burden on them, then we should be doing
that. That should be our part of the government. Thank you.
Thank you for your answers.
Chairman Bachus. Thank you. Let me address one final
question to you gentlemen. It deals with what banks and
financial institutions, credit unions, are having to do right
now. And I just want to make sure you all are aware of the
requirements that you have imposed on them over the past 10 or
15 years.
One is the customer identification program. Now, Mr. Werner
and Mr. Morehart, are you all familiar with that program?
Mr. Werner. Yes, sir.
Chairman Bachus. What's your understanding of the
requirements in a customer identification program? What does
the Federal Government require the banks to do when someone
opens an account?
Mr. Werner. The customer identification program is laid out
in section 326 of the Patriot Act. There are some very clear
requirements and others are risk-based. I haven't come with a
text of that document with me, so I would be reluctant to try
and do it from memory, sir.
Chairman Bachus. They are required to gather quite a bit of
information on that customer.
Mr. Werner. They are depending, again, on the nature of the
business and the customer, but yes.
Chairman Bachus. Well, I think every customer.
Mr. Werner. That's correct.
Chairman Bachus. And that information is available to you.
Mr. Werner. Well, the institutions keep it on file.
Chairman Bachus. Sure. It is available to you. Then there
is the customer due diligence process. Are you all familiar
with that, the basic requirements?
[No response]
Chairman Bachus. They are supposed to check out their
customers, find out whether they have a legitimate business.
Mr. Werner. That would be part of any standard--
Chairman Bachus. You have imposed that on the banks,
haven't you? I say the Federal Government has.
Mr. Werner. That is correct.
Chairman Bachus. Then you have this FFIEC BSA AML
examination manual, which--imposes on our financial
institutions additional controls, policies, and procedures to
be implemented in order to actively uncover and track
suspicious activity among their customers.
Mr. Werner. Well, sir, that manual was produced at the
request of the financial institutions so they would have
guidance to--
Chairman Bachus. Sure, sure. But they have agreed to do all
that.
Mr. Werner. That's correct.
Chairman Bachus. And as a result of that, from--suspicious
activity filings have increased from 52,000 in 1996--that and
other requirements you put on them--have increased from 52,000
in 1996 to 689,000 in 2004, and they projected--I think the
figures for 2005 will be over 1 million times that a financial
institution has said, ``This is outside the regular course of
business,'' or, ``This breaks a pattern,'' or, you know, ``This
is suspicious to us. This isn't what we consider normal.'' A
million times they file that information that you have
available to you.
Mr. Werner. My statistics are that in--if you are
discussing suspicious activity reports, there were over 600,000
in Fiscal Year 2005, over 800,000 in Fiscal Year--excuse me, in
2004; over 800,000 in Fiscal Year 2005, and then I wouldn't be
surprised if we reached the million mark in the current fiscal
year.
Chairman Bachus. Then the USA Patriot Act imposes some new
requirements on banks and credit unions to gather additional
information that they didn't have to do before from their
customers when their account is open. I mean, these are brand
new requirements.
Mr. Werner. Many of the requirements you have mentioned
previously are part of the Patriot Act requirements.
Chairman Bachus. There are some additional requirements.
Mr. Werner. The entire AML program is more extensive than
just customer identification and due diligence, yes.
Chairman Bachus. Now you've got all that, and then what we
have here in our legislation is if we have a well-established
business that is incorporated by the laws of the United States,
or a State, or a sole proprietorship that is licensed to do
business in the United States, it's registered and eligible to
do business, and it maintains a deposit account with a bank for
at least 12 months, and during that period of time engages or
uses the account with multiple currency transactions of $10,000
or more, that after the end of that one-year period, you are
advised.
You are advised about the customer, you are advised of
certain information which you have asked to be collected about
the customer--the type of business they are engaged in, their
identity, their social security number, their residence, their
citizenship, you know, all these things you're given.
And the fact that they have made multiple transactions in a
normal course of business, for example, every Friday? Or,
``This is the pattern they have engaged in in the last month''
or the last year.
And then the bank certifies to you that they believe--and
they continue to say if they see any suspicious activity, or if
these transactions change, or the pattern of these
transactions, that you will be advised, or anything suspicious
goes on with that account, you will be told. Do you have all of
that?
But all this information is submitted. And simply what they
ask you to do is just to prove this as a legitimate, well-
established business that has a need, a necessary--a necessity,
a demonstrated necessity, to deposit $10,000 or more in regular
intervals as a regular part of their business. And you're given
that information.
Going forward, why would you have to receive notice every
time these well-established businesses licensed to do business,
which the bank has certified that they have done their due
diligence, they have identified this customer, they have
supplied you all this information, why would you--and what
reason does law enforcement have to have access, to go in any
time you wanted to, and see every single deposit that that
well-established business engaged in?
In what regard does this have anything to do with
counterterrorism or terrorist activities?
And let me say this. Let's just suppose that what you've
said here in your testimony is that you believe that car
dealerships, attorneys, physicians, accountants, convenience
stores--and there are about six other different types of
businesses--anyone that sells or anyone that operates--I think
you said buses or--there are about 10 other categories that you
would still like the right to, every time they make a deposit
of $10,000 or more, you want to know about it.
You can turn down the bank's request to certify them as a
seasoned customer. You can say, ``We have a question about
this.'' You can--what--why does the Federal Government, our
national government--when, you know, 20 years ago they had none
of these rights, why do they need to know what every account in
this country, every time he deposits $10,000, why do they need
to know that?
And if you suspect him, you can take action, you can say,
``I suspect this person, I want to know that''--if you're
investigating him, as Mr. Garrett said, you can go in and
request this information. But isn't this a tremendous--and you
talk--you describe all this as data mining. Is that the word?
And losing data, and data mining.
You are basically mining information from every business,
every sole proprietorship in this country that, in a regular
course of business, well-established, deposits money every day
or every week of, considerable sums.
Do you see why we, some of the members of this committee,
could consider this as somewhat of a loss of privacy that the
American people are concerned about, and that's not necessary?
Do you believe that law enforcement has an overwhelming
right to know every time an American citizen makes a deposit of
$10,000 or more? If you have been advised that they are a
legitimate business, they have been identified to you, the
purpose of that business, they have a license to do business,
they are incorporated under the laws of a State, and they
deposit money on a daily or weekly basis in the regular course
of business, of $10,000 or more, why do you need to know the
details of each and every transaction, as opposed to their
right of some privacy? There are some legitimate rights that
American citizens should have not to supply all of this
information to the government?
The IRS itself in 1994 testified before this committee that
there was absolutely no legitimate purpose for--``IRS estimates
that 30 or 40 percent of CTR's filed are reports of routine
deposits by well-established retail businesses, and that these
CTR costs on the government and the nation's banking industry
impose costs on the government and the nation's banking
industry.'' What they didn't say is a tremendous loss of
privacy that we have actually agreed to.
This Congress, they have agreed to all this stuff. They
have agreed that every time somebody walks in a bank and tries
to establish an account, that we tell the FBI all about it.
Then the FinCEN comes before our committee and testifies
that, in fact, there is no legitimate need for this, other
than--I understand, Mr. Morehart, you're the FBI. I suppose
that you would come before this Congress and say, ``It would
help us if you would give us every bit of information on every
American out there. You give us everything they do, everywhere
they go, every time they make a call, every time they walk in a
bank.''
It would be of help to you. We could put a wire on
everybody. But would that be right? Do you understand why we
have legitimate concerns about the level of surveillance. I am
a little disturbed that you've walked in and said car
dealerships, accountants, doctors, physicians, that, these
people--and part of it is in the name of counterterrorism.
And I just don't believe that American citizens here,
licensed to do business here, and do business in the regular
course of business, and are of such--and their business is so
well-established that they, on a weekly basis, they deposit
$10,000 or more, that somehow the Federal Government is here
making a case that we need to know each and every time, going
forward, each and every time they make a $10,000 deposit.
Mr. Morehart. Mr. Chairman--could I address that, Mr.
Chairman?
Chairman Bachus. Sure.
Mr. Morehart. I do understand your concerns, sir. And I do
think they are relevant concerns. I will say I jotted down
myself a couple of notes while listening to you speak. And if
you don't mind, I will address them.
Chairman Bachus. Sure, sure.
Mr. Morehart. I think they may answer some of your
questions.
First and foremost, let me say that, again, I want to
reiterate we recognize it's a burden. There is data that is
included in the BSA data, particularly the CTR's, that we do
not need. We will be the first to admit that. The Wal-Marts, as
you say, the Cracker Barrels, you name it. And we would be more
than happy--
Chairman Bachus. Even the guy who has had a pharmacy in
town for 20 years--
Mr. Morehart. Absolutely, sir.
Chairman Bachus.--or the guy that's operated a restaurant
for 15 years.
Mr. Morehart. Absolutely, sir.
Chairman Bachus. Because, you know, I am also troubled, to
a certain extent, that you say if it's a publicly listed
company and it trades, they're legit, but if it's a small
businessman, you know, that--
Mr. Morehart. Yes, sir. But may I add, too, that there are
those companies out there that we do know are involved in
nefarious activity, that we do know are funding terrorists, and
those are the ones we're looking--
Chairman Bachus. Sure. And I suggest with those companies,
that if they don't sell you on the fact they're a legitimate
industry, turn this request down.
And also, if you think they are engaged in suspicious
activity, revoke their exemption.
Mr. Morehart. My--
Chairman Bachus. Or, if you are investigating them, go
interview them. Or, if you need to, ask for a subpoena--you can
get a subpoena prior to indictment--to subpoena their records.
Or you could probably--I think you could even go to the bank
and ask for their records, can't you?
Mr. Morehart. Well--
Chairman Bachus. In fact, you do that, on a--
Mr. Morehart. You can, under the Right to Financial
Privacy--
Chairman Bachus. Sure--
Mr. Morehart.--certain data, but not the records without
a--
Chairman Bachus. Well, it's kind of funny that you say you
can't go into a bank and ask for this information, because it
violates financial privacy, but you're gathering it every day.
You see what I'm talking about?
Mr. Morehart. No, sir. It's actually different data.
Chairman Bachus. It's what?
Mr. Morehart. It's different data, sir.
Chairman Bachus. Okay, all right.
Mr. Morehart. Yes.
Chairman Bachus. I stand corrected. And go ahead, I
interrupted you.
Mr. Morehart. No, sir, not at all. No problems. I just
wanted to make clear that there are a couple of reasons we need
that data. It is not oftentimes immediately obvious whether you
have someone who is involved in the various activities.
Again, I re-emphasize, we don't want all data. And quite
candidly, sir, with all due respect, I wouldn't want to put a
wire on everybody, and I wouldn't want everybody's data,
because I don't have the manpower or the--
Chairman Bachus. I will say I understand that.
Mr. Morehart. Yes, sir. It does act as a deterrent, though.
Please understand--
Chairman Bachus. Oh, absolutely. Let me tell you something.
I understand that. I understand that if the banks just mail you
a copy of everybody's bank account transactions every month,
there would be a deterrent.
Mr. Morehart. Yes, sir.
Chairman Bachus. I acknowledge that.
Mr. Morehart. And please understand, 30 years ago we didn't
have electronics funds transfer to the extent that we do today,
thereby making cash transactions even that much more unusual.
And when you're talking about cash transactions--businesses
sometimes do have those, and there are legitimate reasons to do
them.
However, the majority of us use either our debit card,
checks, or some form of transaction that does not require a CTR
filing. That's why a lot of those documents are of interest to
us. And we use them--again, I emphasize--not only for tactical
issues, for cases--that is, for example, to put the bad guy in
jail, that piece of evidence will do that.
More often than not, we use it for intelligence purposes.
It's important for us to know what part of the United States,
for example, is heavy with CTR filings. That may be either a
traditional criminal hub that you would want us to identify,
for example, with narcotics issues, or it may be a hub of some
type of terrorist funding activity, or money movement.
Chairman Bachus. Well, I wouldn't think that with the
terrorist activity--I can't imagine that any well-established
business that has been certified to use well-established
incorporated--you know, and you have been told that they do
file--you know, you've been told that, for a year, they have
filed numerous cash transactions. If you suspect them, then you
know that information. You know, you already have that.
But if it's narcotics, and trying to determine regions of
the country, I can just tell you that narcotics are a problem
everywhere. And I just almost think that--
Mr. Morehart. Sir, could I give you an example?
Chairman Bachus. Yes, yes.
Mr. Morehart. Let me give you an example. I won't go into
great detail, because of the classification issues, and I
apologize for that, I have no control over that.
However, I will say that there are those businesses out
there that are involved in this type of activity. And I could
go, let's say, let's speculate and say I went and got a
national security letter or a subpoena, and I got those bank
account records. What would I lose in terms of CTR value if
CTR's weren't filed?
Let me give you an example. If a CTR is filed and the money
is brought in by an individual that is not associated with the
account--i.e. he is an employee of the account holder, but not
associated with the account--does the subpoena document tell me
that?
Chairman Bachus. No, but a suspicious transaction report--
Mr. Morehart. Yes, sir?
Chairman Bachus.--in a case like that, they're required to
file a--
Mr. Morehart. Not necessarily, sir. And that's--
Chairman Bachus. If it's not in the ordinary course of
business--
Mr. Morehart. No, sir. It's not. For example, if you look
at the CTR filing document, it basically says did someone else
come in and make this deposit to this person's account, and
they're required to collect that data. That individual may or
may not be the subject of a suspicious activity report,
depending upon who negotiates the transaction.
They may see this individual do this every single day for a
year, and have developed a relationship, and therefore, it's
not unusual. And I can tell you, from my 10 years as a street
agent working white collar cases, that happened all the time,
that they would develop a relationship, and the next thing you
know, an individual would take the bank for some money, they
would be gone, and they would go, ``Gosh, Fred was a nice
guy.''
So, sir, there are those instances where that does happen.
And without that CTR, we have lost valuable data where we
might--and again I emphasize, and perhaps--I don't want to seem
too dramatic--but you might identify a cell member through that
CTR that you would then not know about.
Chairman Bachus. We already have a process, CTR exemption
process, where you could deal with it in that way.
Mr. Morehart. And again, sir, we're more than willing to
work together to try to address that issue. I know Mr.--
Chairman Bachus. Sure, and I understand you are. Can you
understand the frustration of our financial institutions?
Mr. Morehart. Yes, sir.
Chairman Bachus. Thank you.
Mr. Werner. Sir, if I might address the existing CTR
process, because you did question the distinction between a
publicly traded company versus a non-publicly traded company.
And I think it's important to recognize that the reason we
provided an exemption in the existing rules for publicly traded
companies is because a publicly traded company is subject to
certain disclosure requirements, and has a level of
transparency that a non-publicly traded company may not. And
so, I think that goes to your point of--
Chairman Bachus. Yes, but I think that's because the
Federal Government says, ``If you're going to publicly trade,
and if you're going to operate, then you should reveal certain
things. If you're an individual, you have an absolute right not
to reveal that.''
Mr. Werner. I recognize that, sir, but the transparency is
what allows you to understand the nature of the business and
have assurances--
Chairman Bachus. Sure. All I--
Mr. Werner.--that it's legitimate.
Chairman Bachus. I'm not going to argue with the fact that
we can be so transparent that everything we do, as I say--that
we supply law enforcement all that information. And obviously,
it's going to be of assistance, so I appreciate your testimony
today, and I look forward to working with you. Mr. Hinojosa has
a question.
Mr. Hinojosa. Thank you, Mr. Chairman. And I want to thank
the panelists for coming to visit with us this afternoon, and
talk to us, and explain to us some of the things that are
happening out there in the world of business.
H.R. 5341 makes it easier for financial institutions to
exempt certain customers, as the chairman was pointing out. I
gather that some of you are concerned that the bill might allow
exemptions for certain types of customers of financial
institutions.
I want to stress that the bill gives broad authority to the
Treasury Secretary to prescribe regulations to define a
``seasoned customer?'' Is it your position that the bill, as
currently drafted, would not permit the Secretary to continue
to make ineligible certain types of high-risk customers such as
services, businesses, car dealerships, law practices,
accountancies, and others? If so, explain your interpretation.
Mr. Werner. My concern, sir, with the bill is that law
enforcement has looked at the exemption as drafted, and is
worried that, given their current capacities to mine data, that
they are evolving in ways that they feel we ought to study this
issue further to make sure we get it right.
And their point is once we lose the data, it's very
difficult to assess the need for it, because you don't know
what you don't know.
With respect to the Secretary's ability, my reading of that
provision was that the Secretary could reject a request for an
exemption, or revoke an exemption. And again, it puts us in a
very difficult position. Because, as Mr. Morehart has said, you
don't--and this is the problem that the banks, the financial
institutions, have as well--you don't always know there is
something suspicious about a customer. They have established a
pattern of conduct in the course of doing business which
becomes regularized.
And you have--looking at it from just a pure objective
standard without any other relational information, you may not
realize that there is something wrong there. And I think that's
what--and law enforcement can speak to this point, but I think
that's what they're afraid of losing, is data that they--either
the Treasury Department or the financial institutions do not
realize can provide investigative value.
But because of the data they have, and the way they can hit
this information against their data, they can make use of that,
and make that assessment.
Mr. Morehart. Yes, sir. Thank you. I would agree with
everything that Director Werner said. I would also add this,
too, is that in terms of the entities, if you will, the
business types that are currently excluded from the exemption
process, many of those there is a good reason for that.
Some of those businesses--for example, car dealerships, and
perhaps Mr. DelliColli can talk more about this from the
narcotics standpoint--are historically known to be utilized,
whether wittingly or unwittingly, for the movement of money,
whether it's money laundering or otherwise for those purposes.
And that's why we asked, I guess a long time ago, that those be
included in there for that purpose.
I would be concerned that if we just wiped the slate clean
and started over again, that provides an opportunity where we
have to again go through and prove up once again why those
entities should not be subject to those exclusions.
I will also point out, as I mentioned to the chairman, that
it is unusual in this day and time to move great deals of cash,
unless you're in a cash-intensive business. Car dealerships are
not in a cash-intensive business. It is unusual to carry
$20,000 or $30,000 or $40,000 in to buy a car with cash, for
example. It is unusual to carry cash to your accountant to pay
him or her for their services, or an attorney, for that matter.
That is an unusual--and I would characterize as a suspicious--
activity, in and of itself.
Granted, there are those entities that are involved in the
movement of actual cash, and that's why the exemption process,
as I understand it, was originally created. I would suggest
that perhaps, as Director Werner suggested, we take a look at
this; we do a study. The FBI is willing to try to identify
whatever data we can to assist to make the process easier, to
make sure that we have identified the right entities for
exclusion.
But I would strongly urge that caution ought to be applied
in simply wiping the slate clean before there is a
comprehensive study to see if we can adapt, adjust, and assist
the financial services sector in reducing their burden, while
at the same time satisfying our need for information, not only
to address traditional criminal activity, but to ensure our
nation's security from terrorists, or would-be terrorists.
Thank you, sir.
Mr. Hinojosa. I will come back to you with another
question. But, I want to ask Mr. Werner if the bill gives the
Secretary of the Treasury a great deal of discretion? Yes or
no?
Mr. Werner. I'm not sure how to answer that, because it
does permit exemptions to be made. But again, they have to be
made on a reasonable basis. And if you don't have the
information to do that, I wouldn't expect a lot of exemptions.
Chairman Bachus. Would the gentleman from Texas yield?
Mr. Hinojosa. Yes, I will.
Chairman Bachus. Now, Mr. Werner, I don't mean to correct
you, but the legislation creates absolutely no new exemptions.
Mr. Werner. I don't think I said it created any new
exemptions.
Chairman Bachus. Okay, I--
Mr. Werner. What I said is it does permit the Secretary to
make exemptions, and--
Chairman Bachus. Well, it doesn't require him to do any of
that. But what it does do is streamline the existing process
for exemptions. These are exemptions that already are in the
law.
And it only focuses on known customers who have a
legitimate business purpose for depositing large amounts of
money, which--
Mr. Werner. Well, I think as drafted, the exemptions would
be broader in who is exempted than is currently exempted under
the two phases of the--
Chairman Bachus. Oh, the people. But the exemptions, we're
not creating any new exemptions.
Mr. Werner. I agree with that.
Chairman Bachus. Mr. Morehart, you said we're wiping the
slate clean. We're not creating--we're not going in and saying
we're going to exempt these--we're going to exempt them from
the filing requirements.
Mr. Morehart. Well, sir, the way I understand it, current--
Chairman Bachus. And we're not--in the suspicious
transaction reports--
Mr. Morehart. Well, sir, what I was getting ready to say
was that there are a number of entities that cannot be provided
a customer exemption, and that's what I was trying to--
Chairman Bachus. Okay.
Mr. Morehart.--answer the gentleman's question about
before.
Chairman Bachus. Sure, and I--
Mr. Morehart. What this legislation does, H.R. 5341, is it
basically says you can be afforded that exemption. What I am
saying is--if I may--is that I think we ought to be very
cautious in doing that, because there are those entities where,
in and of itself, it's suspicious to carry cash into--
Chairman Bachus. I guess what I am saying is that you used
the example of a car dealership, a guy walking in a car
dealership, and he pays $40,000 for a car. Okay?
But the CTR that's filed doesn't list that some guy walked
in and bought a car for $40,000. You're not going to get any
information about that transaction in a CTR. What you're going
to get in a CTR is that Bruebaker Buick deposited $160,000 last
week, and $180,000 this week, and $240,000 the week after.
And you would have to then go out to Bruebaker Buick and
say, ``Hey, guys, you've been depositing $200,000. It jumped up
to $240,000 this time. Give me a list of your''--it's of no
value in determining--
Mr. Morehart. Well, it--
Chairman Bachus.--identity, or identifying an individual
who pays $40,000 for an automobile.
Mr. Werner. Well, I think where it could be of value is
where you see cash transactions coming out of a dealership over
time that create a pattern, and then you have got a case--
Chairman Bachus. You break the pattern--the banks, through
your own instruction books, are legally obligated to try to
report that if it's suspicious, or if it's a change in their
normal practice.
Mr. Werner. That's true. But maybe you don't break the
pattern, but some other lead, investigative lead, pops up a
name which, when the law enforcement puts it into a
consolidated data--
Chairman Bachus. Yes. The name on there is just the
business, correct?
Mr. Werner. But it may be the business that's involved in
the illicit activity. And that's what is so significant. And
when a business is involved in illicit activity, particularly
if there is large cash transactions, you may have other
documents that supplement it, such as an 8300. So there is a
long trail that you can follow, once you get into a--once you
understand--
Chairman Bachus. If they're depositing more and more cash,
it may mean their business is increasing.
Mr. Werner. That's the difference between CTR's and SAR's.
CTR's are just objective data points that are filed, whether
you know that it's suspicious or not. And it may turn out it is
suspicious and you didn't know it. And that's why I think it's
dangerous to equate a suspicious activity report with a CTR.
Chairman Bachus. Okay. Let me just say one more time our
legislation streamlines an existing process for exemptions. It
creates no new exemptions. Mr. Morehart, I'm just saying, I
don't want to mislead you.
A guy walks in, pays $40,000 for a car at a dealership here
in Maryland. You know, you're not getting a report from the
bank that says, ``Bill Smith bought a $40,000 car and he paid
cash,''.
Mr. Hinojosa? I can understand what you are saying there.
Mr. Hinojosa. Thank you, Mr. Chairman. I think that this is
all very interesting, and I am pleased to be able to hear some
of the explanations that you all have given.
But prior to my coming to the meeting, there was in your
testimony, Mr. Morehart, something about a 73 percent of
filings by the MSB's, which in no way means that, from your
standpoint, that the $35 billion to $40 billion sent from the
United States to Latin America in remittances by hard working
people is money laundering, is it?
Mr. Morehart. Well, I--the one clarification that--I am
glad you asked the question, sir, because that question was
brought up before--is that that 73 percent relates only to the
SAR's that were filed, not to all the money that was moved by
money service businesses.
Mr. Hinojosa. So the 73 percent is just the SAR's that were
filed?
Mr. Morehart. Correct.
Mr. Hinojosa. That's more realistic.
Mr. Morehart. Yes, sir.
Mr. Hinojosa. Because here in the last 3 to 4 years,
remittances have become a big part of not only the big banks,
but small community banks and credit unions. And with the
Treasury allowing the banks to decide whether to accept
matricula consular identification card to be used as
identification, we have seen more and more of those remittances
sent through our mainstream financial institutions, rather than
from some of the organizations--I'm not going to name them by
name--that were traditionally used to send remittances to their
families.
So, I am pleased that you have given that explanation,
because that was worrying me, that there was something
happening of which I just was not aware. I appreciate that
explanation. Mr. Chairman, I'm going to yield back my time.
Mr. Hensarling. [presiding] Thank you. At this time,
gentlemen, we thank you very much for your testimony, and the
consumption of much of your time. At this time, we would ask
that our second panel be seated.
And with some housekeeping here, I ask for unanimous
consent to submit the following written statement into the
record, a letter of support for H.R. 5341 from the National
Association of Federal Credit Unions from Mr. B. Dan Berger,
senior vice president of government affairs; a letter of
support for H.R. 5341 from the Financial Services Roundtable,
from the Honorable Steve Bartlett, president and CEO; the March
1994 GAO report titled, ``Money Laundering: the Volume of
Currency Transaction Reports Filed Can and Should be Reduced'';
and opening statement from the Hon. Debbie Wasserman-Schultz, a
member of the full committee, but not of our subcommittee.
Mr. Hensarling. At this time, we will begin our second
panel. I have personally had the opportunity to read the
testimony and apparently, as the last Republican in the room, I
will now have the honor of hearing the testimony, as well.
We would like to welcome to the committee Mr. Weller Meyer,
chairman and president and CEO, Acacia Federal Savings Bank,
representing American Community Bankers. Welcome, sir.
Mr. Robert Rowe, regulatory counsel, Independent Community
Bankers of America. Welcome to you, sir.
And now, I would like to yield time to Mr. Israel for our
last introduction.
Mr. Israel. Thank you very much for your courtesy, Mr.
Chairman. I have the good fortune of introducing to the
committee Mr. Brad Rock. I had the opportunity to visit with
Mr. Rock several months ago in his office, and learn first-hand
of the regulations involved in the Bank Secrecy Act.
He pulled out a file cabinet drawer for me, and showed me
just reams and reams and reams of paperwork. And I told him I
hadn't seen that much paperwork since I visited my doctor's
office and saw the medical records that they have to keep under
the HIPAA regulations.
Mr. Rock knows about this issue from practical experience,
but also from his position of leadership. He is the 2005/2006
ABA vice chairman and chairman. He is president and CEO of the
Bank of Smithtown and Smithtown Bank Corp., in Smithtown, New
York. He is a former chairman of the ABA Government Relations
Council, and has testified in Congress numerous times for the
ABA on the subject of regulatory reform. And he is the former
president of the Independent Bankers Association of New York
State.
So, we are very proud of his leadership, and very proud to
be able to benefit from his expertise today. And I thank the
chairman for the courtesy.
Mr. Hensarling. Thank you. And at this time, Mr. Meyer, you
are recognized for 5 minutes.
STATEMENT OF F. WELLER MEYER, CHAIRMAN, PRESIDENT & CEO, ACACIA
FEDERAL SAVINGS BANK, ON BEHALF OF AMERICA'S COMMUNITY BANKERS
Mr. Meyer. Chairman Hensarling and members of the
committee, I am Weller Meyer, chairman, president, and CEO of
Acacia Federal Savings Bank in Falls Church, Virginia. I am
here this afternoon representing America's Community Bankers,
whose board I chair.
I want to thank Chairman Bachus for calling this hearing.
Mr. Chairman, we appreciate your leadership and the leadership
of the committee members, Ranking Member Frank, Congressman
Renzi, Congresswoman Maloney, and others, in crafting H.R.
5341.
Community Bankers fully support the goals of the anti-money
laundering laws, and we are prepared to do our part to fight
crime and terrorism. However, the CTR reporting regime is
broken. H.R. 5341 is an important step towards balancing the
burdens and benefits of CTR reporting.
The Seasoned Customer CTR Exemption Act of 2006 would
reduce costs and regulatory burdens on financial institutions,
and it would ensure that the government receives highly useful
information to help law enforcement prosecute and prevent
financial crime.
H.R. 5341 would provide streamlined criteria for exempting
established business customers from CTR reporting. Depository
institutions that exempt business customers would be required
to file a one-time notice for each exempted customer. This
approach would be simpler and less burdensome than the
exemption requirements under the current regulatory regime.
H.R. 5341 would also advance the Bank Secrecy Act's goal of
collecting reports and records that have a high degree of
usefulness for law enforcement. We do not believe that the
repeated reporting of routine transactions of reputable
businesses has a high degree of usefulness in prosecuting
financial crime.
If H.R. 5341 is adopted, financial institutions would still
be required to screen the transactions of exempted customers
for signs of illicit activity. Institutions would still be
required to conduct customer due diligence, monitor customer
account activity, and report suspicious transactions, and they
would still be required to search customer databases for the
names of known or suspected money launderers or terrorists.
We support law enforcement's efforts to develop improved
data mining capabilities. But the promise of future improved
data mining techniques does not justify waiting to improve a
CTR database. Waiting ignores the Congressional mandate in the
Money Laundering Suppression Act of 1994, that requires the
number of CTR filings to be reduced by 30 percent. And waiting
ignores the real-world burdens of CTR filings on community
banks.
The banking industry has worked with FinCEN, the banking
regulators, and law enforcement agencies to meet the
Congressional mandate to reduce CTR filings, and to improve the
quality of the CTR database. But frankly, we reached a
stalemate in 2004. The time has come for Congress to intervene.
We call on Congress to adopt H.R. 5341.
In addition to enacting the Seasoned Customer CTR Exemption
Act of 2006, we believe that it is also time for Congress to
increase that dollar value that triggers a CTR filing, at least
with respect to business customers. The current $10,000
threshold was established in 1970. When adjusted for inflation,
$10,000 in 1970 is equivalent to more than $52,000 today.
This important reform will help those institutions that do
not use the CTR exemptions, and further improve the usefulness
of the CTR database.
The cumulative burden of BSA and other regulatory
requirements has very real opportunity costs. For example, the
fees that a community bank must spend for software that
monitors cash transactions is money that cannot be spent to
hire multiple tellers, a new loan officer to reach out to
community small businesses, or to develop and market new
products.
What may seem like insignificant costs to law enforcement
have real business implication for community banks and their
communities.
Thank you for inviting ACB to testify on the importance of
improving the CTR system so that it collects only information
that is highly useful to law enforcement. ACB believes that
H.R. 5341 would provide important regulatory relief to
community banks by providing a simpler alternative to the
current CTR exemption provisions. I am happy to answer any
questions that you may have.
[The prepared statement of Mr. Meyer can be found on page
70 of the appendix.]
Mr. Hensarling. Now, Mr. Rowe, you are recognized for 5
minutes.
STATEMENT OF ROBERT ROWE, REGULATORY COUNSEL, INDEPENDENT
COMMUNITY BANKERS OF AMERICA
Mr. Rowe. Mr. Chairman and members of the Committee, my
name is Robert Rowe, and I serve as regulatory counsel for the
Independent Community Bankers of America. I have held that
position since April 1995, but I have worked on Bank Secrecy
Act compliance for over 15 years, and for more than 7 years
have been an active member of the Treasury Department's Bank
Secrecy Act advisory group.
During that time, I have played an active role in
discussions on how to improve the currency transaction
reporting process, and have served on a Bank Secrecy Act
advisory group subcommittee on the issue.
On behalf of ICBA's more than 5,000 member banks, I want to
express our appreciation for the opportunity to testify on
legislation to reduce the regulatory burden of filing currency
transaction reports. We commend Chairman Bachus, Representative
Frank, and the many other members of the committee for
introducing H.R. 5341, the Seasoned Customer CTR Exemption Act
of 2006, which is based on section 701 of H.R. 3505.
We look forward to working closely with Chairman Bachus and
this committee to find solutions to reducing the BSA compliance
burden, while still meeting the needs of law enforcement. We
hope today's hearing will improve the chances for this
provision to become law.
The Nation's community banks are committed to supporting
the Federal Government's efforts to prevent money laundering,
terrorist financing, and other fraudulent activities. However,
bankers across the country continue to identify the Bank
Secrecy Act as the most burdensome area of compliance. ICBA
believes that it is critical that resources be focused where
the risks are greatest.
ICBA fully supports the committee's efforts to address this
regulatory burden through the Seasoned Customer CTR Exemption
Act of 2006. ICBA has long believed that it is important to
develop a simple and easily applied exemption process that can
eliminate currency transaction reports that have little value
for law enforcement. We therefore support the provisions of
H.R. 5341 that would allow banks to exempt seasoned customers
from CTR's without being required to renew the exemption
annually.
Eliminating unnecessary reporting would result in
substantial savings to our banks, and increase the time our
employees can spend on customers' financial needs. It would
also make law enforcement analysis of the data much more
efficient by eliminating unnecessary data.
The bill would require Treasury to implement the provisions
of the statutory definition of a qualified customer. ICBA
strongly encourages that Treasury be given sufficient authority
to make this definition flexible and easily applied, for
example, by allowing certain customers to be exempt, even
though they have not had accounts for 12 months.
ICBA will gladly work with Treasury and law enforcement to
develop a rule that is workable and that properly balances the
costs against the benefits. Many financial institutions report
that the cost of using the current exemptions outweighs any
associated benefits. As a result, many institutions find it is
much simpler and less risky to file a CTR on every cash
transaction over $10,000. Our members report that this approach
is more practical and cost effective than using the current
exemption process.
Using the existing BSA exemption not only consumes a
community bank's limited resources in time and money, it also
increases the burden on the bank's existing compliance program
by requiring that the bank develop policies and procedures for
exempting customers, train personnel on the procedures, and
establish audit programs to monitor compliance with the
exemption process.
For example, if a community bank establishes an exemption
for a customer under current rules, it must document the
decision and annually file an exemption with the government. It
then must ensure that it has up-to-date exemption lists
available for all branch personnel, and that all branch
personnel are properly trained in which customers are exempt,
and when those exemptions can be used, since not all
transactions for an exempt customer may be exempt.
With turnover of tellers and other branch staff, it is
often much simpler, less complicated, and certainly less
confusing to simply file the currency report. All that the bank
staff has to remember is that currency in or currency out over
$10,000 requires a report. Plain, simple, and easily applied.
Unfortunately, it also means many routine transactions are
reported.
Anecdotal evidence and comments from financial institutions
of all sizes support the notion that avoiding the current
exemption process is significantly less burdensome in terms of
cost and compliance management. Barring a significant change in
the CTR filing process or the exemption regulations, many
institutions will continue to file on all transactions that
exceed the $10,000 threshold. This defeats the purpose of
creating a reporting system that allows law enforcement and the
Federal Government to properly focus resources.
ICBA believes this bill is an important step towards
eliminating unnecessary reports and appreciates this
committee's commitment to moving legislation that would reduce
the regulatory burden on community banks by creating the
seasoned customer exemption to the CTR requirement.
Thank you. I will be happy to answer any questions.
[The prepared statement of Mr. Rowe can be found on page 99
of the appendix.]
Mr. Hensarling. Thank you, Mr. Rowe.
Now, Mr. Rock, you are recognized for 5 minutes.
STATEMENT OF BRADLEY E. ROCK, CHAIRMAN OF THE BOARD AND
PRESIDENT & CEO, BANK OF SMITHTOWN, REPRESENTING THE AMERICAN
BANKERS ASSOCIATION
Mr. Rock. Thank you, Mr. Chairman. When establishing the
BSA regulatory regime, Congress sought to require reports when
they have, in the words of the Act itself, ``a high degree of
usefulness.'' The current CTR requirements have long departed
from this standard of usefulness, and in fact, serve more to
distract and impede efforts against crooks and terrorists than
to help identify and stop them.
The original CTR requirements were enacted more than 35
years ago in 1970. Subsequently enacted requirements for
suspicious activity reporting, rigorous customer identification
programs, mandates to match government lists to bank accounts,
and the availability of focused and detailed information under
section 314(a) of the Patriot Act, leave little value to be
added by collecting millions of CTR's on legitimate routine
business activity.
In 1994, Congress tried to address this problem by enacting
an exemption process for some CTR reporting. Nonetheless, since
that exemption process was passed, the number of CTR's has
grown from approximately 11 million in 1994 to more than 14
million today.
Unfortunately, the compliance technicalities for banker use
of the exemption and renewal processes, and examiner second-
guessing of banker use of the exemptions, have severely
discouraged most banks from seeking exemptions for any of their
customers.
The exemptions go largely unused. Bankers do not want to be
put in the position of being asked what they are trying to hide
by filing for exemptions, nor do banks want to be threatened
with penalties and regulatory criticism by examiner second-
guessing.
In my bank, during the past year, we filed 2,766 CTR's.
Most of these CTR's were filed for ordinary transactions by an
ice cream parlor, a clam bar, a restaurant, and a high-volume
Amoco dealer, all of whom have done business with us for many,
many years. My tellers spent more than 460 hours in the
branches, preparing the CTR forms, and one person in our main
office spent more than 1,000 hours checking the forms for
accuracy, checking them against computer print-outs, and filing
the forms with the appropriate government office.
Having watched this process for years, and being thoroughly
familiar with the businesses that are the subject of these
filings, I can tell you with firm assurance that all of this
time and paper did absolutely nothing to further advance our
collective efforts to thwart money laundering and terrorism.
We have passed the time for studying what to do. The time
has come to take effective action to make the system better.
Accordingly, we support H.R. 5341, which recognizes that the
best way to improve the utility of cash transaction reporting
is to eliminate the valueless reports being filed on legitimate
transactions by law-abiding American business people.
This improvement can be achieved by establishing a seasoned
customer exemption for business entities, including sole
proprietorships that, I might add, was endorsed by FinCEN last
year in testimony before Congress, and now embodied in H.R.
5341.
The clear standards, as proposed in the bill, would avoid
the compliance barbs that have made the previous exemption
effort ineffective. As H.R. 5341 makes clear, all customers
would continue to be subject to suspicious activity monitoring
and reporting. SAR's provide precise account and related
transaction information, as well as narrative detail not
available in CTR's.
In addition, by using the 314(a) inquiry process, law
enforcement will be able to locate transaction data and other
relevant information on a broad range of accounts of suspects.
This more targeted approach is working, and producing tangible
results today.
I thank you, Mr. Chairman, and your colleagues, for your
commitment to improving the BSA system. And I assure you that
ABA and its member banks share that commitment. We are all
striving to make the system work best to protect the security
of our banking system from abuse by money launderers and
terrorists, and to safeguard the confidence that our customers
have that the integrity of their legitimate business conduct is
respected. Thank you.
[The prepared statement of Mr. Rock can be found on page 87
of the appendix.]
Mr. Tiberi. [presiding] Thank you to all three of you. Mr.
Rock, let me ask you a question. Mr. Rock, the banks worry
about using the exemption system today because of concerns that
their decisions to seek an exemption are going to be impacting
their customers, and maybe will be second-guessed by examiners.
Some would say that this is not a true concern, a legitimate
concern.
Tell me why you think it might be a legitimate concern from
a banker's point--
Mr. Rock. Well, that's not supposition, Mr. Chairman. When
the exemption process was enacted in 1994, in the first round
of exams that followed in the year or two after that exemption
process was enacted, it was widely discussed among bankers that
examiners came in and said, ``What are you trying to hide by
filing for exemptions for these customers?''
Not only that, you have to look at the exemption process
closely--and nobody wants to be put in that position, by the
way, because we want to play our role; that's important to us.
But the other thing is, is that if you look at the exemption
process itself, it has an annual renewal process, and it has a
biannual renewal process in which certifications have to be
made.
If you read through the footnotes for those certifications,
they carefully define the word ``frequently.'' And what
examiners do is they come in and they question and second-guess
the amount of due diligence that you have done in the renewal
process, and then threaten penalties if you don't live up to
that unspecified amount of due diligence in following the
annual and the biannual renewal system.
So, the risks and the difficulty far exceed the amount of
time and effort for just filing the form in the first place.
Mr. Tiberi. Thank you, Mr. Rock. Mr. Meyer, I understand
that many community banks do not use the CTR exemption. Can you
explain to us why that is the case?
Mr. Meyer. There are a variety of reasons. I think many
banks want to train their employees to one single standard,
because it's a lot easier. We were having a discussion earlier
today about how difficult it is, particularly when you're using
part-time employees, to train to different standards. So, from
a training perspective, it's just a lot easier for an
institution to train to a simple standard that says, ``This is
the way you do it,'' and to not make any exemptions.
I think the issue regarding the regulatory second-guessing
is the stories are more than anecdotal. They are real stories.
I think everybody has acknowledged in recent years that the
landscape has changed. There have been discussions within the
regulatory agencies, on a joint basis, to try to get out to the
industry to indicate to them that the second-guessing does not
continue. However, that has not been proven to be true in fact.
So, I think there are a variety of reasons that cause
people to say, ``Let's take the path of least resistance. Why
utilize an exemption when it's going to potential expose us to
second-guessing and criticism by the regulatory agencies?''
Mr. Tiberi. For the record, for the Committee record, can
you tell us, or estimate to us, what it would cost one of your
average members, community banks, to implement a CTR filing
system? How much cost, how much staff time?
Mr. Meyer. I am sorry that I don't have that data available
to me.
Mr. Tiberi. Is it something you think would be easy to get
ahold of, just for the record?
Mr. Meyer. If I might, I would like to sort of lean back
and get some--
Mr. Tiberi. Go right ahead. You may lean.
Mr. Meyer. I missed an opportunity.
Mr. Tiberi. We all do.
Mr. Meyer. One of the costs--and I neglected to talk about
this--and I can give you a real example with my own
institution, when we looked into the cost of automating the
software that would be necessary--buying the software that
would be necessary--to perform this analysis on an automated
basis, we were given a quote of $120,000 plus an annual $10,000
fee. And that has nothing to do with the cost of our employees
actually performing the work, the review process, the
recordation, sending the documentation off to the appropriate
agencies.
So, if you're looking at a global sense, that gives you
some magnitude for just one institution. And we do not--we, in
our institution, made the decision not to. We're not a very
retail-oriented business, so we made the decision that with the
staff, it would be less expensive for us to utilize staff, and
if necessary, to add on additional staff, as opposed to taking
on the burden of that initial outlay plus the ongoing expense
associated with it.
Mr. Rock. Mr. Chairman, if I could add to the explanation--
Mr. Tiberi. You may.
Mr. Rock.--of my friend, Mr. Meyer, and the software that
he is talking about, that $120,000, is just the cost of the
software that gets appended to the existing infrastructure for
teller transactions. And many community banks across the
country cannot afford the kind of massive infrastructure at the
teller station that larger banks can afford in order to append
that additional software to it.
I mean, keep in mind that 3,300 banks in the country have
fewer than 25 employees. So they don't even have the
infrastructure to append that software to, let alone the
$120,000 cost and the other costs that Mr. Meyer has referred
to.
Mr. Tiberi. How big is your bank, your personal bank--
Mr. Rock. $950 million. And we use computer print-outs of
two kinds. We have a computer program that prints out
everything over $10,000, and we have one that aggregates all
transactions by one customer in amounts of more than $10,000.
And we have a person who sits and reviews the reports every
single day, those computer print-outs, against the CTR's that
were prepared by the teller. And that takes her--her name is
Mrs. Ragusa, and it takes her about two-and-a-half hours a day,
because in preparation for this testimony I checked with her
every day last week to see how long it took her to do that
work.
So, that's about two-and-a-half hours a day, just on that
review process. So that's more than 1,000 hours a year on the
review process, and that's in addition to the cost of the
computer programs.
Mr. Tiberi. Ohio is a good banking State, if you're
interested in expanding, by the way.
Mr. Rowe, I saw you shaking your head. I'm over my time. If
you could, just briefly comment.
Mr. Rowe. Just very quickly, one of the things I would like
to add is that the software packages that these gentlemen are
talking about, while the costs are coming down, there is an
infrastructure that is needed to be there. These systems are
off-the-shelf systems that are designed merely to catch and
aggregate currency transactions.
The exemption process doesn't even enter into these costs.
To try and add that on would geometrically increase the cost of
these software packages. And for many community banks, it's
just completely out of the realm of believability.
Mr. Tiberi. Thank you. My friend from Texas, Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. I have enjoyed
listening to all three of the presenters. I want to clarify
that this bill addresses currency transaction reports, and not
suspicious activity reports. Am I correct on that?
Mr. Rock. Yes. Yes, sir.
Mr. Hinojosa. And the bill further provides Treasury with
the flexibility and authority it needs to define ``seasoned
customers,'' isn't that correct?
Mr. Rock. Yes, sir.
Mr. Hinojosa. Your responses reaffirm why I agreed to
become an original cosponsor, along with the bill's author and
original sponsors, Spencer Bachus and Barney Frank. After
listening to your experiences and those of the small community
banks of less than $1 billion, I really don't have a question,
Mr. Chairman. I want to just say that after hearing all three
of our panelists, I am convinced that H.R. 5341 is a good,
justifiable bill, that should be reported favorably to the
House and passed. Community banks and other financial
institutions need to be given the considerations that you all
have asked for.
So, Mr. Chairman, I am not going to ask them any questions.
I think that they have done a good job, and that the record
will reflect why we are going to be supporting this bill.
Chairman Bachus. I thank you, Mr. Hinojosa. And gentlemen,
I did read your testimony last night, because I was locked out
of my house.
[Laughter]
Chairman Bachus. And I spent the night on my couch, so I
couldn't sleep. So I read every bit of it. And it was--it's
very good testimony. It will help us in continuing to document
this case.
I know you are as frustrated as we are, in that we sat down
with FinCEN and worked out a very reasonable approach that all
parties agreed was a good, common-sense solution, and at some
point, for whatever reason, it came off the tracks.
And I think more--if for no other reason that law
enforcement always wants more information. They're just--
they're going to always want to know as much as they can know.
But I think there has to be a limit to, you know, to what
you're required to do, and the cost of what you're required to
do, and particularly when it's information that is of really--
of marginal use, or could be obtained, you know, in a more
effective way.
So, if you will continue to make your case before other
Members of Congress, your associations, I know it's
frustrating. In 1994, GAO took a look at this very issue and
said that the widespread use of these on well-established
businesses was of no value. It just simply served as an expense
to both government and to your institutions, and actually made
the job of combating money laundering more complicated than it
should be. And we proposed a solution, and worked with law
enforcement in fashioning, which passed this body with two
dissenting votes.
And I believe that maybe separating this out and sending it
over to the Senate, I think the Senate--I really have heard no
disagreement from any senator to this legislation. I would--I
am not sure, you know, how carefully it was considered. But
they will have to deal with the policies of this.
So, I have been handed a note that says, ``Wrap it up,''
because I'm supposed to be in the Senate in about 10 minutes,
meeting on a different subject matter. I very much appreciate
your testimony. And if you have suggestions for us and certain
of your associations were very--all of you were very valuable,
but we worked with you in fashioning this, and then talking to
law enforcement. Any suggestions you have got for us will be
appreciated, in addition to your testimony today. So thank you
very much.
Some members may have additional questions for this panel,
which they may submit to writing, or to the former panel. So,
without objection, the hearing record will remain open for 30
days for members to submit written questions to these
witnesses, and the first panel witnesses, to place their
responses in the record. This hearing is adjourned.
[Whereupon, at 4:35 p.m., the subcommittee hearing was
adjourned.]
A P P E N D I X
May 18, 2006
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