[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
BANK SECRECY ACT'S IMPACT ON
MONEY SERVICES BUSINESSES
=======================================================================
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
__________
JUNE 21, 2006
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-100
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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:
June 21, 2006................................................ 1
Appendix:
June 21, 2006................................................ 53
WITNESSES
Wednesday, June 21, 2006
Abernathy, Wayne A., Executive Director for Financial
Institutions Policy and Regulatory Affairs, American Bankers
Association.................................................... 41
Carbaugh, Don, Acting Associate Director for Regulatory Policy
and Programs, Financial Crimes Enforcement Network............. 7
Goldman, Gerald, General Counsel, Financial Service Centers of
America........................................................ 39
Jaedicke, Ann F., Deputy Comptroller for Compliance Policy,
Office of the Comptroller of the Currency...................... 11
Landsman, David, Executive Director, The National Money
Transmitters Association, Inc.................................. 42
Mayer, Eileen C., Director, Fraud/Bank Secrecy Act, Small
Business/Self-Employed Division, Internal Revenue Service...... 9
Milne, Philip W., President and CEO, MoneyGram International,
Inc............................................................ 37
Taylor, Hon. Diana, Superintendent of Banks, State of New York,
on behalf of the Conference of State Bank Supervisors.......... 12
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 54
Kelly, Hon. Sue W............................................ 57
Abernathy, Wayne A........................................... 61
Carbaugh, Don................................................ 75
Goldman, Gerald.............................................. 82
Jaedicke, Ann F.............................................. 93
Landsman, David.............................................. 105
Mayer, Eileen C.............................................. 107
Milne, Philip W.............................................. 114
Taylor, Hon. Diana........................................... 126
Additional Material Submitted for the Record
Statement of Isak Warsame.................................... 139
Statement of Western Union Financial Services, Inc........... 142
Revised Interagency Interpretive Guidance on Providing
Banking Services to Money Services Businesses Operating in
the United States.......................................... 156
Bachus, Hon. Spencer:
Responses to questions submitted to Ann Jaedicke............. 160
BANK SECRECY ACT'S IMPACT ON
MONEY SERVICES BUSINESSES
----------
Wednesday, June 21, 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 10:07 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Baker, Kelly, Biggert,
Feeney, Hensarling, Neugebauer, Price, McHenry, Maloney,
Sherman, Moore of Kansas, Waters, Carson, McCarthy, Green, and
Clay.
Ex officio present: Representative Frank.
Chairman Bachus. Good morning. The subcommittee will come
to order.
The purpose of today's hearing is to review the oversight
and regulation of money services businesses (MSB's). More
specifically, we will address the impact that the Bank Secrecy
Act and related financial institution account discontinuances
have had on MSB's.
Despite expressions of concern by members of this Congress
to both regulators and financial institutions to treat MSB's
fairly, I remain concerned that financial institutions continue
to unjustifiably sever their relationships with MSB's.
MSB's provide a valuable service to consumers, and in some
instances are the only financial services available to them.
No one disagrees that banks and MSB's should comply with
any money laundering guidance issued by their regulator.
Nonetheless, terminating an entire regulated industry and
forcing its customers into the underground financial system
itself creates a significant money laundering risk.
MSB's are regulated at the State level, and are required to
comply with the Bank Secrecy Act at the Federal level.
Currently, 28 States and the District of Columbia have
regulations requiring MSB's to be licensed by the State banking
agency, and some of these States have specific laws regarding
transmittals abroad. In many of these States, an MSB has to
submit to a rigorous review, including providing financial
statements and internal audit reports and permitting background
checks on owners and managers. Furthermore, the licensing
process requires annual training, current BSA compliance
programs, and the submission of a surety bond.
Since the adoption of the USA PATRIOT ACT, MSB's have been
required to adopt a written anti-money laundering compliance
program and to conduct independent reviews of their programs.
MSB's are also required to register with FinCEN and are
examined for BSA compliance by the IRS. Certain MSB's are also
required to file suspicious activity reports for transactions
involving at least $2,000. In addition, MSB's are required to
file CTR's for cash transactions of more than $10,000, and must
also maintain information on fund transfers of $3,000 or more.
Despite the increased regulation of MSB's, the bank
regulators and their examiners have classified all MSB accounts
as high-risk, regardless of whether there have been any actual
problems.
Banks have been required to investigate the money
laundering compliance standards of the MSB's, forcing them to
become the de facto regulator of these institutions.
FinCEN and the Federal banking regulators have issued
guidance twice. Unfortunately, in my opinion, the requirements
continue to be vague, subjective, and burdensome to the banks.
Over the past year, at least three national banks have
ceased offering services to MSB's, and some State-chartered
institutions have also discontinued service, and this is
across-the-board blanket discontinuance by these institutions
of all MSB's.
In response to concerns raised over the previous year by
MSB's and financial institutions, FinCEN issued an advanced
notice of proposed rulemaking in March 2006. The comment period
for the ANPR ends on July 10, 2006.
I am hopeful that today's hearing and discussion will shed
some light on this issue and be taken into consideration as
FinCEN and the bank regulatory agencies move forward with the
rule.
In closing, I would like to ask unanimous consent that
Congressman Rangel, the ranking member of the Ways and Means
Committee, be allowed to participate in today's hearing.
The Chair now recognizes the Ranking Member of the Full
Committee, Mr. Frank, for his opening statement.
Mr. Frank. Thank you, Mr. Chairman, I appreciate it,
because I am not going to be able to stay, but this is
something which I had raised.
We, on our side, received a letter from our extremely
distinguished colleague, Mr. Rangel, who is the Ranking
Democrat on the Ways and Means Committee, but who also
represents a district in New York where the MSB's play a
significant role.
Now, I should say that we have been concerned, many of us,
from time to time, about potential consumer abuses with some of
the irresponsible MSB's, and things like payday lending and
elsewhere, but being concerned about abuses does not mean that
you think that the function is useless, and I would like to get
people at the lower end into banks. I think getting people
banked is a good thing for them. We have pushed for that.
Our colleague from California, Ms. Waters, has been a
leader in trying to get lifeline banking to try and encourage
people into the banking system, but with all of that, there is
still a role for the MSB's, and it is a role that many lower-
income people are going to be relying on, and Mr. Rangel, who
represents a district in which they play an important part,
came to us, because he had heard from some of these entities
that service his constituents that they were being turned down
by the banks, and when we checked, it was one bank, in
particular, that was cited as having turned these down, and we
asked the bank what was involved. The bank's top people for
this came to see our staff and said it is the uncertain
atmosphere that has been created in the regulatory area, and
sometimes, I will say to my friends and regulators, people hide
behind you unfairly. Sometimes they have a legitimate point.
It does seem to me that we have some uncertainty here, and
obviously we want to prevent money laundering, but we all have
a temptation to kind of overdo, in some cases, when the
negative consequences of the overdoing do not fall on us, and I
think this may be a case where the regulators have not been
sufficiently sensitive to the impact uncertainty can have, and
so, I am very glad that we have this hearing.
I hope what will come out of this is a further movement
towards a situation in which there is all the regulation we
need.
We obviously do not want there to be terrorist schemes
being financed here.
On the other hand, from what Mr. Rangel has said, and from
what we have gleaned, it does seem to me that the impact has
been greater than would be called for by terrorism. I do not
think all of these MSB's in Harlem are potential terrorist
financing entities, although we will defer to New York State's
expertise in this, but I think that we probably--I think that
this is one of these areas where we have conceptual agreement
that we want regulation so that we do not have abuses, but we
do not want to put legitimate market entities out of business.
I do not think we have reached that level of accomplishment
yet.
So, I look forward to our being able to work together, and
we will hear from the regulators, and then we will hear from
some of the people in the business.
I hope we can come out of this at some point fairly soon
with a more specific set of regulations and with guidance and
with some way for the businesses to look into it, because as I
said, I think we are now in a position where the effect of the
regulation is to shut down some businesses and deny people some
services.
I do not think anyone is to blame in the sense of anybody's
set out to do something bad, but the interaction of regulators,
banks, and businesses here is nothing, and what we hope to be
able to do is, particularly between the banks and the
regulators, promote the right kind of interaction, so we can
have a degree of confidence, never certainty, that we have done
everything we can to reduce the abuses.
I also--as I said, I want very much to work with the
regulators here, but also--I am a great believer in free
speech, and I voted against fining people, people saying
naughty words on television, but I would like to ban metaphors
from use in discussions of public policy. I think it would be
very helpful, but as long as it is still constitutional, I will
say I do think, in the area--particularly in this area of
regulation, we have told the regulators to find needles, and we
should refrain ourselves from the instinct to build bigger and
bigger haystacks as they look for the needles, and I think, in
some cases, we may get into that direction.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Frank. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman. For, I think, the
second time this month, I find myself in complete agreement
with the ranking minority member. I am not sure who should be
more worried, him or me.
Mr. Frank. Mr. Chairman, point of personal privilege.
Chairman Bachus. You are recognized.
Mr. Frank. I will drop it.
Mr. Hensarling. I knew I would regret saying that.
Mr. Chairman, let me thank you first for holding this
hearing.
Along with Mr. Moore of Kansas, I helped author the
regulatory relief bill for financial institutions, and
throughout that exercise in legislating, we knew that each and
every regulation that had been imposed upon our banking sector
at one point in time made a lot of sense. Frankly, there are a
number of regulations that still create benefits for our
economy, and for our Nation, but too often, we never go back
and we look at the cost, the costs that are being imposed upon
this same economy and same Nation, and we often find out that,
among other things, both the bureaucracy and Congress can often
exceed--excel at unintended consequences, and so, I am glad
that you are holding this hearing, because now we see a fair
amount of evidence, if not alarming evidence, that a number of
our financial institutions are deciding to drop MSB's as
customers, and I think principally due to increased cost, to a
lot of uncertainty, due to a lot of ambiguity, and we have to
take a very serious look at what that means to our Nation, what
is happening to the cost associated with the MSB's as,
increasingly, they get dropped as bank customers.
What is ultimately the impact upon low-income citizens,
low-income neighborhoods?
Is our Nation really more secure if we start to drive MSB's
into the non-banking sector?
Finally, how much duplication do we have here? Are we
coming up with a system that essentially makes our financial
institutions de facto regulators of MSB's when, apparently, on
paper, we have a number of other institutions that are supposed
to serve that purpose.
So, Mr. Chairman, again, I thank you for holding this very
important hearing, and I yield back.
Chairman Bachus. I thank the gentleman from Texas.
The gentlelady from New York, Ms. Maloney.
Mrs. Maloney. I thank you so much, Chairman Bachus, for
holding this very important hearing. The issue of bank
discontinuance of check cashers is very important to my
district, and to New York City, in general.
I joined Mr. Rangel in requesting this hearing and, at one
point, was a member of the city council partially within the
boundaries of Congressman Rangel's district. So, I know
firsthand that the financial services industry, in many cases,
made a decision not to open banks in that area, so the check
cashers were really the only way that many people could achieve
services.
So, they were very important, and I saw firsthand during my
days on the city council the service that they provided to my
constituents there, and continue to provide throughout New York
City.
I would like to especially welcome all of the witnesses,
but especially my constituents, Superintendent Taylor, and
Gerald Goldman of the Financial Services Centers of America.
As a New Yorker, I know money services businesses form a
very important part of the financial services district industry
in my home town, and many of my constituents depend on their
services for their financial needs.
There are about 150 money service businesses in New York
City, in over 750 locations, mostly in neighborhoods not served
by banks.
They employ about 4,000 New Yorkers, and serve many
thousands more each day.
In recent years, the money services businesses in my
district have repeatedly asked me to help them with the problem
of banks discontinuing check cashers' and money transmitters'
accounts.
Like all businesses, these need a bank account and access
to bank services.
In fact, because of their substantial cash flows, they need
a bank with a local presence.
This issue came to a crisis point 2 years ago in New York,
when J.P. Morgan Chase, which serviced about 75 percent of the
MSB's in New York State, announced that it was terminating all
MSB customers.
This left North Fork Bank as the sole bank doing business
in New York with check cashers, and I understand even they have
stopped doing business with money transmitters.
In late 2004, shortly after the J.P. Morgan announcement, I
spoke directly to senior J.P. Morgan Chase officers and asked
them what their reasons were for discontinuing money services
businesses.
They said that the OCC guidance effectively required them
to do so.
I then called the Director of OCC, Jerry Hawke, and urged
him to take a more balanced approach to this issue. I followed
up with a letter, and he responded with a letter denying that
the OCC was encouraging banks to cut off MSB's.
Basically, the banks were pointing fingers at the
regulators, and vice versa.
I was, however, encouraged that the heightened scrutiny
this issue was receiving from myself and others in Congress,
including Chairman Bachus, led to the FinCEN conference in late
spring of last year on this issue, which appeared from the
reports to have been a very, very positive development.
Right after the conference, I had the opportunity to ask
Bill Fox, then-director of FinCEN, and Julie Williams, acting
head of OCC, whether FinCEN would continue to support MSB's as
viable financial institutions.
Director Fox said, ``The check cashers are critical to the
Nation's economy and to the world's economy.'' Rebutting
critics who assert that MSB's are not regulated, he said,
``They are regulated by us and the IRS enforces those
regulations,'' as well as by the States that license them. He
pointed out that MSB's are subject to the Bank Secrecy Act and
make filings under that act.
Fox and Williams attributed the discontinuance problem to
what Fox called, ``a misperception by banks of the level of
risk involved in doing business with this sector,'' and
asserted, ``We are having success in educating them.''
Unfortunately, this does not seem to have happened. If
anything, the situation seems worse now. Banks seem to have
been frightened by the amount of work required by the guidance.
Even though the guidance said that banks should not
arbitrarily treat MSB's differently, it requires banks to do
much more due diligence than they have to for other types of
business.
MSB's are on the OCC's list of high-risk businesses, but so
are car dealers, lawyers, accountants, investment bankers,
broker-dealers, travel agencies, and leather goods stores, just
to name a few.
What does the OCC require in the way of due diligence for
them? Is the standard higher for this particular industry?
I would like to see the regulators adjust the guidance to
the real level of risk.
Frankly, FinCEN seems to have lost interest in advocating
for a solution on this, and I am concerned that the other
regulators do not see it as their responsibility to help MSB's
function. I hope we can correct that by working together.
If we do not, we will only drive MSB's and their customers
underground, where they are much more susceptible to money
laundering and fraud.
Thank you very much for coming, and I look forward to the
testimony.
Chairman Bachus. Are there any more members wishing to make
an opening statement? If not, at this time, I would like to
introduce our first panel.
Mr. Don Carbaugh is the acting Associate Director for
regulatory policy and programs, Financial Crimes Enforcement
Network, FinCEN.
Ms. Eileen Mayer is the Director of Fraud/Bank Secrecy Act,
the Small Business/Self-Employment Division of the IRS.
Ms. Ann Jaedicke is the Deputy Comptroller for Compliance
Policy, Office of the Comptroller of the Currency.
At this time, I will ask Ms. Maloney to introduce our
fourth witness.
Mrs. Maloney. Thank you so much. It is my pleasure today to
welcome my long-time friend, Diana Taylor, the superintendent
of banks for the State of New York. Ms. Taylor has served in
this position since 2003, and provides great insight and
perspective into the field of financial services.
Having worked in both the public and private sectors, she
acted as the deputy secretary for finance and housing to
Governor Pataki, served as the chief financial officer for the
Long Island Power Authority, and helped found M.R. Beal &
Company, an investment banking firm.
I am looking forward, as always, to Ms. Taylor's testimony,
as well as her responses to our questions about money services
businesses.
Thank you so much for being here, Diana.
Chairman Bachus. Thank you. Let's start with Mr. Carbaugh
and proceed.
STATEMENT OF DON CARBAUGH, ACTING ASSOCIATE DIRECTOR FOR
REGULATORY POLICY AND PROGRAMS, FINANCIAL CRIMES ENFORCEMENT
NETWORK
Mr. Carbaugh. Thank you, Mr. Chairman.
Chairman Bachus, Ranking Member Sanders, and distinguished
members of the subcommittee, I appreciate the opportunity to
appear before you today to discuss initiatives that the
Financial Crimes Enforcement Network is implementing under the
Bank Secrecy Act relating to the money services business
sector.
Your leadership and commitment to understanding and
publicly discussing the issues confronting this industry is
critical not only to the safety and soundness of our financial
system but also to our Nation's security.
I am pleased to be here today with Eileen Mayer from the
IRS, Ann Jaedicke from the Office of the Comptroller of the
Currency, and Superintendent Taylor from the New York State
Banking Department.
Each of these agencies plays a vital role in implementing
Bank Secrecy Act requirements. I am happy to say that we have
forged a strong working relationship in our united effort to
regulate the money services business industry.
The Financial Crimes Enforcement Network has regulated the
money services business industry under the Bank Secrecy Act
since the 1990's.
Issues surrounding the money services business regulatory
regime, including the need to identify unlicensed and
unregistered money services businesses, conduct robust Federal
Bank Secrecy Act compliance examinations, and ensure access to
banking services, continue to be at the forefront of our
agenda.
As you are aware, there has been mounting concern among
FinCEN financial regulators and the money services business
industry regarding the ability of money services businesses to
obtain and maintain banking services. Many banks have stated
their uncertainty as to the appropriate steps that they should
take under the Bank Secrecy Act to manage potential anti-money
laundering and terrorist financing risks.
At the same time, the money services business industry has
expressed concern that misperceptions of risk may be unfairly
labeling them as unbankable.
Individual decisions to terminate account relationships,
when compounded across the U.S. banking system, have the
potential to result in a serious restriction in available
banking services to an entire market segment. The money
services business industry provides valuable financial
services, especially to individuals who may not have ready
access to the formal banking sector.
If money services business account relationships are
terminated on a widespread basis, we believe that many of these
businesses could go underground.
This potential loss of transparency would, in our view,
significantly damage our collective efforts to protect the U.S.
financial system from money laundering and other financial
crime, including terrorist financing.
Clearly, resolving this issue is critical to achieving the
goals of the Bank Secrecy Act.
In March 2005, the Non-Bank Financial Institutions and
Examinations Subcommittees of the Bank Secrecy Act Advisory
Group jointly hosted a fact-finding meeting to solicit
information from banks, as well as money services businesses,
on issues surrounding the provision of banking services to the
money services business industry. Subsequently, in April 2005,
FinCEN and the Federal banking agencies issued interagency
guidance to the banking industry on regulatory expectations
when providing banking services to domestic money services
businesses.
FinCEN issued a companion advisory providing guidance to
money services businesses on what they should expect when
obtaining and maintaining banking services.
Currently, based upon what we have learned at the March
2005 meeting, and in subsequent discussions with other Federal
and State regulators, law enforcement, and the industry, we
have developed, and are implementing, a three-point plan, which
is detailed in my written testimony, for addressing these
issues.
First, guidance that outlines with specificity Bank Secrecy
Act compliance expectations when banks maintain accounts for
money services businesses.
Second, education that provides banks and bank examiners
enhanced education on the operation of the variety of products
and services offered by money services businesses and the range
of risks that each may pose.
Third, regulation that strengthens the existing Federal
regulatory and examination regime for money services
businesses, including coordinating with State regulators to
better ensure consistency and leverage examination resources.
We also continue to work closely with our colleagues at the
Internal Revenue Service to enhance the examination regime
through the development of revised Bank Secrecy Act examination
procedures, information sharing, and examination targeting.
Additionally, we continue to work closely with the
Conference of State Bank Supervisors and State regulators on
these issues.
Executing individual agreements with State banking agencies
will ensure better coordination and synergy with State-based
examiners and improve consistency in examination processes.
We also intend to continue working on developing indicators
for law enforcement and financial institutions to help identify
unlicensed and unregistered money services businesses.
By providing law enforcement, banks, and other financial
institutions with indicia of illicit activity, they will be
better able to help us identify money services businesses that
choose to operate outside of the regulatory regime.
Lastly, I would like to comment briefly on our registration
efforts.
Identification of money services businesses subject to the
Bank Secrecy Act requirements is an essential first step in
effective regulation.
Our effort to identify money services businesses begins
with the Bank Secrecy Act requirement to register with FinCEN
and maintain lists of agents.
However, the industry is largely composed of small,
unsophisticated businesses whose primary business is often
something other than the money services that they provide,
frequently to the poor and unbanked.
Additionally, due to language barriers within certain
communities, there may be confusion regarding the applicable
regulations.
We recognize that the complexity of our current approach to
MSB registration may be contributing to a lack of registration,
and we are working on solutions to provide a more efficient and
reliable method for identifying money services businesses.
In conclusion, Mr. Chairman, we are grateful for your
leadership and that of the other members of the subcommittee on
this issue, and stand ready to assist you in your continuing
efforts to ensure the safety and soundness of our financial
system.
Thank you for the opportunity to appear before you today.
I look forward to any questions you may have regarding my
testimony.
[The prepared statement of Mr. Carbaugh can be found on
page 75 of the appendix.]
Chairman Bachus. Thank you, Mr. Carbaugh.
Ms. Mayer?
STATEMENT OF EILEEN C. MAYER, DIRECTOR, FRAUD/BANK SECRECY ACT,
SMALL BUSINESS/SELF-EMPLOYED DIVISION, INTERNAL REVENUE SERVICE
Ms. Mayer. Good morning, Mr. Chairman, and members of the
subcommittee.
I am pleased to be with you this morning to discuss the
IRS's role in administering the BSA.
Specifically, the IRS is responsible for examining for BSA
compliance all financial institutions not currently examined by
a Federal functional regulator. These entities include money
services businesses such as check cashers, issuers of
traveler's checks, and money transmitters, casinos, certain
credit unions, dealers in jewelry and precious metals, and
insurance companies.
The largest of these groups is the MSB's. No one is sure
just how big the universe of MSB's may be or how many of them
are required to register with FinCEN under the BSA.
What we do know is that, currently, there are more than
24,000 registered MSB's. FinCEN maintains a list of registered
MSB's on their Web site. The IRS is committed to our important
role in enforcing the BSA.
In late 2004, we created the Office of Fraud/BSA within the
Small Business/Self-Employed Division. That is the office I now
head. This allows us to utilize field agents whose sole
responsibility is to examine MSB's, casinos, and other entities
covered by the BSA but not monitored by traditional Federal
regulators.
Previously, agents conducting BSA exams were doing so as
collateral duty to their more traditional income tax
enforcement work.
Today, we have approximately 350 BSA examiners in the
field, and it is my hope that we will get the number up to 385
in the not-too-distant future.
This increased workforce is reflected in the number of
Title 31 exams we have been able to conduct. In FY 2005, we
examined 3,680 MSB's.
Through late May of this year, we have almost exceeded that
total, and expect to examine over 6,000 by the end of the
fiscal year.
We are also leveraging our resources with those of the
States.
In late April, Commissioner Everson announced agreements
with 33 States and Puerto Rico to begin sharing BSA
information.
These agreements will allow the IRS and the participating
States to share information and leverage their resources to
ensure that MSB's are complying with their Federal and State
responsibilities.
We recognize, Mr. Chairman, that the money services
business industry provides valuable financial services,
especially to individuals who may not have ready access to the
formal banking sector.
It is a longstanding treasury policy that a transparent,
well-regulated money services business sector is vital to the
health of the world's economy.
We find it regrettable that compliant MSB's are being
rejected by banks over fears of potential non-compliance with
BSA requirements. Our examinations do not support those fears.
Of the over 7,300 MSB's that we examined last year, and
this year thus far, there have been only 41 cases that merited
referral to FinCEN for consideration of civil penalties or the
IRS criminal investigations unit for possible criminal
penalties. For the most part, the violations that we find are
minor or technical in nature and can be corrected easily.
When a minor or technical violation is noted, we issue a
letter to the MSB listing the violation. Unless our letter is
challenged, we expect those violations to be remedied in a
timely manner, and to ensure that happens, our examiners will
conduct a follow-up examination within 6 to 8 months.
If no violations are found in the original exam, we issue a
different letter showing that the business has been examined
and no violations were found.
Mr. Chairman, I hope my remarks this morning, as well as my
written statement, submitted for the record, address many of
the questions that the subcommittee has relative to the IRS's
role with the BSA, and specifically its examination of MSB's.
I will be happy to respond to any additional questions that
the members of the subcommittee may have.
[The prepared statement of Ms. Mayer can be found on page
107 of the appendix.]
Chairman Bachus. Thank you, Ms. Mayer.
Ms. Jaedicke.
STATEMENT OF ANN F. JAEDICKE, DEPUTY COMPTROLLER FOR COMPLIANCE
POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Ms. Jaedicke. Thank you, Chairman Bachus, and members of
the subcommittee. I appreciate the opportunity to discuss the
Bank Secrecy Act's impact on money services businesses.
Over the past couple of years, the OCC has taken many
actions to help ensure that MSB's are not unfairly denied
access to a bank account. For example, we participated in
numerous meetings and conferences with representatives of the
banking and MSB industries to help us understand the issues.
With the other regulatory agencies, we issued interagency
guidance and examination procedures that address MSB issues. We
have provided instructions and training to our examiners on
MSB's.
As the regulator of national banks, the OCC has long been
committed to ensuring that all Americans have fair access to
the banking system and financial services. We recognize the
positive role that MSB's play in this process, and the OCC is
very concerned about the problems that MSB's are experiencing
in obtaining banking services.
The reasons some MSB's have lost access to banking services
are complex and derive from a multitude of factors, including
the risks presented by some MSB accounts, the costs associated
with maintaining MSB accounts, and banks' concerns about law
enforcement and regulatory scrutiny. Notwithstanding these
concerns, there is still a significant number of national banks
that continue to provide accounts and banking services to
MSB's.
OCC officials have met often over the last 18 months with
various representatives of the MSB industry to better
understand the problems MSB's face. For example, in March of
2005, OCC representatives attended the fact-finding meeting on
MSB's hosted by FinCEN. Later that month, the OCC hosted a
teleconference for the banking industry in which we discussed a
variety of issues, including MSB's.
Also, the OCC participated in a nationwide teleconference
on MSB issues hosted by the American Bankers Association. And,
in April of 2006, the OCC again joined various Federal, State,
and industry representatives at an MSB regulatory policy
meeting sponsored by the ABA.
All of these initiatives have helped to further the
understanding of all parties, and we at the OCC are committed
to continuing this dialogue.
As our knowledge and understanding of MSB's and their
issues have grown, our guidance has evolved. Along with FinCEN
and the other Federal banking agencies, in April of 2005, we
issued interagency guidance on MSB's. That guidance has since
been incorporated into the Interagency Bank Secrecy Act and
Anti-Money Laundering Manual and into our interagency training.
More recently, on March 10, 2006, FinCEN issued an advanced
notice of proposed rulemaking to solicit updated facts
concerning MSBs' access to banking services, as well as
recommendations regarding additional guidance or regulatory
action that might address these concerns. The comment period
closes soon, and the OCC will again work with FinCEN and the
other Federal banking agencies to provide, if needed, different
guidance to the banking industry that is clear and consistent.
We commend the efforts of Director Werner for the leadership he
has shown in addressing this important issue.
The BSA has been the focus of regulatory, Congressional,
and media attention for the past few years, and, certainly,
there has been an increasing sense of urgency for all of us
since 9/11. The intense focus on BSA compliance may have led to
misperceptions about the OCC's policies and practices relating
to MSB accounts at national banks, so let me be clear.
First, the OCC is not the supervisor of MSB's and does not
expect national banks to be the de facto regulators of their
MSB customers. Second, the OCC does not, as a matter of general
policy, require any national bank to close the accounts of an
MSB or any other customer. Third, the OCC does not discourage
banks from having MSB accounts. We expect banks that open and
maintain accounts for MSB's to apply the requirements of the
BSA, as they do with all accountholders, on a risk-assessed
basis.
Finally, the OCC has taken many steps to ensure that our
examiners are acting in conformance with our agency policies.
For example, when the interagency guidance was issued, we
provided copies to every national bank examiner with
instructions that it was to be followed immediately. As
previously discussed, the interagency guidance has been
incorporated into the interagency BSA manual, and Comptroller
Dugan has directed that the procedures in the interagency
manual be used at every BSA/AML exam. We have trained our
examiners extensively on the procedures in the interagency
manual.
Perhaps most significantly, in the past year, senior OCC
officials have held nationwide teleconference briefings with
the entire national bank examination force. In those briefings,
examiners were instructed that under no circumstances should
they be directing or encouraging banks to close MSB accounts.
We have been very clear in this regard.
Mr. Chairman, the OCC salutes your leadership in this vital
area. We also believe that important objectives are achieved
when MSB's have access to banking services, consistent with
anti-money laundering laws and rules. We stand ready to work
with Congress, FinCEN, the other Federal banking agencies, and
the banking industry to achieve these goals.
Thank you.
[The prepared statement of Ms. Jaedicke can be found on
page 93 of the appendix.]
Chairman Bachus. Thank you.
Ms. Taylor.
STATEMENT OF THE HONORABLE DIANA TAYLOR, SUPERINTENDENT OF
BANKS, STATE OF NEW YORK, ON BEHALF OF THE CONFERENCE OF STATE
BANK SUPERVISORS
Ms. Taylor. Good morning, Chairman Bachus, Congresswoman
Maloney--thank you very much for your kind introduction--and
members of the subcommittee.
I am Diana Taylor, superintendent of banks for the State of
New York.
I am pleased to be here today on behalf of the Conference
of State Bank Supervisors to discuss the impact of Bank Secrecy
Act compliance requirements on the availability of banking
services through money service businesses.
The New York State Banking Department is responsible for
licensing, supervising, examining, and regulating MSB's that
operate within our State's borders. The MSB's that we currently
oversee, by State law, include money transmitters and check
cashers.
MSB's fill a need in many markets. For many individuals and
families, especially in low-income and urban communities, MSB's
may be the only means of access to cash or the only avenue for
sending funds to family members abroad.
In New York State, there is an enormous concentration of
money transmitters and check cashers in only a few banks. Two
banks provide services to 42 percent of our money transmitters,
and two different banks provide services to 87 percent of our
licensed check cashers. The two banks in New York that are the
most active in providing these services to money transmitters
are currently considering exiting this business.
The departure will undoubtedly present a significant
challenge to New York's MSB's, not only in the short term but
in the long term, as well, as the decline in competition is
likely to not only raise fees for these businesses but to make
it that much more difficult to find any bank to do business
with them.
So, how do we solve this problem? Our solution must create
incentives that ultimately serve to protect consumers, the
banks, and the MSB's. Piecemeal stop-gap legislation is not a
viable solution.
The solution requires effort from all parties involved--the
MSB's, the banking industry, State and Federal banking
regulators, FinCEN, and the IRS.
First, FinCEN should revisit its definition of an MSB. The
current definition is too broad, with a threshold so low that
it may capture more entities than intended. The definitions hit
target entities whose primary business is providing financial
services, rather than the entities that offer financial
services only incidentally to their core businesses, such as
supermarkets cashing checks for their customers.
Two, regulators should consider further clarifications of
standards.
We, as regulators, should be able to develop simplified
standardized requirements for MSB's that serve a lower-risk
client base.
This new standard could serve as a foundation for an
advanced comprehensive BSA/AML program.
Additionally, while the joint guidance issued by FinCEN and
the Federal banking agencies did help clarify regulators'
expectations for banks that serve MSB's, further guidance may
also be necessary in two areas--appropriate due diligence when
maintaining accounts for foreign providers of money services
and identifying entities that may be operating covertly as
MSB's.
Third, we must continue to improve Federal and State
coordination.
Thirty-nine States have signed a memorandum of
understanding (MOU) with FinCEN, and 35 States have signed with
the Internal Revenue Service, to set forth procedures for
sharing certain Bank Secrecy Act information.
These MOU's, however, cannot entirely address a critical
need for additional services at both State and Federal levels.
We need access to additional training and a renewed commitment
from FinCEN and the IRS to deliver on the promises of the
MOU's.
Federal and State regulators, FinCEN, and the IRS need to
continue our efforts to deliver a consistent message to the
banking industry about their obligations and rights.
Fourth, we should create incentives to encourage banks to
serve the MSB industry.
We might consider offering CRA credit to banks that provide
services to MSB's, since a significant segment of these
businesses' customers are low-income individuals, households,
minorities, and new immigrants.
We should also seek out incentives for banks to offer MSB-
type services in unbanked and underbanked communities across
the country.
MSB's must continue to improve their risk-management
systems, with continuing focus on the area of BSA/AML
compliance.
As MSB's make their commitment to compliance clear, banks
may become more willing to provide services to these
businesses.
At the State level, we must continue to improve supervision
of these entities.
New York supervisory protocol for MSB's takes an integrated
approach that focuses on risk management, with an emphasis on
the compliance function, inclusive of BSA.
Our FILMS evaluation system provides an early warning
system about weakening conditions and a guide to where to look
for noncompliance issues.
Both CSBS and its counterpart organization, the Money
Transmitters Regulators Association, have made a commitment to
provide additional training and resources for State MSB
examiners across the country.
No silver bullet can solve this issue, and finger pointing
is not helpful.
This is an industry that is vital for many people.
Licensing alone is not a panacea. It is also not helpful
for banks to categorically refuse to do business with MSB's.
Regulators must be consistent in their requirements for the
industry. Everybody must work together.
I commend the subcommittee for holding a hearing on this
very important issue.
Thank you.
[The prepared statement of Ms. Taylor can be found on page
126 of the appendix.]
Chairman Bachus. Thank you.
Mr. Carbaugh, the SAR's that the MSB's are required to
file--does law enforcement review those SAR's?
Mr. Carbaugh. Yes, they do, sir.
Law enforcement around the country, through various, for
example, high-intensity financial crime areas, have SAR
activity review teams that review and assess individual SAR's
that come in, and they distribute them based on their
jurisdiction. So, yes, they are being looked at on that level.
They are also being looked at on a more macro level at
FinCEN to identify potential trends and patterns, and to look
at the information in a more strategic way and to provide some
proactive targeting of institutions when they are identified.
Chairman Bachus. What is the last year that you all have
reviewed those SAR's? Have you reviewed those that were filed
last year?
Mr. Carbaugh. One of the strategies that we have in place
right now is actually looking at SAR's filed by depository
institutions since the issuance of our guidance last year,
where we said in our--in the guidance that if you identify a
potential unregistered or unlicensed money service business
that you believe is operating outside of the requirements--
Chairman Bachus. Yes, I am talking about the licensed ones
now. How long after they file the SAR's are you reviewing those
SAR's?
Mr. Carbaugh. Well, they come into the database very
quickly, depending on how they are filed.
Chairman Bachus. How many of the SAR's filed by MSB's last
year resulted in criminal cases being brought?
Mr. Carbaugh. I do not have that information. I would have
to reach out to my law enforcement counterparts to obtain that.
Chairman Bachus. Is that information available?
Mr. Carbaugh. I would have to check with them.
Chairman Bachus. Are you personally aware of whether any of
them have resulted in criminal charges?
Mr. Carbaugh. My understanding is that, yes, they have
resulted in criminal actions, and we do have evidence that we
put forth in our SAR activity review, which we publish twice a
year, detailing cases where suspicious activity reports have
resulted in prosecution.
Chairman Bachus. Are the prosecutions from the SAR's that
MSB's have filed--are they much greater in number and
percentage than those filed by other financial institutions?
Mr. Carbaugh. I do not have that information.
Chairman Bachus. Could you get that information and supply
it to the committee?
Mr. Carbaugh. I would have to check with our law
enforcement counterparts.
Chairman Bachus. Okay.
Thank you.
Ms. Jaedicke, what is the OCC doing to discourage banks
from severing their relationships with MSB's? I mean it is not
working.
You know, there was another major announcement this week of
another major bank that actually says they are not going to
extend banking services to MSB's. Is the OCC powerless to stop
this?
Ms. Jaedicke. I hope not, sir. The intent of the guidance
that was put out last year, under FinCEN's leadership, was to
provide more clarity around this particular issue, so that
banks would feel comfortable servicing MSB's, and MSB's would
know how to provide information to banks that would make banks
more comfortable. So, I would again say that we should take a
hard look at the comments that come in from the ANPR that
FinCEN has issued and see if there are some changes we can make
in the guidance that might help the situation.
Chairman Bachus. Let me ask both FinCEN and the OCC. You
are aware that some of the largest banks in America say that
they are not going to continue to serve MSB's, and I think you
both said you are very concerned about this. My question is
what are you going to do about it?
Ms. Jaedicke. Sir, as I said, we do not tell national banks
which accounts to open or close.
Chairman Bachus. OCC is powerless--if a whole industry--if
banks are saying we are not going to deal with this industry--
the OCC--do you feel like you have any responsibility or any
obligation to--
Ms. Jaedicke. I think this is a multi-part problem, sir,
that will require a multi-part solution.
Chairman Bachus. Is there any obligation or responsibility
on your part, when the major banks in this country say that
they are not going to serve an industry, and they discontinue
their services to that industry, do you--does the OCC have a
statutory or regulatory duty or obligation to see that does not
happen? It is not a loaded question. You are in charge of
compliance.
Ms. Jaedicke. Yes, sir.
I think our duty and obligation is to provide clear
guidance in terms of what our supervisory expectations are, and
that is what we have tried to do. We are very concerned about
the situation with the money services businesses and the
discontinuance. We want to do what we can, what is within our
power, although we are not the regulator of the money services
businesses, we do not write the regulations for MSB's, but
certainly our banks are some of the banks that are providing
services to them. So, I think the best place for us to have
influence is in the information and the guidance we provide to
the financial institutions.
Chairman Bachus. I do not know the answer to this question.
Is there any statutory or regulatory obligation of banks to
serve all industries, or can they categorically just announce
that they will not serve certain industries or certain groups
of people?
Ms. Jaedicke. There are CRA obligations, sir, that have to
do with lending, particularly lending to--
Chairman Bachus. Or servicing accounts?
Ms. Jaedicke. Right. Lending to a bank's communities,
including low- and moderate-income areas.
Chairman Bachus. If these are law-abiding companies that
are subject to regulation, and they are complying with the
regulations, is it a violation for banks to just publicly
announce to the world that they are not going to deal with
those companies anymore?
Ms. Jaedicke. Not to my knowledge, sir.
Chairman Bachus. Okay. Do you need such statutory power?
Ms. Jaedicke. No, sir, I don't think so. I think the
solution to this really lies with multiple parties. It lies
with the OCC and the other Federal banking agencies. It lies
with the States and the IRS, who need to provide even and
vigorous supervision of the MSB's. It lies with the MSB's
themselves, who need to make sure that they are in compliance
with the regulations that apply to them.
Chairman Bachus. You know, some of them are complying. They
have not been guilty of any violations, and yet, they have been
denied banking services by some of the country's largest banks.
You are aware of that?
Ms. Jaedicke. Yes, sir.
Chairman Bachus. Okay.
You said you do not like the regulations that have been
imposed upon OCC or that you have to comply with? Is that the
FinCEN regulations?
Ms. Jaedicke. I am sorry, sir. Would you repeat that?
Chairman Bachus. You made some statement that you did not
like the regulations.
Ms. Jaedicke. No, sir, I do not think I said that.
Chairman Bachus. Okay.
All right.
Ms. Maloney?
Mrs. Maloney. Thank you.
Superintendent Taylor, in your testimony, you state that
FinCEN's definition of an MSB does not differentiate among
levels of risk within the MSB industry, and you gave several
suggestions about how that definition should change based on
targeting the entities whose primary business is providing
financial services rather than entities that offer financial
services only incidentally to their core business.
What sort of a breakdown in definitions do you think would
be helpful to properly regulate MSB's? If you would like to
expand on any of your recommendations, you have the floor.
Ms. Taylor. Thank you.
What I was referring to is the entities that have a primary
business of being an MSB. For instance, entities like a
MoneyGram or a big check casher are subject, under the current
regulations, to the same sets of rules and regulations as a--
for instance, a grocery store that is cashing checks as, you
know, a courtesy to their customers or entities that carry out
more limited businesses--for instance, just cashing payroll
checks or government checks or something like that--and I think
this is an area that needs to be explored, where maybe we could
be a little bit more pointed in which types of entities get
regulated how, so you do not have everybody getting swept up
under the same group of regulations.
I think that is something that we need to look into, and
maybe we can do something there and maybe we cannot, but I
think that we need to look at it.
Mrs. Maloney. I would like to ask the Deputy Comptroller
for Compliance in the OCC, Ms. Ann Jaedicke--one of the
problems that we are hearing is, when I talk to some of the big
banks--and I am not just talking about New York banks. I am
talking about big banks in this country--a number of my
colleagues, Mr. Frank and others, have mentioned that they have
talked to these banks and they say we have to stop this service
because the OCC is telling us to do that.
Now, when I wrote to Mr. Hawke, and in your comments, you
are saying you are not doing that, but there definitely is some
misconnection, because they truly do believe that they are
being told to discontinue the service, and so, that is my
question.
You say that you are not telling them that, but whatever--
there is a disconnect. They are pointing fingers back at you.
How can you clear this miscommunication up?
Ms. Jaedicke. We tried to clear it up in March of 2005, as
part of the interagency guidance on MSB's that we issued with
FinCEN and the other regulators. In that guidance, we made it
clear that it was the bank's decision whether to keep open an
account or close it. Also, as I said in my testimony, we made
it very clear to our bank examination staff that it was not
their job to decide which accounts should stay open or be
closed; that was the bank's decision.
Mrs. Maloney. Well, I tell you, we work on this committee
and we try to figure out how to get financial services into our
country.
We are working very hard to try to get people who are
unbanked into the banking system.
It is a better way to track money laundering and to just
track what is happening in our country, and everyone says that
they want to help, but nothing seems to be happening, and I
would like to ask everyone to just talk about what you think
should happen, but right now, I would like to ask Don Carbaugh,
how many MSB SAR's were filed last year, and of those that were
found to involve money laundering, how many do you expect will
eventually reveal actual criminal activity?
Mr. Carbaugh. Thank you, Congresswoman.
Last year, there were approximately 384,000 MSB SAR's filed
by the money services business industry. Your question with
respect to prosecutions or criminal activity, I cannot answer.
That is a question that will, again, be a question for law
enforcement.
We at FinCEN do not have criminal investigative authority.
Mrs. Maloney. Of those that were filed, do you know if any
of them involved money laundering? Did any of them involve--I
mean that is an important question.
Mr. Carbaugh. Sure. The SAR's that are filed--there is
information on the SAR's that the MSB has to check to determine
what kind of activity they have identified, and many of those
SAR's do indicate money laundering or Bank Secrecy Act
violations.
Mrs. Maloney. If you cannot get it to me today, I think a
very legitimate question is how many MSB SAR's were filed and
how many of them had money laundering or some problem with
them, and so, I think it is important to see whether there is
any correlation between criminal activities and your assertion
that MSB's are high-risk.
It may be that there has not been any money laundering in
MSB's, and therefore, the high risk level should be removed.
You may not have that information now, but you surely can
obtain it, and I'd like to ask for it for the committee.
My time is up, but if you have a comment, I would love to
hear it.
Mr. Carbaugh. Again, there were 384,000 filed last year.
Just to your point, we do not suggest that all MSB's are
high risk.
In the joint guidance that was issued last year to the
banking industry, we indicated that there were various levels
of risk in the money services businesses industry, as there are
with any other account holders or businesses that depository
institutions would bank.
Mrs. Maloney. To my question, how many MSB SAR's had any
type of money laundering, that figure has to be out there.
It may be that none of them had any money laundering. I do
not know.
I think it is a legitimate question; maybe you could get
back to us.
Mr. Carbaugh. We can get that information. Again, it would
be suspected money laundering.
Mrs. Maloney. Thank you.
Chairman Bachus. Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Carbaugh, on page 3 of your testimony, I think you said
that if the MSB account relationships were terminated on a
widespread basis and these businesses go underground, that this
could significantly damage our collective efforts to protect
the U.S. financial system from money laundering and other
financial crimes.
That is pretty strong language.
Could you elaborate just how serious of a challenge this
would be to FinCEN?
Mr. Carbaugh. Sure.
The challenge for us would be that, if there is a loss of
transparency, then we have no indicators of activity that may
be flowing through these types of businesses.
When we bring them under the AML regulations, they are
filing reports to us that are then used by law enforcement,
that are obviously indicators of potential suspicious activity.
So if, in fact, they go underground, that is that much
information that we would not have available for law
enforcement to potentially investigate,
Mr. Hensarling. So, between the regulation and the
legislation, if we do not get it right, these businesses are
not necessarily going away; we are just simply going to lose
their paper trail.
Is that a fair statement?
Mr. Carbaugh. I think that there is evidence to suggest
that, correct.
Mr. Hensarling. Ms. Jaedicke, I peeked ahead at the
testimony of the next panel, and Mr. Abernathy with the ABA
states in his testimony that the interagency guidance has not
provided a firm enough separation between the low-risk and
high-risk profiles on the MSB's, causing, in the opinion of
ABA--and I have not seen a statistic saying that most banks are
prompted to use a high-risk due diligence criteria and applying
that to the MSB's.
I think, in your own testimony, if I remember right, that
banks are supposed to be using some amount of due diligence to
differentiate between the two, but it sounds like they do not
feel they have sufficient guidance on how to do that, and so,
they are using the higher risk, which, to some extent, is
perhaps helping the phenomena that Mr. Carbaugh is worried
about.
Can you detail how this interagency guidance defines low-
level risk versus high-level risk, and why, seemingly,
financial institutions do not feel that they have too much
ambiguity to apply it?
Ms. Jaedicke. Certainly, sir.
The guidance has examples of what low-risk money services
businesses might be versus what high-risk money services might
be and supplies some attributes. For example, it explains a
low-risk money service business to be something like a check
casher that would cash payroll checks for a local employer, and
that would describe many of the money services businesses that
we have here in the United States. As an example of a high-risk
money service business, it gives a wire remitter that was
remitting large and frequent wires to a country that was of
money laundering concern to some part of the United States
Government, either Treasury or the State Department or some
other organization. So, we tried to make differentiations, with
FinCEN's help, in the types of MSB's and give the industry
examples of low-risk versus high-risk.
Mr. Hensarling. At what point, if any, does a financial
institution ultimately become responsible for the BSA
compliance of its customer, because I believe a number of our
financial institutions believe that, de facto, they are.
Ms. Jaedicke. At what point does the bank become
responsible for its--
Mr. Hensarling.--for the BSA compliance of one of its
customers.
Ms. Jaedicke. We would not say that the bank was
responsible for the BSA compliance program of the MSB. MSB's
are required by regulation to have a compliance program. What
the bank typically would do would be to simply ask questions of
the MSB, if the bank felt it was necessary to do so for their
due diligence program, questions about the MSB's own program,
perhaps.
Mr. Hensarling. You understand that a number of the
financial institutions--apparently a great number of them, as
we will soon hear testimony--believe that, de facto, they are
being asked to do that and that they do bear some
responsibility.
You understand--
Ms. Jaedicke. I do understand that, sir. All I can tell you
is that the guidance was specifically intended to address that.
Mr. Hensarling. Thank you.
I am out of time.
Chairman Bachus. Mrs. McCarthy?
Mrs. McCarthy. Thank you, Mr. Chairman.
It has been interesting hearing each one of you speak, and
also reading your testimony, and it seems to me, obviously,
with all of you sitting in front of us, we are sitting here
because we are thinking, okay, how are we going to fix this
problem.
I know New York State is going to have some legislation in
front of their committee--that was in your testimony--that
would require banks to get your permission in order to close an
MSB account. Could you go further into detail on your concerns
with this requirement?
I think the one thing I am hearing is that everybody is
going by these requirements, but nobody seems to be talking to
each other on how to handle this.
New York State has, at least, come up with some solution,
where the Federal Government--have you all talked together, all
of you, to try and figure out what we can do to make sure that
everybody is on the same page, so that our MSB's can serve the
people they need to, and certainly protect our banks that have
an obligation to make sure that we are not money laundering.
Ms. Taylor. I will start with the New York State
legislation problem and then go to the Federal regulations to
answer your question.
As far as the proposed legislation in New York State, what
it would require is that any bank that told an MSB that it was
going to close its account--it would have to get written
permission from the superintendent of banks in order to do
that.
I think this is a very, very bad idea for exactly the
reasons that Ms. Jaedicke said before.
Regulators are not in the business of telling their
regulated institutions who to do business with or who not to do
business with.
We set up guidance and guidelines and regulations, and each
bank in this free country of ours is free to do business with
whomever they choose.
However, what we can do, and what we are trying very hard
to do at the New York State Banking Department, is to put in
place--which I think we have done--a system of rating and
examining and supervising the MSB's, which hopefully will bring
them up to par in the BSA compliance area. We have done a lot
of work in this area, and it is starting to show some success.
The money transmitters who have gone through our system--
they are on their second round. The first round, there were
some very severe BSA compliance problems. Approximately two-
thirds of the businesses were not up to standard.
The second time through, it is about two-thirds who are up
to standard.
In the check-cashing area, there are some very severe
compliance problems, and we are working with our constituents
to make sure that they put the systems in place that they need
in order to comply with the rules and regulations.
Mrs. McCarthy. Thank you.
Ms. Jaedicke. I would just like to say that the Federal
bank regulators and State bank regulators are spending a great
deal of time trying to work on this issue. We have met
repeatedly as a group, and we have met with the trade
associations for the MSB's, and we have met with the ABA to try
to find solutions.
Mr. Carbaugh. I would add that, as was previously
mentioned, FinCEN took the lead last year in conducting a fact-
finding meeting on this issue, worked very closely with our
counterparts in the Federal banking agencies to develop and
issue a policy statement, as well as joint guidance, on this
issue, and since there has been some evidence of continued
discontinuance--and again, I think we are taking the lead in
that, in March, we issued an advanced notice of proposed
rulemaking seeking comment on this very issue, and that
rulemaking closes on July 10th, and at that point, we will
certainly assess all comments and recommendations provided to
us, and make some decisions about appropriate steps to take at
that point.
Mrs. McCarthy. I guess my concern is--because I am also
hearing from my MSB's that, you know, as they try to go into
new entities, you know, to join with a bank or a credit union,
they will not even consider them anymore, because they are
hearing of all the other larger banks that are actually pulling
out.
Obviously, we want to work with the bankers. We also want
to work with those that are serving the underserved
communities.
So, I guess that is going to be up to us to see how we are
going to come up with those answers.
I yield back the balance of my time.
Chairman Bachus. Thank you.
Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman.
Mr. Carbaugh, you say in your testimony that many banks
have stated their uncertainty as to the appropriate steps that
they should take under the Bank Secrecy Act to manage potential
anti-money laundering and terrorist financing. Those are your
words.
In your opinion, is this due to the lack of regulatory
guidance?
Mr. Carbaugh. No.
I think that there might be misperceptions about the
guidance.
Again, we worked collaboratively with the Federal banking
agencies when this issue was raised last year to develop some
very specific guidance that details what our expectations are
when they open and maintain accounts for money services
businesses.
Those requirements and expectations are similar to that of
any other business that a banking organization would bank, and
the types of risk assessments that they would conduct pursuant
to those types of accounts, as well.
Mr. McHenry. You also talk about certain MSB's going
underground.
How would they do that?
Mr. Carbaugh. One is not registering with FinCEN and not
licensing with any potential State requirements, and then
conducting business through, for example, a banking
organization without being in compliance with those basic
compliance requirements under Federal, as well as potentially
State--
Mr. McHenry. Have you seen that?
Mr. Carbaugh. Yes, we have evidence, through suspicious
activity reports, of that occurring.
Mr. McHenry. How significant?
Mr. Carbaugh. I think it is significant enough to certainly
pay attention to, and we are certainly developing a strategy to
identify unregistered money services businesses and put in
place a broad spectrum of compliance and enforcement strategies
to address that issue.
Mr. McHenry. I would like to also echo what the chairman
requested, some statistics in terms of what--you talk about
385,000 suspicious activity reports last year, right?
Mr. Carbaugh. Correct.
Mr. McHenry. You know, in terms of what that is doing, I
mean how many of those have netted anything, we would like to
hear that, because perhaps we are generating too much paper for
you, or not enough, and you know, unless we have the
statistics, we are not going to be able to judge.
Mr. Carbaugh. We will get those statistics for you.
It is also important to note that it is a database of
information, and one SAR that is filed will not necessarily
result in an action, but looking at the database as a whole and
linking different pieces of information together may present a
very different picture, and that is important, too, I think.
Mr. McHenry. Moving to Ms. Jaedicke, you are popular today.
I think it is because of your name, so easy to say.
Ms. Jaedicke. Yes, sir, it is fun.
Mr. McHenry. Yes.
You mentioned the diversity in MSB's--size and mom-and-pop
versus Fortune 500.
Ms. Jaedicke. Yes.
Mr. McHenry. How are the regulations affecting these--is it
across the board? Is it affecting certain areas more than
others?
Ms. Jaedicke. You mean in terms of the bank discontinuance
issue?
Mr. McHenry. Yes.
Ms. Jaedicke. Which types are losing accounts more
frequently?
Mr. McHenry. Yes.
Ms. Jaedicke. I do not know that I would have that
information.
Maybe Ms. Taylor would know better for the State of New
York.
Mr. McHenry. Ms. Taylor?
Ms. Taylor. I think the best way to answer that is to say
that everybody is complaining about the same issue. If a bank
says that it is not doing business with money service
businesses anymore, that includes the big ones and the small
ones.
I would say that you could ask the next panel that
question, also, but it is our experience that it is pretty much
across the board, I think.
Mr. McHenry. Is there a certain type that would have a
greater risk for money laundering?
Ms. Taylor. Who are you asking?
Mr. McHenry. You, Ms. Taylor.
Ms. Taylor. Okay.
Well, it depends on the business. There are a lot of
different characteristics of--
Mr. McHenry. That is what I am asking.
What characteristics would say that there is a greater
risk?
Ms. Taylor. If money is being--large amounts of money are
being transmitted overseas, large checks being cashed, if
there--
Mr. McHenry. What I mean is the type of business--mom-and-
pop versus a Fortune 500.
Ms. Taylor. It is hard to say, because it depends on the
compliance systems.
If the compliance systems are in place to catch trends and
transactions to lead people to go look at them, then that's one
thing.
I think that any business, large or small, that does not
have a good compliance system is a very high risk situation, no
matter what kind of business it is conducting.
Mr. McHenry. Ms. Jaedicke, would you like to comment?
Ms. Jaedicke. I would add to that that it sometimes can be
more difficult--I am not saying they are inherently more
risky--but it sometimes can be more difficult for the very
small MSB's, the mom-and-pop-type MSB's, to have robust
compliance programs. Of course, they do not need as robust a
compliance program as does a big MSB, but it is sometimes
difficult for them to find qualified people to help them design
a program, and that can make a difference sometimes in bank
discontinuance.
Mr. McHenry. Thank you, Mr. Chairman.
Ms. Taylor. Can I add to that?
Mr. McHenry. Go right ahead.
Ms. Taylor. Thank you.
We had a situation recently where there was a newspaper
article which was written about a city in western New York
which complained that there were several--as in many--check
cashers that were unlicensed, operating in the city, which were
charging exorbitant rates to their customers. This is
problematic on a couple of levels.
One, they are charging their customers exorbitant rates,
which is not good.
Two, they were unlicensed, unregistered entities, and so,
we need to know about those.
A lot of these mom-and-pops do not even know that they have
to be registered.
So, the really small ones that are below everybody's radar
screen--you have to actually go out in the community and see
them before you can find out what they are doing and whether or
not they are registered and licensed.
So, that is a very big problem, too, and those, I think,
are very high risk.
Chairman Bachus. Thank you.
Mr. Clay?
Mr. Clay. Thank you, Mr. Chairman, and I thank you for
holding this hearing today, and I appreciate the panel's
participation.
Many banks cite the risk associated with dealing with
unlicensed MSB's, and it is required that MSB's register with
the Treasury.
The Patriot Act also prohibits anyone from knowingly
operating or owning a money transmitting business without a
license in a State that requires one or without registering the
business with the U.S. Treasury.
This question is for the entire panel.
Why does it seem that all MSB's are generally put into the
same category of risk regardless of whether they are licensed
or have a strong record of compliance? How do banks quantify
and distinguish between the risk of unlicensed MSB's and those
that are licensed?
We can start with you, Ms. Taylor.
Ms. Taylor. One of the things that we have been very
definite with our banks about is, if we find that they are
doing business with unlicensed money service businesses, that
is a very bad thing.
The first question they should ask any money service
business that comes to them for an account is whether or not
they are licensed.
Doing business with unlicensed money service businesses is
not a good idea.
Mr. Clay. What happens when you find out they are not
licensed?
Ms. Taylor. We tell them, if they are not licensed, then we
ask them to close the account, and we go to the money service
business and tell them that they need a license in order to
operate in this State, and if they do not get a license, you
will be penalized.
Mr. Clay. Ms. Jaedicke.
Ms. Jaedicke. I would say that is a significant issue for
the banks that we deal with, as well. One of the threshold
questions for them when they're opening an account for an MSB
is, are you registered with FinCEN, are you properly licensed
with the State? Sometimes MSB's do not understand the licensing
requirements, and the banks will, in some cases, try and help
them to understand those requirements.
They will print the licensing forms off of the Web site;
they will explain to the MSB what they need to do. But, if the
MSB then does not follow through, that leaves the bank with
what they view as a rather serious situation, because the MSB
is operating outside of the requirements of the law.
Mr. Clay. Then they are immediately stopped from doing
business with the bank?
Ms. Jaedicke. Well, I would not say they are immediately
stopped. I would say that banks will close accounts for MSB's
that have not gotten licensed and registered, once the bank has
made the MSB aware of the requirement, if, indeed, they were
simply unaware.
Mr. Clay. Thank you.
Ms. Mayer?
Ms. Mayer. Congressman, as you know, the IRS is charged
with enforcing compliance with the BSA by MSB's, and so, we do
not have anything, really, to do with banks.
However, whether or not MSB's are registered is obviously
an important issue for us, and at the moment, we are working
with FinCEN, we have put a special emphasis on trying to find
MSB's that are not registered and have pushed out several
thousand non-registration cases into the field in order to find
these MSB's that are not registered and to get them registered,
to bring them into compliance with the law.
Part of what we do in our efforts is to educate businesses
that we find through various sources and try to bring them into
compliance with the law.
Mr. Clay. Any idea of how many MSB's, percentage-wise, are
not registered or that may be registered?
Ms. Mayer. That is the $64,000 question. You know, there
are estimates all over the place of how many MSB's there really
are.
We know that there are 24,000 MSB's that have actually
registered.
Mr. Clay. I see.
Okay.
Thank you.
Mr. Carbaugh, anything to add?
Mr. Carbaugh. I would just echo that licensing with the
State, if required, and registration with FinCEN, if required,
is one of the most basic requirements under our regulations for
MSB compliance, and we have outlined that, actually, in our
guidance to the banking industry, as well, and the guidance
also details the steps that a banking organization should take
when they do identify an institution that they believe is
operating outside of the law, and therefore, in potential
criminal violation under Title 18, and that is to file a
suspicious activity report. We are looking at that information
right now and providing data to the Internal Revenue Service
for outreach and examination purposes.
Mr. Clay. Do you see any flaws in the current guidance for
banks and the guidelines for the banks? Do you see any flaws?
Mr. Carbaugh. Well, I think the guidance is very detailed
and lays out expectations, and it is important to note that we
also, at the same time, issued a companion piece of guidance to
the MSB industry indicating what they should expect whenever
they open and maintain accounts at a banking organization.
One of the things, as I mentioned before, that we are doing
is the issuance of the advanced notice of proposed rulemaking
to ascertain if there is anything else we can do in this area
as far as guidance or changes to regulations.
Mr. Clay. Thank you. I thank the panel for their responses.
Thank you, Mr. Chairman.
Chairman Bachus. Mrs. Kelly?
Mrs. Kelly. Thank you.
Ms. Jaedicke, the OCC ombudsman program allows banks to
complain about examination issues in a forum that is free from
negative consequences, but MSB issues do not appear in the
ombudsman's summary of cases and published documents. How many
cases have been raised with the ombudsman about the BSA and the
MSB issue since last year, and what was their deposition?
Ms. Jaedicke. I do not actually know, Ms. Kelly, how many
have been raised. To my knowledge, there have not been any, but
I will be happy to check and find out.
Mrs. Kelly. With the chairman's permission, I would like to
insert in the record--I have here the summary of the cases, and
there is not one case on MSB that appears here that was brought
up to the ombudsman by the banks.
Chairman Bachus. Without objection.
Mrs. Kelly. Thank you. It seems to me that we can err on
the side of getting too much information, and I really
appreciate, Mr. Carbaugh, that you are looking to try to figure
out what to do.
It is a Catch-22, because we do not want people to go down
under where we do not know what is going on financially. We
need to see what is going on out there in order to protect
America, but to do it right does require a very delicate hand
in various ways.
It appears that no banks have complained to the OCC about
the regulatory problems with MSB's, which may mean that they
are simply refusing to take the MSB business, and this is a
problem.
I had one president of a major bank say to me that he was
getting rid of all of the MSB's.
This is a New York bank, and he said that he was not going
to do any MSB business, and he just simply canceled all their
accounts.
This is not helpful for them, it is not helpful for the
bank, and it is not helpful for all of us as regulators, but
what we need to do is not, I think, try to write a piece of
regulation that is going to impose something again, before we
understand how to do it properly.
That is why I appreciate, Ms. Taylor, your being here and
your talking about the fact that you are concerned about over-
regulating. It would indicate to me, from your prior testimony
to Ms. McCarthy, that you are going to recommend that the
Governor of New York veto the bill that has passed the State
Senate and the Assembly banking committee, because you think
that it is a bad idea.
Is there a way that you can put in place a better situation
than you have now with regard to rating and supervising the
MSB's so that people will understand?
I think part of our problem is that the general public--and
especially people who do not use banking systems and need
MSB's--need to have education that there can be a certification
out there, and they can go--when they are getting their check
cashed--and find a certificate posted on the wall.
That may be all we actually need to see.
I would be interested in the comments of you, Ms. Taylor,
on that, and then I have one more issue I am going to try to
pick up here.
Ms. Taylor. Thank you, Mrs. Kelly, and that is really the
crux of what we are trying to do in New York State to alleviate
the situation, which is to educate people, especially in the
money services businesses, to supervise, examine, and license
them in a way that is very similar to how we license--or
charter, supervise, and examine the banks.
We have put into place a system called the FILMS system,
which is unique to the money services businesses.
They are different than banks. They are very short-term. It
is not credit-based, so much. Liquidity is a big requirement.
So, there are different characteristics that you look at in a
money services business than you do in a bank.
So, what we are doing is, in taking our money services
businesses through the licensing process, which has been made
much more stringent over recent years than it was before--so,
it is a lot harder to get a license, and it means something
when you have a license, and our examination procedures are
much more rigorous than they were in the past.
So, what we are hoping happens is that the banks become
more comfortable with doing business with money services
businesses licensed by us, knowing that they do--will have the
compliance systems in place that are necessary, and I have to
say, in addition to that, we have worked very hard with CSBS to
take that system out to the other States in the country.
We have a pilot program--
Mrs. Kelly. I am going to run out of time here, but I do
need to ask one more question of Ms. Jaedicke.
It is about the Arab bank in New York. It was fined by the
OCC and FinCEN for BSA violations. The Arab bank, in spite of
paying a record fine, continues to insist that they were the
victims of persecution and that they violated no U.S. laws.
I would like to know when the OCC is going to release the
summaries of their investigation.
I think that investigation's summaries show directly the
threat that Arab Bank did pose to this country, and that we
were justified, at the OCC, and FinCEN were justified in
levying that fine.
When are you going to release those records?
Ms. Jaedicke. That is a supervisory matter, and, to my
knowledge, we do not intend to release the records.
Mrs. Kelly. Okay. Thank you.
Chairman Bachus. Thank you. I would like to ask additional
questions. Are there any other members that would like to do
follow-up? All right.
My first question--and I will just ask this to OCC or
FinCEN or IRS or even Ms. Taylor. Do you know of any instances
where an MSB itself was convicted of money laundering or
terrorist financing? I am talking about the MSB itself.
Any cases, Mr. Carbaugh? You all would maintain a database
on that, wouldn't you?
Mr. Carbaugh. Again, that would be law enforcement
information, and I would have to defer to my law enforcement
counterparts.
I do not know if Eileen can speak on behalf of IRS criminal
investigations.
Chairman Bachus. None that you know of. Is that right?
Mr. Carbaugh. Well, I think we can point to the SAR
activity review.
Chairman Bachus. I am not talking about the SAR's which
they file on their customers. I am talking about the MSB
itself.
Mr. Carbaugh. Right. I think we have some evidence in a
publication that we have called the SAR Activity Review, in
which law enforcement provides us information on cases that
have been supported by the filings of suspicious activity
reports, and I believe there are cases in there that relate to
MSB's.
Chairman Bachus. Are they licensed, registered MSB's?
Mr. Carbaugh. It could be both. Again, I would have to get
back to you.
Chairman Bachus. Could you get me that information?
Mr. Carbaugh. We can get you some information, yes.
Chairman Bachus. Okay.
Now, as far as if their customers are engaged in money
laundering, the indication of that would either be--I mean they
would file SAR's and you would have to review that information.
So, it would be a good thing actually for them to go to
MSB's, because that is a regulated industry, and then you would
get a SAR, right, as opposed to going underground.
Mr. Carbaugh. It is very important that they stay
transparent to us, as I mentioned in my testimony.
Chairman Bachus. So, it is actually very important that
these customers--even if the customers are engaged in money
laundering--very important that they go through a regulated
industry so that law enforcement can discover those activities.
Mr. Carbaugh. It would be important, also, for the MSB then
to report that activity, pursuant to requirements.
Chairman Bachus. Now, do you know of any evidence or any
cases when MSB's were not reporting those transactions?
Mr. Carbaugh. I would defer to Ms. Mayer on that from an
examination standpoint.
Chairman Bachus. Ms. Mayer?
Ms. Mayer. Mr. Chairman, I do not know specifically, but I
would be happy to ask our examination folks if we have any
information that we can share with you and get back to you.
Chairman Bachus. You have the MSB itself, and you know, I
have not heard that any of those are guilty--I have yet to hear
any evidence or any testimony or anybody say, oh, yes, you
know, there are--particularly licensed, registered MSB's which
are engaging in money laundering or terrorist financing, and
then the customers of the MSB's--as long as the MSB's are
filing the reports and the SAR's they are supposed to file, I
mean that is all you can ask them to do, I would think.
Mr. Carbaugh. They have to have an anti-money laundering
program that is designed to detect--
Chairman Bachus. Right.
Mr. Carbaugh.--and report and have appropriate controls in
place, correct.
Chairman Bachus. Would you supply me any cases where
licensed, registered MSB's did not do that, you know?
Mr. Carbaugh. Again, we will look at that, in cooperation
with--
Chairman Bachus. I guess there are literally thousands of
examples of MSB's which have not been charged with any criminal
activity or that have developed such programs, but despite
that, the banks have discontinued their business with those
MSB's. You know of some of those, I suppose, don't you? We hear
reports every day.
Mr. Carbaugh. Again, on the discontinuance issue, you know,
I have to defer comment until the advanced notice of proposed
rulemaking is final, so that we can then assess the findings
and comments and recommendations.
Chairman Bachus. You need to know some of this information
I am asking you before you finalize the rule. I mean if you
address the problem, you need to sort of be informed about what
the problem is and the extent of the problem.
Mr. Carbaugh. Sure.
Ms. Jaedicke. Mr. Chairman, may I just add that there have
been MSB cases subject to prosecution, and we can provide some
of that information.
Chairman Bachus. Sure.
Ms. Jaedicke. I do not have it with me today.
Chairman Bachus. I just looked at the information that is
available on the internet, and there are three of them; one was
in 2003, one was in 2004, and one was in 2006, and they
actually--and one case involved, really, misconduct by the
bank, not the MSB, is my understanding, just from reading the
account. So I know of three cases.
I think this is, you know, Delta National Bank, Hudson
United Bank, and Bank Atlantic.
Ms. Jaedicke. Yes.
Chairman Bachus. Not all of them actually involved the MSB.
Sometimes it was a failure of the bank.
My last question--are banks responsible for reviewing the
MSB's customers' activities and to monitor the transactions
conducted by the MSB's customers?
In other words, the banks--are they responsible for
monitoring the MSB's customers, and to what extent, and should
they be, and are they capable of doing that?
Ms. Jaedicke. I would say no. Specifically, the banks are
not responsible for monitoring the individual customers of
MSB's. That would be extraordinarily difficult to do, Mr.
Chairman--
Chairman Bachus. Oh, I agree.
Ms. Jaedicke.--because some of the customers of MSB's do
not necessarily have an ongoing, long-term relationship with
the MSB.
Chairman Bachus. Right.
Ms. Jaedicke. But what we do often see banks do is have
some general understanding of the type of customer that the MSB
does business with.
Chairman Bachus. Right.
Ms. Jaedicke. They do not know the individual customer, but
they know that the MSB is servicing a particular customer base
that sends wires to a particular country or that kind of thing.
Chairman Bachus. Sure.
In certain cases, it ought to be our policy, I would think,
to encourage the MSB's to monitor those transmissions and to
report them, but beyond that, you know, I am not sure that the
MSB can even refuse--unless they have some grounds--refuse
business.
Ms. Jaedicke. The MSB's are required by regulation to have
a BSA program that would include doing some of those types of
things.
Chairman Bachus. Sure.
So, it is my understanding that the answer to my question,
though, is that the banks are not responsible for reviewing MSB
customer activities, nor for monitoring in any way the
transactions engaged in by MSB customers.
Is that right?
Ms. Jaedicke. There is no overt obligation for them to do
that. Where I think this becomes very confusing, though, sir,
is when an MSB brings to the bank transactions that the MSB is
facilitating on the part of a customer and the bank facilitates
these transactions via a wire to somewhere else, then the bank
becomes involved.
Chairman Bachus. Does there need to be some clarification
as to exactly what the bank's responsibility is, and as to
whether any responsibilities extend to the MSB customers?
Ms. Taylor. I would say part of the problem here is it's
very similar--and correct me if you think differently--to the
correspondent banking problem.
You know, how far do you have to go down into your
customer's customer, and what we really look at is patterns of
activity. Is it something that is a pattern throughout, you
know, a series of transactions and the bank does not pick that
up, but we do. Then that becomes a little bit of a problem.
We try and--and we look at all of the businesses, you know,
with the same sort of criteria.
Chairman Bachus. Correspondent banks self-certify, right?
Ms. Jaedicke. Yes.
Chairman Bachus. Okay. I have no further questions.
Ms. Maloney.
Mrs. Maloney. I would like to ask FinCEN--has FinCEN ever
brought an enforcement action against an MSB?
Mr. Carbaugh. Yes, we have. As a matter of fact, we brought
a civil enforcement action last month against one MSB, and I
think since 1999, we have had seven MSB-related enforcement
actions, including in 2003, an enforcement action with Western
Union.
Mrs. Maloney. Well, this is becoming a tremendous problem
in New York. Many banks are not providing any services, by
their choice, and the two smaller banks that are now still
doing business with MSB's--there are rumors that they may be
bought by larger banks that will not provide the service.
So, this is a crisis in New York, and that is why you see
the New York State assembly and Senate passing out a bill to
maintain MSB support by banks, which the superintendent has
raised some objections to, and others have raised objections
to.
So, my question is, if banks decide they do not want this
business and it is a service that many people need--we want
financial services. We want the underground economy to go into
financial services. What would be your reaction to legislation
that would allow money service businesses to open up accounts
directly with the Federal Reserve Bank? Would there be any
objection? What would be your response to a legislative action
for money service businesses to open up accounts with the
Federal Reserve?
Mr. Carbaugh. That is a policy issue that would really
require some very senior-level input and coordination through
various compartments of the Department of Treasury.
I am really not in a position to make a statement on that
issue.
Mrs. Maloney. I mean we have to have the service. So, if
everybody is going to--we have to--what would your reaction be?
Mr. Mayer. I have absolutely no knowledge or experience in
that, so I cannot really answer your question.
Mrs. Maloney. OCC.
Ms. Jaedicke. I do not either, Congresswoman Maloney.
Mrs. Maloney. Ms. Taylor.
Ms. Taylor. That is something for the Federal Reserve to
take up.
Mrs. Maloney. What you have all said is that you are
meeting, and that you are thinking about it.
What action are you taking? What policy are you putting in
place?
Is there any comment from any of the panel--everybody is
talking to everyone. You have been talking for years. There
have been conferences.
What action are you taking?
Mr. Carbaugh. Again, I think, as was mentioned in my
testimony, FinCEN took the lead last year in pushing this issue
forward, in holding the fact-finding meeting, and then working
with our colleagues at the various Federal banking agencies to
develop an issue--a policy statement on this issue.
Mrs. Maloney. Do you have the policy statement?
Mr. Carbaugh. The policy is that banks are not the de facto
regulator of MSB's, and subsequent to that, we issued very
specific joint guidance on expectations for the banking
industry, companion guidance to the--
Mrs. Maloney. Who is the regulator on MSB's? FinCEN?
Mr. Carbaugh. At the Federal level, for compliance with the
BSA, we have delegated examination authority to the Internal
Revenue Service.
Mrs. Maloney. So, the Internal Revenue Service is the
regulator of MSB's.
Another approach is, should we have a separate regulator
for MSB's?
Is that an approach that might help?
Mr. Carbaugh. Again, that would be a policy-level decision,
you know, of senior levels within the department, and certainly
something for your consideration.
Mrs. Maloney. Any comment on--what specific action are you
taking?
Mr. Mayer. Well, at the IRS, we are actually delegated the
examination authority to make sure that MSB's are in compliance
with BSA. So, what we are trying to do is to be out and to be
picking the places that we examine in a risk-based way, based
on the knowledge that we have from our databases and from what
we get--leads from law enforcement, so that the banking
industry can be assured that MSB's are complying with the anti-
money laundering regime, with the BSA, and so that they are not
being used in a way that would in some way endanger their
relationship with the bank.
That is what we can add to this mix.
Ms. Jaedicke. I believe that we can try to do more to
alleviate the uncertainty, if it exists, among national banks
in terms of what their roles are vis a vis the MSB's, and to
try to alleviate the concerns they have with the regulators and
how they view these accounts.
Ms. Taylor. In New York State, we have instituted the FILMS
rating system.
We have upgraded our examination and licensing of these
institutions.
We will work toward trying to provide CRA credit to banks
and other incentives for banks to do business with MSB's.
We actually have something in New York State called the
Banking Development District Program, which creates incentives
for banks to put branches in underserved areas, and we are
working very hard, together with our Federal counterparts and
the other States, through CSBS, to make more uniform the
regulatory process and to educate the examiners and train
examiners in these systems.
Mrs. Maloney. Thank you very much.
Chairman Bachus. Thank you.
Ms. McCarthy.
Mrs. McCarthy. Thank you, Mr. Chairman.
I guess the question I have to ask is--the MSB's--I mean,
basically they are serving people that--of very small
paychecks, and I would tend to think that if--certainly, all of
us are concerned about national security and money laundering--
that if anybody deposited or tried to, you know, send a large
amount of money out of the country, I would have to think that
would be very minute and a red flag would go up.
I mean one of the problems that we have seen, especially in
the underserved communities, is that banks do not want to go
into those areas, for a number of reasons. Most of their
customers are not going to open up a checking account or a
savings account, because their weekly check is what they are
living on, on a day-to-day basis.
So, I am having a hard time understanding the problems that
we are having with the MSB's, because they are serving a
community that the bankers do not--it would not be worth their
effort to open up a bank in that area. They are serving a
situation, and again, as far as the security goes, anyone that
comes in and is going to be sending a large amount of money
overseas, or tracking it, that is going to be a red flag.
So, I am having a hard time understanding this whole
problem that we are dealing with.
Can someone clarify it?
Ms. Taylor. Thank you.
You are right. The majority of the transactions that take
place are very small transactions.
However, we have found situations at check cashers in New
York State where checks for $400,000 are being cashed. We have
to find this.
These compliance systems have to be in place to find this.
Nobody is going to tell us, you know, unless a SAR is filed.
It has to be a licensed institution.
So, there--these institutions are used for criminal
purposes in some instances, and we need to have the systems in
place to make sure that when that happens, we can find out
about it and we can direct it to the appropriate authorities to
look into what exactly is going on.
Mrs. McCarthy. I would take it that those particular areas
where they are looking at those kind of checks being--coming
in, and obviously, we should be--they are probably not
licensed.
Ms. Taylor. Maybe, maybe not. We have several
investigations underway right now, some licensed, some
unlicensed.
Mrs. McCarthy. Well, that is where you prosecute, but I
would tend to think that would be not the norm on the majority
of MSB's serving the small communities.
Ms. Taylor. One would hope.
Mrs. McCarthy. Thank you.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
I appreciate the panel's testimony. I think it was very
helpful to us.
Oh, I am sorry, Mr. Baker.
Mr. Baker is recognized.
Mr. Baker. Thank you, Mr. Chairman. I slipped in late, and
just wanted to present a few observations for the record.
I do not recall whose testimony that it was I read
attributing these facts. It appears that there are about 40
million people who are unbanked, who have need of financial
services. Individuals who, for example, may be in south
Louisiana, who get a Social Security check and need to have
that cashed for their daily activities.
The trouble that I think has occurred is that, if that
person is cashing and the money service entity is required to
substantiate the activity, therefore report back to the bank
and the bank take responsibility for that conduct, what we are
missing is an appropriate nexus between the act of negotiation
and the requirement to report, as opposed to someone who has,
for example, a check from Casino Rouge in Baton Rouge for
$128,000, who appears to be cashing these checks on a regular
basis, who the money service organization may have reason to
conclude that there is a reason for me to ask these questions,
as opposed to the wholesale requirement creating the potential
regulatory liability for the institution, the financial
institution, who has no reason nor ability to conclude the
difference between the 80-year-old cashing of the Social
Security check and the 30-something cashing of the $100,000
casino check.
Now, has there been--anybody can give me a study that shows
there is statistical prevalence--are there regions of the
country--say, New Orleans--where we have aberrantly high
criminal records relating to liquidity, or if we are going to
get into Oklahoma, where we have maybe a aberrantly high number
of retireds and they are cashing Social Security--has there
been any kind of study to say this is why we are pulling the
trigger on this gun, or is it just a systemic, let's check
everybody out and make sure nobody is sneaking by us that we do
not know about? Could anybody comment on that, please?
Mr. Carbaugh. I would say that the system that we have in
place with respect to the anti-money laundering requirements
for the money services business is a risk-based system, and
certainly, it is up to the money service business, under their
obligations, to assess the risks of all of--
Mr. Baker. Let us back up just one second. From the money
service business back to your level, what is it, or is there
anything, that triggers this high level of responsibility based
on data, analysis, formula? How do you determine it?
In other words, in rural communities, where there is very
little probability of somebody money laundering at a $100
level, as opposed to someone in an urban area who is money
laundering at $100,000 per week, is there a difference between
the two, or are the standards uniformly the same?
Mr. Carbaugh. The standard is a risk-based standard, and
the reporting requirement for MSB's is activity that is $2,000
and above. So, there is a threshold requirement for reporting
suspicious activity.
Mr. Baker. So, if somebody sells a bass boat and deposits
$2,200, they are in.
Mr. Carbaugh. If it is deemed suspicious.
Mr. Baker. How would one know? Is it the way they approach
the check casher or their clothing? You are not going to tell
me this is racial profiling, I hope. I mean you are telling me
it is a risk-based model. Describe the risk. How is it imposed?
Mr. Baker. Again, it would be up to the institution to
determine--
Mr. Baker. So, it is a risk-based model where the check
casher has to determine what the risks are.
Mr. Carbaugh. Correct.
Mr. Baker. Can you understand why there would be resistance
to that level of responsibility? It would be like me hiring a
guy to paint my house. I do not tell him what color, but when
it is done, I will tell him if I like it or not.
That is an unacceptable regulatory standard.
If we are going to apply sanctions in the market for
inappropriate conduct, we have to describe what the
inappropriate conduct looks like. You have not described it. We
are saying that there is a risk associated with laundering
money, but we are not telling the person at the gatekeeper
level what it is they must look for. We are saying you describe
the risk, you enforce it, and if you get it wrong, we will tell
you about it later.
Mr. Carbaugh. We have provided some guidance and indicia of
suspicious activity.
Mr. Baker. I am sorry to be picking on you, but you had the
misfortune of answering me.
The point is, from our side and policy side, if we are
going to pass this criminal statute and we are going to say you
go to jail because you do something, we have to be very
specific, and then artful defense lawyers take us to task that
we have not been specific enough, and therefore, the person
gets off.
In this case, we have generally described a conduct which
we do not like, and we find unbecoming, but we have not really
said what it is, and yet, there is a market consequence to a
regulatory determination that this institution did not oversee
the MSB with sufficient degree of professionalism, therefore
there is a consequence, and a result, financial institutions
withdraw from the market, and people who have that $800 Social
Security check, or $2,200 Social Security check, are left
without services.
All we are saying is that there is a social consequence to
this policy that is unacceptably high in light of an undefined,
ill-defined, or improperly defined risk.
Sure, we know there is money laundering, but it happens at
videotape rental stores, where people come and pay for rentals,
but they do not rent the movie.
Hello?
That is a real problem. Or people who pay for professional
service for which there is no service. That is a whole lot
different from a low-dollar--and $2,000 is an incredibly low
standard.
I think anybody in the money laundering business who is
really in it is going to looking at a significantly higher
cash-out number than $2,000.
There are a lot of used trailers--and I am an expert on
used trailers in Louisiana--and bass boats and a lot of other
items that are sold customarily in the cash market for under
$10,000 on a regular basis, and although the outside view may
be different, most of them are legitimate and without question.
I thank the chairman for his leniency on the time, and I
yield back.
Chairman Bachus. Thank you, Chairman Baker.
Ms. Carson, you are recognized.
Ms. Carson. Thank you very much, all of you distinguished
and informed panelists, for being here today. I have two
concerns.
Number one, I read just yesterday that the overdraft fees
that are collected by financial institutions far exceed the
profit that you derive from any other investment. My concern
is, do you want to continue to rely on that as the stabilizing
asset, the overdraft fees that you collect from consumers--
Chairman Bachus. Ms. Carson, this is actually a hearing on
the MSB's.
Ms. Carson. Sorry about that.
Chairman Bachus. Okay.
Ms. Carson. I just thought I would catch them while they
were here.
I apologize, Mr. Chairman.
Chairman Bachus. Thank you.
I am not sure that this panel handles those issues. I mean
if you do, and you wish to respond to Ms. Carson's statement, I
am sure it would be helpful.
Ms. Carson. I will let you off the hook. I do not think you
want to respond.
Thank you very much.
Chairman Bachus. Thank you, Ms. Carson. I am not sure, in
fairness to the panel, if they were prepared to answer.
Ms. Carson. Right.
I have a visitor out here, and I will be right back, Mr.
Chairman.
Chairman Bachus. Thank you.
That concludes the testimony of this panel.
In closing, I would like to ask unanimous consent that
Congressman Rangel, a member of the Ways and Means Committee--
in fact, the ranking member--be allowed to offer a written
statement into the record.
I also have a written statement submitted by Western Union
Financial and an additional statement by Isaac Warsame that I
would like unanimous consent to introduce into the record.
This panel is discharged. Thank you for your attendance.
At this time, we would welcome the second panel.
Mr. Price is going to chair the second panel, and I have
read the testimony of the second panel and commend them for
their testimony.
Mr. Price. [presiding] Good morning, almost afternoon. We
appreciate your joining us today and your patience on our
schedule.
I also want to just mention that, although there may not be
many members here, your statements and your input into this
process is extremely important and greatly appreciated.
The second panel we will have before our subcommittee
today--I want to welcome Mr. Philip Milne, president and CEO of
MoneyGram International; Mr. Gerald Goldman, general counsel
for Financial Service Centers of America; Mr. Wayne Abernathy,
executive director for financial institutions, policy, and
regulatory affairs for American Bankers Association; and Mr.
David Landsman, executive director of the National Money
Transmitters Association.
I want to also say that, without objection, your written
statements will be made a part of the record and that each of
you will be recognized for a 5-minute summary of your
testimony, and we thank you so much for joining us today, and
with that, I recognize Mr. Milne.
STATEMENT OF PHILIP W. MILNE, PRESIDENT AND CEO, MONEYGRAM
INTERNATIONAL, INC.
Mr. Milne. Good morning, Mr. Chairman, and members of the
committee. My name is Phil Milne and I am the president and CEO
of MoneyGram International. I am very pleased to speak with you
today about the bank discontinuance problem and anti-money
laundering compliance by MSB's.
MoneyGram is a payment services company operating in 170
countries through more than 92,000 agent locations. We are
licensed by the States and comply with the Bank Secrecy and USA
Patriot Acts.
MoneyGram is also a member of the Money Services Round
Table, along with American Express, Western Union, Comdata,
Travelex, Sigue, and Ria.
The bank account problem is not a stand-alone issue. It is
tied to compliance and the challenges faced by MSB's in
complying with the Federal laws and the variety of
interpretations of those laws by State banking departments that
regulate MSB's.
We believe fixing the bank discontinuance problem will also
improve overall compliance by MSB's.
We are dedicated to the fight against money laundering and
terrorist financing, but we also need banking services and the
Federal Government's help to ensure continued access to banks.
Initially, the bank account problem impacted mom-and-pop
stores and check casher locations.
However, 2 months ago, Bank of America informed MoneyGram
that it would be terminating its long-term relationship with
us.
This was not just a simple deposit account but, rather, a
global banking relationship that generated millions of dollars
in fees annually for Bank of America.
While Bank of America is only one of the many banks with
which MoneyGram conducts business, its decision to terminate
our account relationship was, and is, a serious issue.
In the meantime, in order to help our agents, MoneyGram has
been negotiating with banks to establish special accounts, and
hiring armored cars to serve agents who have had bank accounts
closed. These actions, however, increase MoneyGram's cost.
A key point that gets lost in the discussion regarding bank
relationships and compliance requirements, is that all of these
issues cost money, which, in turn, leads to higher fees for
consumers.
So, what is driving this exodus by the banks from MSB's? We
believe it is the banks' fear of their own regulators.
The guidance increased the problem because it raised
bankers' fears that they are responsible for policing the
compliance programs of MSB accountholders.
Now, I would like to offer the committee a few suggestions
on how this issue might be solved, as well as how compliance by
MSB's might be improved.
First, the existing guidance must be rescinded. New
guidance must clarify that banks are not required to evaluate
the quality of an MSB's compliance program, nor are they
expected to monitor the activities of MSBs' customers. A draft
of new guidance which embodies these concepts is attached to my
testimony.
Second, an incentive should be provided to banks to resume
serving MSB's, such as the Community Reinvestment Act credit.
Other incentives might also be effective, but there must be
something to entice banks to reestablish accounts for MSB's.
Third, consistent enforcement of the anti-money laundering
laws as they apply to MSB's is needed. Many States are
interpreting the Federal money laundering laws in their own
way, which has caused confusion and compliance challenges for
MSB's.
MoneyGram urges Treasury and FinCEN to establish their
preemptive authority to interpret and enforce the Bank Secrecy
Act and related Federal laws.
An important offshoot of this suggestion is the need to
create a system that can provide a consistent regulatory
framework for the MSB industry.
MoneyGram is proposing an optional Federal licensing regime
for MSB's that would be available to entities that operate in
multiple jurisdictions and would be mandatory for any entities
that operate in States that do not license their activity.
A Federal license would also help banks gain greater
confidence in the regulatory oversight applied to MSB's.
Fourth, standards for MSB's as to what constitutes an
effective compliance program must be established. We understand
FinCEN is working with the IRS on an exam manual, and we
applaud this effort. The absence of standards has left the MSB
industry with no clear direction on which measures to take in
order to establish an effective compliance program.
MoneyGram appreciates Congress holding a hearing on this
important issue.
We recognize that Congress cannot solve the problem by
ordering banks to serve MSB's, but we believe that, through its
oversight and budget authority, Congress can compel Federal
regulators to take appropriate action. MoneyGram requests that
Congress continue to monitor the bank discontinuance problem
and that Congress hold Federal regulators accountable for
implementing a workable solution by years-end.
In conclusion, I want to thank you, Mr. Chairman and
members of the committee, for the honor of having the
opportunity to present testimony on behalf of MoneyGram. We
appreciate your concern with this issue, Mr. Chairman, and we
hope you will view us as a partner in this effort and call upon
us for whatever assistance we can provide.
Thank you again.
[The prepared statement of Mr. Milne can be found on page
114 of the appendix.]
Mr. Price. Thank you, Mr. Milne. We appreciate your
testimony, and your full testimony, as I mentioned, will be
made a part of the record.
Mr. Goldman, general counsel for Financial Service Centers
of America, we welcome you.
STATEMENT OF GERALD GOLDMAN, GENERAL COUNSEL, FINANCIAL SERVICE
CENTERS OF AMERICA
Mr. Goldman. Mr. Chairman and members of the committee, my
name is Gerald Goldman. I serve as general counsel to FISCA, a
national trade association of over 6,000 neighborhood financial
service providers in the United States.
We serve millions of people engaging in tens of millions of
small financial transactions.
As every business does, we rely on banks for our connection
to the American financial system. For the past 6 years--this is
not a new issue. For the past 6 years, banks have been
abandoning us, first as a trickle and then continuously
accelerating, so that now few banks are willing to service us,
and when they go, that will be a disaster for the people we
serve.
Six years ago, in response to my questions, then-FinCEN-
Director Sloan said that the bulk of MSB's are law-abiding
individuals, are providing legitimate services, and that, in
his view, the MSB industry as a whole is no more a risk than
any other business.
He said that 6 years ago.
Six years have passed.
In the course of those 6 years, two FinCEN directors, the
Secretary of the Treasury, the Comptroller of the Currency, and
the ABA and many Members of Congress have all, on the record,
acknowledged that our industry is a key component of a healthy
financial sector and that it is very important that we have
access to banking services. In fact, in 2004, in a letter to
Congresswoman Maloney, which she mentioned, OCC Comptroller
Hawke noted the important role that money service businesses
play, and stated that, absent extraordinary circumstances, the
OCC would not direct or encourage any national bank to refuse
their accounts. Just 6 months earlier, Comptroller Hawke,
appearing before this very committee, stated that MSB's should
not be dropped by banks as a class, and should be treated on a
case-by-case basis.
All of these same public officials acknowledge that our
industry has an exemplary record of Bank Secrecy Act
compliance, and you heard today the flimsy aspects of a number
of violations.
In fact, former Director Sloan stated that our industry--
and I am quoting him now--``has set the standard for the
financial services industry in the fight against money
laundering, financial crimes, and terrorism,'' and the record
shows that there have been very few violations.
Most of these public officials believe that bank
discontinuance of our industry is just plain wrong.
We all agree on that.
In the past 12 months, there have been no less than three
hearings--one in the Senate, one in the House, one by FinCEN
itself--documenting the bank discontinuance problem. To its
credit, the ABA has courageously recognized this problem and
supports a solution.
In April 2005, we know that FinCEN issued its guidance,
which has gotten nowhere.
Despite all of these valiant efforts, despite all of these
statements, results have been illusory and to no avail. Not one
bank has reversed its termination policy. In fact, no banks are
even here today--terminating banks.
Banks continue to terminate check cashers. None of those
banks, as I said, are here.
For 6 years, we have had support by public officials, we
have had no evidence of money laundering and no evidence that
we discovered any terrorists, and yet bank discontinuance
continues.
We conclude--this is our conclusion, on behalf of the
industry that I represent--all efforts at regulatory change
have failed and will continue to fail and will not solve this
problem.
Regulation is not the answer. Its effort is hopelessly
mired, and you saw it here in the last 2 hours, in a
bureaucratic maze. We believe that it is time for legislative
intervention before more real damage is done.
It is time for either absolution or compulsion. It is time
to absolve banks of an unreasonable burden upon them to monitor
and regulate our industry.
The only alternative to absolution is to compel the banks
to treat us fairly, as they would any other business, and it is
clear to me and to us that this compulsion alternative is
politically less achievable.
We believe that there will be wide support by banks and
MSB's for legislation which gives force to the policy of the
MSB guidance that banks will not be held responsible for their
customers' compliance with Bank Secrecy Act or other
regulations.
To accomplish this, we are supporting a legislatively
adopted self-certification program where MSB's will certify
that they are in compliance with all the requirements of anti-
money laundering laws, with swift and strong penalties for
false certification.
We believe that our industry has taken and must continue to
take responsibility for its own compliance obligations. Banks
should not be called upon to become our regulators, and that is
what has happened, no matter how you slice it.
We also believe that any legislation should eliminate the
OCC designation of our industry as being high-risk, which took
us down this road in the first place.
This would send a strong, clear message to the banks and
other regulators that, by legislative action, we are going to
turn a corner.
Finally, we stand ready to work with members of this
committee, the ABA, and other MSB's on an urgent basis to craft
the legislation proposed.
We believe that if this is not done, we will be back here a
year from now talking about the same problem or, even worse,
talking about a bigger problem.
So, let us go back to fighting money laundering. Let us not
destroy a viable industry which serves hundreds of thousands of
customers.
The facts demand no less.
Thank you.
[The prepared statement of Mr. Goldman can be found on page
82 of the appendix.]
Mr. Price. Thank you so much, Mr. Goldman. I appreciate
your passion.
Mr. Abernathy, we welcome you today. Mr. Abernathy is
executive director for financial institutions policy and
regulatory affairs with the ABA.
STATEMENT OF WAYNE A. ABERNATHY, EXECUTIVE DIRECTOR FOR
FINANCIAL INSTITUTIONS POLICY AND REGULATORY AFFAIRS, AMERICAN
BANKERS ASSOCIATION
Mr. Abernathy. Thank you, Mr. Chairman, and members of the
subcommittee.
Our anti-money laundering program today increasingly
focuses on the legal activities of law-abiding people rather
than on detecting and deterring crime and stopping terrorists.
Of course, this is not what we all intended, but it is the
result that we have, and nowhere is this more evident than in
its application to money service businesses.
In many situations, banks have raised fees to cover added
compliance costs.
Some banks have discontinued accounts for MSB customers
after a case-by-case analysis of their perceived money
laundering regulatory risk.
Other banks have concluded that serving MSB's, in general,
is not an attractive option, given the bank's reputation risk
or regulatory risk tolerance.
The result has been unfortunate for all parties. Banks lose
customers, customers lose access to banking services, and too
many financial activities move off of the financial main street
and into the shadows.
It will take supervisory, regulatory, and perhaps even
legislative change to redress this.
Last year, FinCEN and the banking agencies took the
important step of issuing interagency guidance and an
interagency examination manual.
Despite all the good intentions, the guidance and the
manual have fallen short of their goals.
More is needed to fulfill the policy pronouncement that
ensured banks are, ``not expected to act as the de facto
regulators of the money services business industry,''.
It is increasingly evident that the IRS and the States have
taken concrete steps to oversee compliance by MSB's with the
BSA and AML obligations.
If any gap remains, it is not for the banks to fill but for
State and Federal Governments to address by applying direct MSB
supervision.
The guidance in the manual should be amended to reflect and
reinforce this reliance on the established Federal-State
supervisory regime.
Supervisory expectations that a bank consider whether an
MSB operates consistent with its legal obligations should be
satisfied by a questionnaire executed and certified to by the
MSB, reciting its implementation of the components of an AML
compliance program. Similar questionnaires, for example, have
been developed and used by banks to ascertain the BSA
compliance posture of foreign correspondent banks.
Our members know the importance of providing all legitimate
customers throughout all segments of society with banking
services.
An underlying challenge is that there exists in the United
States and in all countries a large pool of individuals outside
of the financial mainstream. These individuals are often
accustomed to using informal--and sometimes very informal--
financial services providers. Governmental actions that
discourage people from entering banks also make anti-money
laundering goals far more difficult to achieve.
Therefore, it is the view of the ABA that the current MSB
bank regulatory environment must change if we are to advance
the goals of effectively serving all market segments, while
reducing the risks of money laundering and terrorist financing.
ABA urges that State regulators not criminalize the efforts
of banks that, in good faith and with reasonable diligence,
enable MSB's to conduct business. Otherwise, the risks of
unwarranted criminal litigation and unfounded injury to
reputation will adversely impact a bank's risk assessment for
providing account services to MSB's, and those services will
likely diminish.
ABA believes that consistency in implementing regulatory
policy can be promoted by conducting joint industry and agency
training. Placing bank staff, MSB agents, and examiners in the
same room to hear the same explanations helps ensure a
consistent message, consistently communicated, and most
importantly, it reinforces the teamwork approach that is likely
to prove most successful in cutting off the flow of funds for
criminal activities.
Neither banks, their customers, nor our BSA/AML efforts are
served by driving a regulatory wedge between banks and
legitimate MSB's, pushing large segments of America's economy
into the shadows.
The members of the ABA will continue our support for
efforts to improve the regulatory process so that we can all
focus more on stopping criminal activities and avoid efforts
that too often target legitimate businesses and their
customers.
Mr. Chairman, we thank you and the members of this
subcommittee for your leadership in this effort.
[The prepared statement of Mr. Abernathy can be found on
page 61 of the appendix.]
Mr. Price. Thank you very much, Mr. Abernathy. We
appreciate your participation today and your entire testimony.
Now, Mr. Landsman, executive director of the National Money
Transmitters Association, we welcome you.
STATEMENT OF DAVID LANDSMAN, EXECUTIVE DIRECTOR, THE NATIONAL
MONEY TRANSMITTERS ASSOCIATION, INC.
Mr. Landsman. Thank you, Mr. Chairman. I am David Landsman,
executive director of the National Money Transmitters
Association.
The NMTA was founded in 1999 to voice the concerns of
State-licensed remittance companies, or LRC's, of the United
States.
Currently, we have 43 member companies, which collectively
handle over $17 billion a year in migrant worker remittances.
I would like to thank the subcommittee on behalf of our
members for allowing me to appear before you today. I would
also like to express our gratitude to Congressman Charles
Rangel, who has consistently shown his concern for the negative
impact these account closings are having on our customers and
their families, on the many countries that depend on
remittances for their survival, and on the effectiveness of our
Nation's anti-money laundering, or AML, strategy.
No one knows the exact amount, but we estimate that
outbound remittances from the United States total at least $60
billion annually.
The approximately 620 American LRC's that handle these
remittances have never faced more peril than we do today.
Banks are crucial to the operation of our business, and
they are no longer willing to work with us, citing regulatory
concerns.
These regulatory concerns are well-founded, but not because
of any real money laundering risk. Banks get into trouble for
having us as customers because Federal banking regulators have
incorrectly classified all money service businesses, or MSB's,
as high risk, and make no distinction within that stereotype
between licensed and unlicensed remittance companies.
Now, these attempts to protect the banking system from the
risk LRC's pose have backfired badly by threatening to destroy
the best ally law enforcement has in the fight against money
laundering.
If financial institutions are the first line of defense in
our Nation's war against terrorist funding, then we LRC's are
the special forces.
No sector of the financial industry has better compliance
programs, a cleaner record, or is more essential to our
Nation's AML efforts than LRC's.
The average remittance we send is approximately $243,
hardly a size conducive to money laundering.
Although regulators say that they do not hold banks
responsible for our supervision, that is exactly what is
happening.
Under such conditions, it does not make sense for any bank
to keep us as a customer, no matter how profitable our accounts
are for them.
According to the New York State Banking Department's own
survey, 42 percent of New York LRC banking relationships hang
by a thread and are concentrated at only two banks.
If this situation is not remedied, and soon, then the ranks
of LRC's all across the country, not just New York, will be
decimated.
Unscrupulous, unlicensed operators will no doubt fill the
void left by our departure.
Regulators without legislative guidance have steadfastly
refused to grant any sort of protection that would allow banks
to rely on our State licenses.
In order to solve this problem, we recommend the following
steps.
Number one, remove the onus of supervising us from the
banks' shoulders by law as soon as possible.
This may be done by officially recognizing some or all
State licenses, defining all measures a bank is expected to
take when opening our accounts, and making those measures
practicable.
Banks would still have to verify our licenses and remain
alert for red flags, as usual.
The LRC may be required to sign a self-certification form
similar to the one used in foreign correspondent banking
relationships.
Number two, start regulating LRC's at the Federal level
with a voluntary, non-preemptive Federal AML certification that
would involve initial application and vetting, published rules
and standards that must be followed to maintain certification,
and regular examinations and reports.
The current regulation of MSB's we have at the Federal
level is not good enough. Create an MSB supervision department
at FinCEN, and end the unfortunate division of AML
responsibilities that currently exist between FinCEN and the
IRS.
Let the MSB registration program gradually be replaced by
something more meaningful that would give those firms that so
desire a pathway to the credentials that it takes to get bank
accounts.
Regulate the agent population through licensees like us,
rather than trying to herd over 200,000 retail locations, most
of which are mom-and-pop shops.
number three, our industry needs to take the first steps
toward self-regulation. This would involve industry-driven
training, standard setting, certification, and disciplinary
procedures. While this is something that we ourselves need to
do, government can help by encouraging LRC's to join together.
I thank the subcommittee once again for the opportunity to
have our opinions heard.
[The prepared statement of Mr. Landsman can be found on
page 105 of the appendix.]
Mr. Price. Thank you so much, Mr. Landsman. We appreciate
your testimony and that of each of you. I want to once again
assure you that all staff and members have received your full
testimony and that it will be included in the record.
I would like to ask a few questions, just to try to shed a
little light, because Mr. Goldman, your frustration and passion
is clear, and it is shared by many folks. I think one of the
things that is not understood by most folks is the consequence
of having the banks go, and their service for MSB's, to not you
and not me but to the individual on the street, if you would
not mind commenting a little bit about what those real-life
consequences are, and maybe some others would like to comment,
as well.
Mr. Goldman. I think it is pretty clear that the millions
of people who use our services are the people who benefit from
the fact that our services are serviced by banks.
If we eliminate the bank from the process, we cannot
perform the service, and if we cannot perform the service, I do
not know where it is going to go, but it will go someplace,
because the need for our service will be the same with or
without the banks.
Mr. Price. So, what does that mean to Mr. or Mrs. Smith on
the street?
They would pay more for the services that you all are
currently providing?
Mr. Goldman. Well, Mr. and Mrs. Smith certainly, I believe,
would pay more in an underground economy, unregulated, than it
is now, and so, the people in those income groups, who now rely
on us, are going to have an enhancement in the course of their
receiving their financial services, and the banks are not--the
banks are not going to pick up that service.
They have rejected serving us to serve these people. They
are not going to serve them.
They have not up to now, and they are not going to serve
them directly.
Mr. Price. Mr. Abernathy?
Mr. Abernathy. Although I would generally agree with that,
I would differ with it a little bit. Banks are increasingly
providing services to populations of all stripes and locations
and financial situations, but it is very difficult to penetrate
many particular population groups for cultural reasons and a
host of other causes, all causes that we are trying to
overcome. That is why that important role is played by money
service businesses.
It is painful to a banker to tell somebody no, we cannot
provide services to you. We are in the business of providing
services.
What it means to a Mr. or Mrs. Smith, when they cannot have
that access, is they are further alienated not only from
financial services but from the mainstream of our society, in
general, and I think that there are multiple consequences that
come from that.
Mr. Price. I think that we have done a poor job educating
folks on that point.
Mr. Milne, did you have a comment?
Mr. Milne. Yes. I think there are many consequences, Mr.
Chairman.
I think one is access. As our agents are shut down, it
limits the access points for consumers for these valuable
products and services.
Two, I think, as was brought out in the panel this morning,
we provide very valuable information to law enforcement in
terms of anti-money laundering and law enforcement activities,
and once again, those activities will get pushed underground as
access is limited for those consumers, and then, finally, as I
pointed out in my testimony, as we scramble to get the agents
that provide our products and services to consumers bank
accounts, we are ending up hiring armored cars, setting up bank
accounts for them, and we have been really working hard to
drive the pricing down for things like wire transfers, and this
is going to increase our costs.
Mr. Price. Mr. Landsman?
Mr. Landsman. Yes. One of our members is a company called
Dahabshil, and the subcommittee has his testimony, Mr. Isaac
Warsame. Around the time that he was getting his major bank
account notification of closure, 2 weeks ago, the Islamic
fundamentalists were taking over Mogadishu, and they are the
largest transmitter to Somalia.
I think that is pretty clear.
So, the consequences to the consumer, of course, will be
understandable.
They will pay higher prices.
They will have to give cash to friends and relatives who
are traveling there.
It will take longer, it will be less convenient for them,
but the consequences to national security are tremendous.
Dahabshil has an excellent compliance program. They take
ID, they make reports, and they keep records, and most of their
wire transfers are incredibly small, they are like $25, but if
they do not survive, then all of this money will be going to a
very dangerous place in the world with absolutely no control on
this end.
Mr. Price. Given those comments and given the fact that I
think it is readily apparent and certainly all would agree that
no one desired to make the banks a de facto regulator of the
MSB's, and not meaning to put you on the spot, but given the 5-
to 6-year history of this recognition, clearly, by all
involved, why do you think that no change has occurred in a
positive direction? I will let anybody fall on that sword who
wants to.
Mr. Goldman. First, it took a few years for these
regulators to really recognize and acknowledge the extent of
the issue.
So, we will give them the first 3 years, and the last 3
years, I think there is some inherent bureaucratic inertia, and
you know--very interesting--I would like to make two
observations.
One is that we have not heard from the banks that have
terminated.
You know, we have never really talked to the--and I think
there is a wealth of knowledge that we could get from the banks
that have terminated, and I suspect that they would agree that
there is no clarity. They are being asked to be the regulators.
You will get all the war stories, and I think it is that
there is no czar here.
There is nobody who is prepared or willing in the
regulatory system to take the bull by the horns and say--I
would say Mr. Fox, with all due respect, did really take the
bull by the horns. I think, unfortunately, he left for a bank,
but the reality is that he started to take the bull by the
horns, and even he, himself, if you were to talk to him in the
quiet of his office, recognized his own limitations. I mean all
you have to do is re-read the testimony, and I'm not here to
criticize the regulators, okay, but you reread the testimony of
the regulators, and you know, they do not have all the answers,
they do not have any direction, they all have pieces of the
action, you know, but nobody has--nobody has taken it by the
horns, and that is why I have said that I really believe,
genuinely, that it has come time for the legislative body to
make a statement, a legislative body to pass legislation and
say, you know, no more blanket high risk and no more banks
being asked to regulate the industry, and until that happens,
we are having a lot of meetings, we are having a lot of
conferences, we are having a lot of hearings, but nothing is
happening.
The other thing I did want to say, to correct the record
with Mr. Abernathy, is that he is correct. I mean the banks are
making an effort in their own way to service non-bank
customers.
The reality, I think, is that that is a long-term process,
but the answer to your question, I think all you have to do is
reread the testimony of the regulators today, and you have to
ask yourself a lot of questions.
They are proving the point that somebody has to take the
bull by the horns, and as far as we can see, the real
candidates for doing that are the legislators.
Mr. Price. My time has expired, but if anybody else has a
comment about that--
Mr. Abernathy. Just briefly, Mr. Chairman, I think that
there has been a lot of progress, but it has been insufficient.
You can heat water up, but until it gets to 212 degrees, it
does not boil, and the progress has been sort of one step
forward, one step back.
We did get guidance.
The guidance did not quite do it. It is better than it was
before.
It said some good things, but while saying some good
things, it also created some ambiguities. When you give the
ambiguity to an examiner without clear guidance, then the banks
are left in the lurch, and that is a real problem that we have.
The way the law is written, there is a position of
leadership, and that is at FinCEN.
It is interesting, the way the BSA is written, the Treasury
Secretary, FinCEN--they have the responsibility for
administering BSA. It is delegated from there to the bank
regulators, but the policy maker is at FinCEN.
While Mr. Fox was there, I think a lot of progress was
being made.
We would like to see that kind of progress continue, and
then maybe we can get the water to boil and get something done.
Mr. Price. Let me recognize Ms. Maloney for a round of
questions.
Mrs. Maloney. I would like to thank everyone for their
testimony, and I would like to ask, what steps do you take to
ensure that the members of your association or agents who are
part of your network are reputable, and what kind of screening
do you perform?
Mr. Goldman. Well, first of all, we provide manuals which
have gotten the respect and support of FinCEN.
We were the first industry to provide manuals about
responsibilities.
We provide training programs.
We have numerous meetings with members of our association.
I think that, without question, anti-money laundering--the
imposition of anti-money laundering compliance is--it is not--
it is our second most important priority. It is only second to
the issue of bank discontinuance, and we are participants with
FinCEN in DSAG, starting back when Peter DeGinis was there.
We worked from the beginning--we have worked for 15 years
to be compliant, and I think that the proof is in the pudding.
When you get the results that you asked from FinCEN, you
are going to find that there is little, if any, noncompliance,
other than technical noncompliance, with Bank Secrecy Act laws.
So, you know, we are kind of beating a dead horse here.
I mean the point of the matter is that we have not--
notwithstanding what Mr. Abernathy said, with all due respect,
we have not made progress. Not one bank has come back.
Not one bank that terminated us in the last 6 years has
seen fit to come back, and not--and in fact, more banks are
terminating us, and what I am saying is that you reach a point
where you say something dramatic has to be done, and what we
are suggesting is that it may be time for Congress to make a
statement, because as I said, Madam Maloney, when you were not
here for the moment, that my fear is that we are going to be
back here next year listening and saying the same things that
we said this year, and we said if you look back at the
testimony in prior Congressional hearings on this issue, you
will see the same things were said then.
So, we are kind of--we have to accept the fact that we
bogged down and mired down.
Without placing responsibility on anybody--I am not even
placing responsibility on a particular regulator. I am saying
the regulatory process is not working, and I think it needs
some direction, and I said in my oral testimony, I think two
areas that we have to--I noted two areas that I think we have
to deal with.
Mr. Milne. Mrs. Maloney, maybe I could just touch on that
question, as well.
At MoneyGram, we really take compliance and anti-money
laundering very seriously, and really consider ourselves a
partner with FinCEN and Treasury and the IRS in combatting
that.
We start from the basic level of know your agent. We do
background checks on all the agents that our services are
provided through, run them through the OFAC list, look at
criminal records.
We provide them with anti-money laundering training and
compliance materials, help them set up their program, always go
back and review that training with them at a later date, and of
course, we run all the transactions through our computer
system, looking for suspicious activity and any types of
patterns.
So, we have a comprehensive compliance and anti-money
laundering program, not only because we have to, but because it
is the right thing to do.
Mrs. Maloney. Well, as I testified and said earlier, in New
York City, we have roughly 150 money services businesses in
over 750 locations.
They employ 4,000 New Yorkers and serve many thousands each
day, and with this discontinuance, it is causing a huge
problem.
You heard the superintendent of banks speak forcefully
against the New York State legislature's action to force the
banks to do this business, and the banks have repeatedly said
that they do not want to be the regulator; they are not a
regulator.
I would like to ask each member of the panel, what do you
think of the proposal that I put forward earlier that if the
banks are not providing this service, then have the--let us
legislate and have the Federal Reserve serve as a bank to this
financial service industry, the MSB's, and starting with you,
Mr. Goldman, what is your response to that proposal?
Mr. Goldman. I wish I had one.
I am not familiar enough with how that would work and
whether it would or not.
Mrs. Maloney. They would serve as a bank, and you would be
able to use, you know--they would be the bank to the MSB's.
Mr. Goldman. I am not sure whether they could do that on a
local basis. I am not clear on whether--
Mrs. Maloney. With legislation, they could. They cannot
now. If we pass legislation that said, since there is no
banking services for the MSB's and they are providing services
that are needed by thousands of people, that as a last resort,
MSB's can bank through the Federal Reserve.
Mr. Goldman. Well, as I said, if they could serve as the
check cashers' bank, at least on its surface, it appears to me
that we would have no objection. At least we know we would have
one bank.
Mrs. Maloney. Mr. Milne, do you have a comment?
Mr. Milne. I am not an expert on what level of service the
Federal Reserve could provide on a local level for the
depository requirements that these smaller MSB's have, although
I do agree with you that Federal preemption, I think, is a
necessary part of this, and whether it is the Federal Reserve
or it is FinCEN, somebody who has oversight on MSB's at a
Federal level, an optional--maybe charter at a Federal level--I
think would bring a lot of credibility to the industry, and I
think would help on an interpretation, a consistent
interpretation of AML and compliance laws across the country.
So, I think, you know, preemption at a Federal level from a
regulatory standpoint would be a huge step forward.
Mrs. Maloney. Mr. Abernathy?
Mr. Price. The gentlelady's time has expired, but you are
welcome to continue.
Mr. Abernathy. Certainly, Mrs. Maloney, this would be with
the benefit of only having the chance to think about it since
you presented the question and not having given it long-term
thought. I would wonder whether such a proposal would change
fundamentally the nature of the Federal Reserve, which right
now serves as a backstop to the retail financial system. To
then put them into that posture might move them into the retail
sector of the economy, and I am not sure that that is where we
want the Federal Reserve to be.
Mrs. Maloney. If the retail banks in our country refuse to
provide this service--and we are a country that believes in
free enterprise, we believe it has made this country great.
The superintendent of banks raised constitutional questions
of requiring them--the banks are saying it is unfair, that they
are not regulators, they are providing services.
If this service is not provided anywhere else and it is a
service that benefits people--you know what I find unusual
about this--and I want to share this with the chairman.
We constantly have meetings, in this committee and others,
about how we provide services to needy neighborhoods.
Here we have MSB's--they are in all neighborhoods, but in
certain neighborhoods in New York, they are the only financial
services there.
So, sometimes there are proposals--let us create a Federal
bank or a State bank that will go in and provide these
services, and yet, that would be great expense, great overhead,
and yet, a service that is there is essentially being cut off
to many people, and we need to have some answer that respects
free enterprise, respects the fundamentals of this country, but
the fact that the New York State legislature and the New York
State Assembly and Senate are passing bills requiring banks to
do business in certain areas--this shows the crisis level that
it has reached in New York State.
There are rumors that the two smaller banks may be bought
by bigger banks that will not provide the service. Therefore,
this whole service, reaching hundreds of thousands of New
Yorkers, would not be there. Then, if that was cut off,
immediately there would be a crisis meeting in this committee,
how do we get the banking services and check cashing services
into the communities.
You know, so we have to think creatively of how we can work
in the free enterprise system and our constitution to provide
these services, and if the Federal Reserve is the backstop,
maybe they need to be the backstop to this.
Maybe they need to create a place where we can have this
transaction take place so that the service continued to help
hundreds of thousands of people.
So, that is where the thought came from, because there are
a lot of problems here, but everyone agrees that the service
should continue, and maybe if you put the bill forward, maybe
FinCEN and OCC would come out with some regulations that
clarify where we should go.
Could we hear Mr. Landsman's--
Mr. Price. That is what I was about to say. I appreciate
you sharing that with me and the committee, and if Mr. Landsman
would comment, please.
Mr. Landsman. The NMTA is the primary sponsor of the bill
you are referring to, and I agree with you, it is a desperation
measure.
We are concerned that it not be interpreted as a coercive
measure against the banks. Rather, we are trying to find some
way to give them the safe harbor, the protection that they can
feel comfortable banking with us without having people point
fingers at them.
In fact, your suggestion was used by the Government of
Dubai, I understand, when they had similar problems because of
severe money laundering concerns. The banks were closing the
accounts of money exchangers there, but the money exchangers
were incredibly important money transmitters, because of all
their migrant labor that comes from south Asia, mostly.
So, the central bank did step in there, but Dubai is a very
small country.
The thing that we need the banks for very much is to get
small deposits from the agent location into the branches of the
major banks that are right next door.
So, if an agent of ours has 1,000 or 2,000 dollars that he
has collected from the public, he can walk right next door and
deposit it to our account.
That is the fastest, cheapest, and safest way for us to run
our business.
Other than that, we have to send an armored car, and it
just does not pay, because the money that it costs for an
armored car service and the additional delay is practically all
the money we ever make on it.
Mr. Price. Thank you for that. The gentlelady's time has
expired. I appreciate your participation.
I want to thank each of the panel members again for your
participation and your testimony.
The Chair notes that some members may have additional
questions for this panel which they may wish to submit in
writing, and without objection, the hearing record will remain
open for 30 days for members to submit written questions to
these witnesses and to place their responses in the record, and
with that, this hearing is adjourned.
[Whereupon, at 12:43 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 21, 2006
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