[Senate Hearing 109-517]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-517

 
                      AN UPDATE ON MONEY SERVICES
                     BUSINESSES UNDER BANK SECRECY
                       AND USA PATRIOT REGULATION

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

 MONEY SERVICES BUSINESSES UNDER BANK SECRECY ACT AND USA PATRIOT ACT 
 REGULATIONS, FOCUSING ON FEDERAL AND STATE EFFORTS IN THE ANTI-MONEY 
                            LAUNDERING AREA

                               __________

                             APRIL 26, 2005

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                Skip Fischer, Senior Staff Professional

                          John O'Hara, Counsel

              Stephen R. Kroll, Democratic Special Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        TUESDAY, APRIL 26, 2005

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johnson..............................................     2
    Senator Stabenow.............................................     4
        Prepared statement.......................................    44
    Senator Allard...............................................    14
        Prepared statement.......................................    44
    Senator Sarbanes.............................................    23
    Senator Carper...............................................    27

                               WITNESSES

Julie L. Williams, Acting Comptroller of the Currency............     4
    Prepared statement...........................................    45
Kevin Brown, Commissioner, Small Business/Self-Employed Division, 
  Internal Revenue Service.......................................     6
    Prepared statement...........................................    49
    Response to a written question of Senator Shelby.............    84
William J. Fox, Director, Financial Crimes Enforcement Network, 
  U.S. Department of the Treasury................................     8
    Prepared statement...........................................    54
Diana L. Taylor, New York State Superintendent of Banks..........    10
    Prepared statement...........................................    58
John J. Byrne, Director, Center for Regulatory Compliance, 
  American Bankers Association...................................    30
    Prepared statement...........................................    64
Gerald Goldman, General Counsel, Financial Service Centers of 
  America, Inc...................................................    31
    Prepared statement...........................................    68
Dan O'Malley, Vice President of the Americas, MoneyGram 
  International, Inc.............................................    33
    Prepared statement...........................................    72
David Landsman, Executive Director, the National Money 
  Transmitters Association, Inc..................................    34
    Prepared statement...........................................    77

              Additional Material Supplied for the Record

Guidance and Advisory Issued on Banking Services for Money 
  Services Businesses Operating in the United States, dated April 
  26, 2005.......................................................    85

                                 (iii)


                      AN UPDATE ON MONEY SERVICES
                     BUSINESSES UNDER BANK SECRECY
                       AND USA PATRIOT REGULATION

                              ----------                              


                        TUESDAY, APRIL 26, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

          OPENING STATEMENT OF CHAIRMAN RICHARD SHELBY

    Chairman Shelby. This hearing will come to order.
    This morning, the Committee will hear testimony from 
representatives of the banking and money services industries, 
as well as from the Government agencies that regulate them, on 
the rapidly growing problem of what for lack of a better term 
we will call ``the unbanking of MSB's.''
    Money services businesses, MSB's as we call them, include 
wire transmitters, check cashers, sellers and redeemers of 
money orders, and currency exchangers. MSB's are a large and 
vital part of the global economy. It is estimated that the 
international market for remittances by itself is as much as 
$80 billion per year. That is money generally earned in 
developed countries by foreign nationals that is wired home to 
family members in less developed countries. It is a large and 
important component of those countries' economies and has 
helped hundreds of thousands if not millions of otherwise 
desperately poor families to earn vitally needed currency.
    Even more than within the formal banking system, however, 
MSB's are vulnerable to abuse by criminals and terrorist 
organizations. It is now well-known of course that much of the 
money that supported the terrorists that carried out the 
horrible attacks of September 11, 2001 was wired to them from 
the Persian Gulf, especially the Emirate of Dubai. It is not 
only al Qaeda though that moves cash around by way of money 
transmitters. The Times of London reported on April 3 of this 
year that Hezbollah has continually provided funding to 
Palestinian terrorist organizations by way of money 
transmitters. The Times quotes a captured member of the 
Palestinian Islamic Jihad as stating with respect to 
Hezbollah's support for Palestinian terrorist groups, ``They 
would send Islamic Jihad money in amounts of something like 
$4,000,'' said the 27-year-old leader of that organization. 
``It is easy. They just use Western Union.''
    It is not just terrorists. Drug traffickers too routinely 
exploit the vast MSB world to move the proceeds of their 
criminal activity. Exactly one year ago a DEA-led organized 
crime drug enforcement task force in Texas concluded a major 
investigation, Operation Candy Box. It involved the use of wire 
transfer services to launder and move money. Concurrently, an 
FBI-led investigation also in Texas and dubbed Operation 
Foreign Exchange resulted in the filing of 6 criminal 
complaints charging 7 individuals with money laundering and 
violations of the Bank Secrecy Act.
    Enhanced scrutiny and oversight of MSB's was then, and 
remains, fully warranted. Unfortunately, the very nature of 
many MSB's, in effect their global reach, ease, and 
reliability, has increased perceptions of them as high risk by 
the banks with whom they have to maintain accounts in order to 
do business. Banks in turn have been dumping or unbanking their 
MSB accounts, and they are doing this in a major way. MSB's, a 
vital component of the global financial system, are at risk of 
being driven out of business, or more ominously, underground.
    That brings us to the subject of today's hearing, the 
latest in the Banking Committee's ongoing examination of money 
laundering and terror financing. How do we regulate MSB's 
sufficient to ensure that they are not abused by criminals and 
terrorists? How do the MSB's police themselves in conformity 
with antimoney laundering and Bank Secrecy Act statutes and 
regulations? How do banks regain the level of confidence in the 
first two questions to feel comfortable banking MSB's? It is 
the Committee's hope that the witnesses testifying here this 
morning will help us to understand the scale of the problem and 
what to do about it.
    Our first panel is composed of representatives of U.S. 
Government agencies responsible for regulating money services 
businesses and for enforcing the Bank Secrecy Act. They 
include: William Fox, Director of the Financial Crimes 
Enforcement Network, who has details of the newly released 
interagency guidance on providing banking services to MSB's; 
Kevin Brown, Commissioner of Small Business and Self-Employment 
Division, Internal Revenue Service; Julie Williams, Acting 
Comptroller of the Currency; and a representative of State 
banking supervisors, Diane Taylor, Superintendent of Banks, New 
York State Banking Department. Ms. Taylor's testimony is 
particularly important both for the role the States play in 
licensing MSB's and for the vast number of MSB's that operate 
in her State.
    Our second panel will include: John Byrne, Director, Center 
for Regulatory Compliance, American Bankers Association; Gerald 
Goldman, General Counsel, Financial Service Centers of America; 
Daniel Landsman, Executive Director, National Money 
Transmitters Association; and Dan O'Malley, Vice President for 
the Americas MoneyGram International.
    We welcome all of you today and we look forward to your 
testimony.
    Senator Johnson, do you have an opening statement?

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Yes, I do. Thank you, Chairman Shelby for 
holding this important hearing today. I am pleased that the 
Banking Committee is exercising its important oversight 
function to determine whether the Bank Secrecy Act and the USA 
PATRIOT Act are working properly to deter and detect money 
laundering and terrorist financing activity.
    Following the attacks of September 11 we recognized that 
the war on terrorism needs to be fought on many fronts. While 
extreme ideology fuels terrorist activity, terrorists would be 
unable to implement their plans without financial resources. I 
can think of few Committee responsibilities more important than 
helping to ensure our financial services infrastructure is not 
used in this manner.
    Today's hearing focuses on whether antimoney laundering 
legislation is having unintended negative consequences on money 
services businesses, and by extension, on low-income 
communities that have come to rely on nonbank financial 
services sector. The lessons that we learn from today's hearing 
will, I hope, inform future legislative and regulatory action 
as we work to balance important national security priorities 
with the capacities of industry and regulators to implement the 
law.
    As Ranking Member Sarbanes pointed out in a hearing last 
June, one of the biggest problems we have seen with the Bank 
Secrecy Act is that no one seems to be directly accountable for 
its enforcement. My colleague from Maryland noted that those 
with BSA enforcement responsibility range from Treasury to 
FinCEN to the Federal banking regulators, to the FBI, to the 
Bureau of Immigration and Customs Enforcement, to the Drug 
Enforcement Administration, and to the IRS.
    I am hopeful that the witnesses today will have some good 
news to share about progress in BSA enforcement coordination. 
However, I remain concerned that the BSA and other laws that we 
have crafted are not being implemented in a fashion that 
maximizes their effectiveness. For example, Mr. Fox has noted 
in his testimony that we have seen a dramatic rise in defensive 
filing of suspicious activity reports, which clearly undermines 
the usefulness of SAR's as a tool for law enforcement. As a 
matter of fact, in the American Banker just today, an article 
indicates that the debate over why banks are filing more 
suspicious activity reports than ever has turned into a war of 
letters among bankers, regulators, and even Members of 
Congress. Bankers are complaining that the Agency's zero 
tolerance policy for violations has given banks no choice but 
to flood the agencies with so-called ``defensive filings.'' 
Regulators have responded that hefty fines handed down by the 
Justice Department have led to a surge in filings, and the 
article goes on about the concern we have here in this respect.
    In addition, I share the concern of my colleagues that so 
many depository institutions have discontinued essential 
banking services for money remitters and other money services 
businesses. We need to look carefully at what regulatory 
resources have been dedicated to helping regulated entities 
understand how to continue serving this important sector.
    Clearly, we are making progress on the war on terror, and I 
would like to express my profound appreciation to those of you 
here today who have committed yourselves to the safety and the 
integrity of our Nation's financial sector. We will not be 
successful in protecting our system without a strong 
partnership between and among the regulators and the regulated 
entities.
    I look forward to hearing from enforcement officials as to 
what steps they have taken to ensure that policy decisions made 
in Washington are actually being communicated to regional and 
local examiners. I cannot tell you how many times I have heard 
concerns about the time it takes for guidance to trickle down 
to the field, and similar concerns about the consistency in 
training levels for field agents and examiner.
    Likewise, I would like to hear from the financial service 
witnesses, what steps they have taken to implement the law and 
where they would benefit from more guidance.
    Mr. Chairman, I am confident that we will continue to 
improve our antimoney laundering enforcement efforts, but we 
clearly have a long road ahead of us to work out some of the 
unintended consequences that have been reported in recent 
months.
    Mr. Chairman, I regret that I will not be able to stay for 
the entire length of this hearing because of conflicting 
obligations that I have, but I look forward to the testimony. 
My staff is here, and we look forward to working with you on 
ways to address this issue. Thank you.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman, and I would 
first ask that my opening statement be put in the record.
    Chairman Shelby. Without objection it will be so ordered.
    Senator Stabenow. And I would just welcome our witnesses 
here today. I was very pleased to work on the provisions of 
money laundering when we passed the USA PATRIOT Act and to 
sponsor a couple of the provisions that in fact have become 
law. I am anxious to hear from you about how it is going and 
any unintended consequences that we need to be addressing right 
now. We do know that these provisions have had some positive, 
intended effect, but we certainly want to make sure that we are 
looking with a critical eye at whatever we need to do to 
strengthen or to change provisions in order to make sure that 
they are more effective.
    So thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator.
    Ms. Williams, we will start with you. All of your written 
testimony will be made part of the record in its entirety, so 
you proceed as you wish.

                 STATEMENT OF JULIE L. WILLIAMS

               ACTING COMPTROLLER OF THE CURRENCY

    Ms. Williams. Chairman Shelby, Senator Johnson, and Senator 
Stabenow, I appreciate the opportunity to appear before you 
today to discuss implementation of the Bank Secrecy Act in the 
context of money services businesses. We very much appreciate 
your leadership, your interest, and that of the Committee as a 
whole in this vital area.
    ``Money services businesses,'' or MSB's, is an umbrella 
term that encompasses many different types of financial 
services providers. Estimates of the numbers of MSB's run into 
the hundreds of thousands, ranging from Fortune 500 companies 
with numerous outlets worldwide to independent convenience 
stores that offer check-cashing services. Reportedly, millions 
of Americans depend on MSB's to satisfy most of their financial 
services needs.
    But because they may handle large volumes of cash, MSB's 
can pose significant risks. While most MSB's have never been 
tainted by money laundering, some have been conduits for 
illicit activity. We have even seen cases in which money 
launders established MSB's to disburse and effectively launder 
their excess cash to unsuspecting customers.
    Today, MSB's are governed by an uneven system of licensure 
and regulation. Some States do not require any MSB's to obtain 
licenses; some only license certain segments of the MSB 
industry. Others, as Superintendent Taylor can tell you, have 
comprehensive licensing standards and oversight. And, as of 
last year, apparently a substantial percentage of MSB's had not 
registered with FinCEN as Federal law requires.
    Thus, banks that maintain relationships with MSB's face 
multiple challenges. In general, at a minimum, they must apply 
their customer identification program requirements, confirm 
FinCEN registration, confirm compliance with State or local 
licensing requirements, confirm agent status if applicable, and 
conduct a basic risk assessment to determine the level of risk 
associated with the account, and thus the level of diligence 
that is going to be required for the relationship. Depending 
upon the nature of a bank's business with MSB's, fulfilling 
these responsibilities can involve significant bank resources.
    Compounding the challenge, we recognize that guidance on 
key issues provided by Federal regulators has been in need of 
clarification in important respects. This was especially true 
in the case of unregistered MSB's where clarity was needed as 
to whether banks are expected to file SAR's, close accounts, or 
take some other action upon discovery that an MSB customer has 
not complied with applicable registration and licensing 
requirements.
    Finally, in addition to these costs, risks, and 
uncertainties, it is a reality that banks feel that they are 
subject to substantial compliance and reputation risk, 
including from sources beyond banking regulators, if they are 
perceived to misstep on BSA issues. It is not surprising, given 
these factors, that some banks have determined that the risks 
were not worth it, and chose to terminate their accounts with 
MSB's.
    In closing, I would like to stress several points. First, 
the OCC does not expect banks to be de facto supervisors of 
their MSB customers. A bank's role and responsibility are to 
development of systems and controls that effectively identify 
suspicious transactions, and to implement those systems in a 
risk-based manner. Banks should not be expected to be policemen 
of their MSB customers.
    Second, except in unusual cases, and those generally 
involve an enforcement matter, the OCC does not require 
national banks to close the accounts of an MSB customer or any 
other customer.
    Third, the OCC expects banks that service MSB's to apply 
the requirements of the BSA on a risk-assessed basis, just as 
they do with other accountholders. Not all MSB's represent the 
same level of risk, and banks should treat MSB's according to 
each MSB's risk profile.
    I also want to emphasize that the OCC is constantly 
striving to improve the quality of our BSA examinations and the 
quality and clarity of the guidance that we provide to national 
banks. Our track record of BSA enforcement actions reflects 
judicious use of our enforcement authority. We absolutely do 
not have a ``zero tolerance'' approach where any and every BSA 
deficiency warrants a formal enforcement action, but we will 
absolutely take action where action is warranted.
    With respect to improving BSA guidance, the OCC, together 
with FinCEN and the other banking agencies, recently issued an 
Interagency Policy Statement touching on several key issues. 
FinCEN and the agencies today are issuing Interagency 
Interpretive Guidance on Providing Banking Services to MSB's, 
which should clarify several key issues where uncertainties 
have existed. I will defer to Director Fox to describe that 
guidance in detail. I would also like to take this opportunity 
to applaud him for all of his efforts to foster coordination 
and collaboration between FinCEN and the Federal banking 
agencies.
    Last, in concert with FinCEN and the other Federal banking 
agencies, we will soon be producing a revised uniform 
interagency BSA examination handbook.
    Mr. Chairman and Members of the Committee, thank you again 
for your leadership in this area. We strongly share the 
Committee's goal of preventing and detecting criminal acts that 
involve misuse of our Nation's financial institutions. We also 
share the concern that it is important that MSB's have access 
to financial services, but those relationships also must be 
consistent with the antimoney laundering and antiterrorism 
financing laws of this country.
    We stand ready to work with Congress, FinCEN, and the other 
Federal banking agencies, and the banking industry, to achieve 
these goals.
    Thank you.
    Chairman Shelby. We will next hear from Mr. Brown, Internal 
Revenue Service.

            STATEMENT OF KEVIN BROWN, COMMISSIONER,

             SMALL BUSINESS/SELF-EMPLOYED DIVISION,

                    INTERNAL REVENUE SERVICE

    Mr. Brown. Good morning, Mr. Chairman and distinguished 
Members of the Committee. I appreciate the opportunity to be 
here today to discuss the Internal Revenue Service's efforts 
involving the Bank Secrecy Act and to update you on the 
progress we have made since last September.
    The IRS addresses both the civil and criminal aspects of 
money laundering. On the civil side, the Department of the 
Treasury has delegated to the IRS responsibility for ensuring 
compliance with the BSA for nonbanking financial institutions 
such as money service businesses, casinos, and certain credit 
unions.
    The IRS's Criminal Investigation Division is responsible 
for the criminal enforcement of BSA violations and money 
laundering statutes related to tax crimes. In October 2004, the 
IRS's Small Business/Self-Employed Division officially 
established the Office of Fraud BSA which reports directly to 
the Commissioner of the Small Business/Self-Employed Division. 
The Director, an IRS executive, has end-to-end accountability 
for compliance with BSA including policy formation, operations, 
BSA data management, and all field activities.
    The Office of Fraud BSA is staffed by approximately 300 
field examiners located nationwide. These examiners are 
overseen by 31 group managers and supported by 8 analysts 
throughout the country. Our hiring plans call for us to have 
some 325 field examiners on board by the end of fiscal year 
2005. We also plan to hire an additional 60 BSA examiners in 
fiscal year 2006 for a 2-year combined increase of 28 percent.
    In contrast to years past, all of our BSA examiners and 
their managers devote 100 percent of their time to examinations 
of BSA related cases. In carrying out our responsibilities 
under the Bank Secrecy Act, the IRS works in close partnership 
with FinCEN, law enforcement agencies, and the States. 
Together, we are identifying MSB's, raising awareness of BSA 
obligations, and improving oversight and enforcement by 
targeting examination resources toward high risk elements of 
the industry.
    Most recently we finalized, as of yesterday in fact, a 
Memorandum of Understanding with FinCEN that provides for the 
routine exchange of BSA compliance information. Moreover, the 
IRS and FinCEN recently reached agreement with the Conference 
of State Bank Supervisors on our model Federal/State Memorandum 
of Understanding. And I am pleased to report that just last 
week Superintendent Diana Taylor signed the agreement on behalf 
of New York State, the first State to do so.
    In the near future, we expect that additional States will 
sign the MOU which provides the IRS and the States the 
opportunity to leverage resources for examinations, outreach, 
and training.
    When I appeared before this Committee in September 2004, I 
outlined several areas where we could enhance our BSA 
examination program. I am pleased to have this opportunity to 
update the Committee on our progress. This fiscal year, we are 
examining more than 3,500 individual MSB's. We also are 
conducting examinations of several larger MSB's at the 
entities' corporate headquarters level. These centralized 
examinations give us the potential to impact the compliance 
behavior of a much larger number of MSB's. For example, there 
are about 29,000 MSB's related to the 5 corporate entities 
currently under examination.
    The IRS is also employing for the first time an examination 
technique known as a saturation audit. Specifically, we are 
conducting simultaneous examinations of all MSB's located 
within particular zip codes in two cities which were identified 
as high risk areas in coordination with other law enforcement 
agencies. This saturation approach allows our BSA examiners to 
identify individuals with unusual patterns of financial 
activity which fall below the reporting threshold. In addition, 
we are exploring two new methods for identifying BSA workload.
    The first approach, which is being tested by our 
classifiers, uses a risk-based scoring system to pinpoint which 
cases in the potential universe are most in need of 
examination. In the second related effort, we are researching 
the feasibility of using currency banking and retrieval system 
data to create an automated national workload identification 
and selection system to designate the universe of potential 
Title 31 cases.
    In conclusion, the fight against money laundering and 
terrorist financing are top priorities for the Internal Revenue 
Service. We are increasing our commitment to the BSA program 
and we will continue to coordinate our efforts closely with 
FinCEN.
    Mr. Chairman, I thank you for this opportunity to appear 
before this distinguished Committee and I will be happy to 
answer any questions you and the other Members of the Committee 
may have.
    Chairman Shelby. Thank you.
    Mr. Fox.

                  STATEMENT OF WILLIAM J. FOX

        DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK,

                U.S. DEPARTMENT OF THE TREASURY

    Mr. Fox. Thank you, Mr. Chairman and distinguished Members 
of this Committee, I very much appreciate the opportunity to 
appear before you again to discuss the money services business 
sector. We very much appreciate the leadership, support, and 
guidance you have offered us on these and other issues relating 
to the administration and implementation of the Bank Secrecy 
Act. Your commitment to understand and publicly discuss the 
issues facing the money services business sector is critical 
not only to the safety of our financial system, but also indeed 
to our Nation's security.
    I prepared a longer written statement that I ask be we are 
submitted for the record, and I will keep these remarks short.
    Mr. Chairman, if you would not mind I would like to take a 
second to acknowledge the colleagues who are with me on the 
panel today. I am honored to be here today with Julie Williams, 
Kevin Brown, and Diana Taylor, and I am pleased to tell you, 
sir, that these leaders and their agencies have been incredibly 
diligent and cooperative on these issues. The importance of our 
good working relationship and our working relationship with the 
other regulators who have a stake in the Bank Secrecy Act 
cannot be overstated. In fact, if we are to be successful in 
achieving the goals of the Bank Secrecy Act, we must speak with 
one voice on these issues. The confusion resulting from 
different or disparate messages has obvious and serious 
ramifications.
    Mr. Chairman, I believe it is fair to say that the Bank 
Secrecy Act regulatory climate has changed significantly since 
the last time I appeared before you. Industry compliance 
remains a contradiction. We continue to see significant 
compliance failures of the most basic type, while at the same 
time most financial institutions are demonstrating an 
extraordinary commitment of resources and effort to comply.
    I have, in my written statement, outlined why we believe 
this change has resulted in, among other things, the widespread 
termination of banking services for money services businesses, 
which is a significant reason we are all here today.
    I would like to take a moment to explain what we are doing 
to address the problem. Earlier this year, when we recognized 
that account termination for money services businesses was 
becoming a significant problem, we held a public fact-finding 
meeting to elicit information from money services businesses 
and banks as to why these account relationships were being 
terminated. The meeting confirmed that money services 
businesses of all types and sizes are losing their bank 
accounts at an alarming rate, even when those money services 
businesses appear to be complying with the Bank Secrecy Act and 
State-based regulatory requirements.
    We also heard a lot of confusion from banking organizations 
about what is required under the regulatory regime. In essence, 
we heard quite clearly that we needed to act quickly to clarify 
the Bank Secrecy Act requirements.
    On March 30, 2005, along with the Federal banking agencies, 
we took the first step toward addressing these issues by 
issuing a joint statement on providing banking services to 
money services businesses. This statement calmed the waters and 
asserted clearly that we do not intend to make banking 
organizations the de facto regulators of the money services 
businesses industry.
    Today, I am very pleased to announce that we have taken the 
next important step and are issuing, jointly with the Federal 
banking agencies, interpretative guidance that clarifies the 
requirements of the Bank Secrecy Act for banking organizations 
that bank money services businesses. The guidance confirms that 
banking organizations have the flexibility to provide banking 
services to a wide range of money services businesses and still 
maintain compliance with the Bank Secrecy Act. The guidance 
also makes clear that not all money services businesses pose 
the same level of risk, and banks should tailor their due 
diligence accordingly. This guidance outlines the due diligence 
needed in fairly specific detail to better assist banks in 
assessing and minimizing that risk.
    But the banks are only part of the equation. Today we are 
also issuing guidance to the money services businesses industry 
that outlines the information and documentation that money 
services businesses should be prepared to provide to banks when 
opening or maintaining an account. Significantly, this guidance 
stresses that the failure to take such basic steps as 
registering with us or complying with State licensing 
requirements may result not only in some form of Government 
action, but the loss of access to a bank account as well.
    We remain committed to ensuring that those money services 
businesses that comply with the law have appropriate access to 
banking services and look forward to continuing to work with 
industry leaders to make compliance a very top priority.
    Mr. Chairman, the guidance we issue today is only a 
beginning. We are not so naive as to believe that this guidance 
will solve all issues or that it will repair all relationships 
between the money services businesses and banking 
organizations. We are, however, committed to continue to work 
with the Federal banking agencies, our State counterparts, and 
the IRS to do everything we can as responsible and responsive 
regulators. We still have a long way to go, sir, and we have a 
lot of work to do, but this is a significant step.
    There are two other important developments I would like to 
mention. We have recently executed an information sharing 
agreement with the IRS, as Kevin has told you just a moment 
ago. Today, we also have just signed an information sharing 
agreement with the State of New York Banking Department. These 
agreements mark important steps in our efforts at FinCEN to 
secure information sharing agreements with those regulators 
that examine for Bank Secrecy Act compliance. These agreements 
are modeled on our agreements with the Federal banking 
agencies. Not only do we benefit by learning more about what 
their examinations are finding, but we also have a better 
mechanism for providing support to their examination effort.
    I wanted to make special mention of Ms. Taylor and her 
staff, as well as John Ryan of the Conference of State Bank 
Supervisors, who were instrumental in helping us and the IRS 
develop model agreements for sharing information with the 
States. Our goal is to have an information-sharing agreement 
with all States that examine financial institutions for Bank 
Secrecy Act compliance.
    We understand that we must move with all the possible speed 
we can muster and that when we move, we have to get it right. 
September 11 has taught us that the information is now central 
to the security of the Nation, and the simple fact is that 
information is what the Bank Secrecy Act is all about. 
Information sharing and cooperation among regulators is key, 
but without a real partnership with the financial industry in 
which the Government shares real information, we will not 
succeed.
    The Bank Secrecy Act regulatory regime should be directed 
at safeguarding the financial industry from the threats posed 
by money laundering and illicit finance, and it should be 
directed at providing the Government with the right 
information; relevant, robust, and actionable information that 
would be highly useful to law enforcement and others.
    The best, if not, only way to achieve these goals is to 
work in a closer, more collaborative way with the financial 
industry. I am convinced that the vast majority of our 
financial industry members are committed to this partnership. 
Our goal is to do all we can to ensure that the Government 
lives up to our side of the bargain.
    Mr. Chairman, Members of the Committee, the importance of 
your personal and direct support of these efforts cannot be 
overstated. Your oversight will ensure that we meet the 
challenges that we are facing. I know how critical it is that 
we do so, and we hope you know how committed we are to meeting 
those challenges.
    Thank you very much.
    Chairman Shelby. Thank you, Mr. Fox.
    Ms. Taylor.

                  STATEMENT OF DIANA L. TAYLOR

             NEW YORK STATE SUPERINTENDENT OF BANKS

    Ms. Taylor. Thank you, Mr. Chairman and Members of the 
Committee, for inviting me back to continue this very important 
dialogue, and I particularly want to thank you for recognizing 
that State regulators are an important part of a solution to 
the issues we are confronting today.
    You are doing all of us a great service by holding these 
hearings, especially at a time when MSB's are having difficulty 
finding banks through which they can transact their businesses.
    We all know what the problems are. One of the goals of 
regulators of legal and compliance systems is to reduce the 
risk factors and vulnerabilities of our regulated industries as 
much as possible, while at the same time allowing legitimate 
businesses to be conducted. I want to spend these few minutes 
talking about the incredible progress we have made toward 
resolving some of these problems and to point out some of the 
challenges that still remain.
    At your hearing last September, we talked about the IRS and 
FinCEN working together with the States as bank and MSB 
regulators to coordinate examination and enforcement efforts 
and share BSA information and training resources. I am so 
pleased that, as you have heard, as a direct result of that 
hearing, that as of this morning, I have signed on behalf of 
New York memoranda of understanding with both FinCEN and the 
IRS, covering both bank and MSB examination information.
    The CSBS, its member States, FinCEN, the IRS, and the 
Federal banking regulatory agencies deserve great praise for 
doing an immense amount of work in a very short time, turning 
this idea of coordinated information sharing and action into an 
unprecedented reality. This is truly ground-breaking 
cooperation that will make a difference, particularly with 
regard to training and education.
    In my written testimony, I talk about needing resources to 
raise the standard. This is exactly what I meant. I am proud to 
have been part of it and I pledge to do my best to help 
convince all 50 States to sign onto the MOU's as well.
    Another huge step was announced today by FinCEN regarding 
their anxiously anticipated guidance about how banks should 
look at MSB's, who is responsible for doing what, delineating 
as clearly as possible the banks' role with regard to working 
with MSB's. We will do everything we can to make sure that all 
of our regulated entities understand this guidance as fully as 
possible. It may not be the U.S. Constitution or the Bill of 
Rights, but in some sectors of this economy it carries as much 
weight, as I am sure you will hear in the next panel.
    Of course there is still work to be done, but we have set 
ourselves on a very positive course. We should all be very 
proud.
    But I have two continuing concerns, which given our track 
record to date, I think we should be able to tackle. The first 
has to do with what many perceive as overzealous prosecution, 
which has been a major reason banks are rapidly distancing 
themselves from MSB's.
    It is clear that an understanding must be reached between 
U.S. prosecutors and financial services regulators as to where 
the jurisdictional line is drawn between them. It is my hope 
that the Department of Justice, with input from the regulators, 
can provide direction and consistency to the U.S. Attorneys in 
this regard.
    The second issue that I hope to see clarified in the near 
future has to do with the OCC's preemption of State licensing 
requirements, which triggers supervision and examination. Under 
the current OCC rules, operating subsidiaries of nationally 
chartered banks, including MSB's, may ignore any State 
licensing or other regulatory requirements.
    I think it is important under these circumstances that a 
means be crafted to establish national standards regarding 
these entities, along with a very clear understanding of who is 
responsible for what in this area.
    In closing, we have made a great start toward reaching our 
goal of a rational and comprehensive approach to difficulties 
and complexities surrounding the relationship between banks and 
MSB's and the regulatory and legal structure that necessarily 
frames the issue.
    The MOU's will help keep us on the same track. The guidance 
should serve to give comfort to the banks. Now if we can just 
crack the issue of setting national standards, we will not have 
so much further to go.
    Thank you again, Mr. Chairman, for allowing me to share the 
New York view of where we are, what the challenges are, and 
what we need to do about them. In holding this hearing you have 
performed a valuable service for us all.
    Thank you.
    Chairman Shelby. Thank you, Ms. Taylor.
    Mr. Brown, I will direct the first question to you. Today's 
Washington Post reports that half of Maryland's 120 money 
transmitters used by immigrants to physically carry cash across 
the border and operating without license was shut down by State 
regulators. Is the manner in which half of this State's 
particular MSB sector operating without a license reflective of 
the limited resources of the IRS to identify these entities?
    Mr. Brown. I think it certainly highlights the need for 
increased coordination between both the States, FinCEN and the 
Internal Revenue Service. The Memorandum of Understanding that 
was entered into this morning----
    Chairman Shelby. That help?
    Mr. Brown. --will have a dramatic impact. I mean we cannot 
touch them all by ourselves. Superintendent Taylor cannot touch 
them all by herself in New York State. Between us, we can avoid 
duplication of efforts, and really leverage our resources. And 
also, the other thing the Memorandum of Understanding allows us 
to do effectively is to emulate best practices. There are 
techniques that New York State is employing that we think would 
be of great benefit to us, that we are going to imitate and 
perform.
    Chairman Shelby. Mr. Brown, I understand that the IRS Small 
Business/Self-Employed Division, which you are in charge of, 
has an 80 percent no-finding rate when examining money services 
businesses and non-MSB, nonbank financial institutions like 
casinos. Could you explain for the Committee this morning the 
significance of that statistic. Does it mean, for example, that 
20 percent of the examined businesses are failing to comply 
with antimoney laundering and Bank Secrecy Act requirements? Is 
80 percent too high a number, indicating a potentially flawed 
examination process, or what is it?
    Mr. Brown. Well, it could be a mixture of many things. The 
first thing is that you would have to determine whether or not 
we are examining the right entities. You would like to hope 
that they are all compliant, but I do not think that our agents 
would tell you that is the case, that they are all 100 percent 
compliant.
    I think there is a gradation here.
    Chairman Shelby. But there are a lot of them, are there 
not?
    Mr. Brown. There are an awful lot of them. We estimate 
there are 200,000. Bill might be able to give you a more 
precise number, roughly 200,000 MSB's in this country. It is a 
tremendous number. It is a tremendous number to cover. We have 
to make sure we are making the examinations count, that we are 
examining the right groups, this will help. The coordination 
with the States is just extremely important here so we do not 
duplicate efforts.
    Chairman Shelby. Ms. Williams, embassy account, perhaps an 
analogy here. Do you think that the current spate of MSB 
account closures is analogous to the situation where embassy 
customers, whose accounts on average were not a huge profit 
maker, as we know, or a compliance risk, had no place to go 
immediately following the shock of the Riggs and the 
termination of its embassy business. But subsequently events 
quieted down and embassy business found a home somewhere. Or is 
the MSB problem a much deeper-rooted problem?
    Ms. Williams. Mr. Chairman, I think that the MSB problem is 
a complex problem that has certain parallels to the embassy 
banking situation.
    As I described in my opening statement, there are several 
factors that intersect. One is just the effort required of the 
bank in maintaining a certain type of account. Second is the 
existence of areas that may warrant clarification from 
regulators about the regulators' expectations of diligence and 
oversight and certain actions on the part of the bank. Those 
two intersect because if there is uncertainty about what the 
regulators' expectations are, the banks may perceive their 
burden or what they may think they need to do as being more 
than what the regulators' view is. The bank's assessment of 
what they need to do and the drain on their resources will be 
factored into their decision about whether they maintain the 
account.
    The third issue is, of course, whether there are reputation 
and compliance risks that are extraneous to what bank 
regulators do that can impact the banks if they maintain this 
type of account.
    Chairman Shelby. Ms. Taylor, it is my understanding that 
the Conference of State Bank Supervisors, along with FinCEN and 
IRS, we have just talked about, have completed the Memorandum 
of Understanding that Mr. Brown referenced, which you 
challenged the IRS to complete at last September's hearing. 
This MOU will facilitate, as Mr. Brown has said, the sharing of 
BSA related information among the States, Federal regulators, 
and enforcement agencies.
    Would you like to comment on the process by which the MOU 
was negotiated? Does the MOU represent a compromise that 
reflects agreement at the levels you envisioned, or does it 
come up short in any area? For example, is there a plan to 
coordinate exams of MSB's with the IRS for BSA compliance?
    Ms. Taylor. Yes. Thank you, Mr. Chairman. I am very happy 
with the process.
    Chairman Shelby. He raised that here, you will recall.
    Ms. Taylor. I do recall that, and thank you very much, and 
I think that it was in large part due to your comments in that 
area, that the impetus was given to all involved to be very 
cooperative in this. And I must say that I am extremely happy 
with the outcome and the process that has gone through. We were 
very much involved.
    The first thing that had to happen was for the Federal 
agencies to come to an agreement among themselves, which was no 
easy task. And then we were involved after that. The structure 
that we have come up with I think is a very good one. There is 
a basic agreement and then each State will craft its own side 
letter, which goes with the agreement, which they will be able 
to sign because obviously every State's requirements are 
different. Because every State has its own set of laws, what we 
are hoping to do over the next couple of months is to help 
those States craft agreements that will allow them to 
participate in this effort. But I am extremely happy with how 
it has come out, and we will see how it works.
    Chairman Shelby. Thank you.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. I have a statement 
I would like to ask unanimous consent to get in the record.
    Chairman Shelby. Without objection, it will be made part of 
the record.
    Senator Allard. And the first question is for Ms. Williams. 
In your testimony, you explained that the cost of opening and 
maintaining the money services businesses accounts are further 
compounded with a huge number of unregistered and unlicensed 
MSB's. Could you please elaborate on those difficulties that 
exist within the apparently uneven regulatory framework between 
the State and Federal laws requiring registration and 
licensing, and how do you think this might be alleviated?
    Ms. Williams. I think the challenge that banks face is the 
complex set of issues presented by their relationships with 
money services businesses. One aspect of the question of what 
is expected of banks when they enter into, open, and maintain 
an account relationship with a money services business is the 
registered or unregistered status of the money services 
business.
    One of the issues that the interagency guidance that is 
being issued today helps to clarify is the agencies' 
expectations as to what banks should do if they determine that 
they have a money services business customer that is not 
registered, and that is file a SAR.
    Senator Allard. SAR stands for what?
    Ms. Williams. Suspicious activity report, sir.
    Second, there is no automatic or absolute requirement to 
close that MSB account simply because the bank is filing a SAR 
because the MSB is unregistered.
    These are areas where I think there may have been lack of 
uniform, clear guidance coming from all of the banking agencies 
and FinCEN, and they are a very important part of the 
clarifications in the interagency guidance that we have put out 
today.
    Senator Allard. Would other members on the panel care to 
comment on that question and her response? Mr. Fox.
    Mr. Fox. Senator, if may--thank you. I think it is very 
important because, again, from our perspective, we have to 
stabilize this situation and ensure that money services 
businesses, as a very important financial sector in this 
country, have banking services. From my perspective, I think it 
is even more important because if money services businesses 
lose their banking relationships, in many respects, we lose a 
lot of transparency in that entire sector. If those industries 
go underground, if you will, or go to a point where we cannot 
see them, they pose significant danger in my view.
    And therefore, I think it is in all of our interest, not 
only economic interest but also certainly from our perspective 
of financial crime and terrorist financing interests, to ensure 
that money services businesses: Comply with the law, and 
particularly at its most basic level; and are afforded banking 
services and are brought into the transparent financial system, 
if you will, so that we can ensure appropriate transparency for 
this sector. The sector provides incredible services to a part 
of our country that desperately need those services, and I 
think it is very important that they are brought into that 
transparent, rationalized part of the sector.
    Senator Allard. While you have been speaking, you know, 
``money services business'' is really a broad term.
    Mr. Fox. It is.
    Senator Allard. Could you give us a number of examples of 
the type of businesses those might be?
    Mr. Fox. Sure. It can be currency dealers, people who 
exchange currencies, exchangers----
    Senator Allard. Such as?
    Mr. Fox. Thomas Cook. You see Thomas Cook at the airports. 
People who exchange currency or deal with currency, check 
cashiers, it can be everything from an actual large check 
casher in Manhattan to the local grocery store if the grocery 
store meets that particular threshold; issuers of travelers 
checks, money orders, or stored value products.
    Senator Allard. So let me get something straight here on 
grocery stores. If a business comes in and writes a check for 
over $10,000, does that inadvertently throw them into any kind 
of reporting posture?
    Mr. Fox. No, sir. I hope I get this right, it is 
essentially if you have individuals who come in with their 
payroll checks, for example, and cash them at a grocery store. 
So there is a $1,000 a day threshold per person that throws 
them into that milieu.
    Senator Allard. I just wanted to make sure that was clear.
    Mr. Fox. Yes, sir.
    Senator Allard. Give me some more examples.
    Mr. Fox. Sure. Sellers and redeemers of traveler's checks, 
money orders, or stored value products, the products that, you 
see like the American Express cards that you can now store 
value and then take it abroad and use almost like a credit 
card. But it is not a credit line, it is actually a stored 
value product. And then certainly one of the largest parts of 
the sector are money transmitters or remitters, people who wire 
monies from point to point, MoneyGram, whom you will hear from 
later today.
    Senator Allard. Can I get back to the credit card again?
    Mr. Fox. Certainly.
    Senator Allard. If this amount that is set aside is at the 
$10,000 threshold or more, how is that treated for reporting 
purposes? I mean you could go over and cash a number of--maybe 
it is $30,000, they cash two $15,000--or let us put maybe 6 or 
7 charges of $5,000 or less, but they would be under the 
$10,000 threshold. Does that trigger anything?
    Mr. Fox. Yes. It is not credit card companies, per se, sir. 
Senator, it is a product that actually looks like a credit 
card, maybe acts like a credit card, but contains value stored. 
In other words, I would come into American Express, hand them 
money, and they would store that money on the credit card.
    Senator Allard. I understand. It is a cash deal.
    Mr. Fox. It is like having cash but with the safety of----
    Senator Allard. Like a debit.
    Mr. Fox. Exactly, yes, sir, except you are not accessing an 
account. The value is in the card.
    Senator Allard. But you could take a debit card overseas.
    Mr. Fox. Yes, certainly you can.
    Senator Allard. And is it counted as a cash transaction 
over there, or would they have a debit number?
    Mr. Fox. Yes, it all depends----
    Senator Allard. And a PIN number and all that or not?
    Mr. Fox. It all depends on the regime----
    Senator Allard. What is available.
    Mr. Fox. Right. It all depends on the regime overseas.
    Senator Allard. My question being: Can you have a series of 
transactions that would occur independently and equal a 
transfer of $10,000, but it is not reported that way because 
they are smaller transactions?
    Mr. Fox. We call that structuring, sir.
    Senator Allard. And that does happen? Is that a problem?
    Mr. Fox. It is. It is an indication I think, not 
necessarily proof, but an indication that there may be 
structuring and we look at that very carefully. There is a 
currency transaction reporting requirement.
    Senator Allard. I see. That is my question.
    Mr. Fox. The threshold is $10,000 under the Bank Secrecy 
Act. Clearly, we have very strong rules about structuring 
transactions to avoid that reporting requirement. That is a 
Federal crime, and we believe it is an indicator of illicit 
activity, or can be.
    Senator Allard. So all of those smaller transactions get 
lumped together and it does raise a flag as far as you are 
concerned.
    Mr. Fox. Yes, sir.
    Senator Allard. Very good, continue.
    Mr. Fox. These are essentially the groups of people who are 
regulated as money services businesses under our regime, under 
the Bank Secrecy Act.
    So just to recap, you have currency dealers and exchangers, 
check cashers, issuers of traveler checks, money orders, or 
these stored value cards, sellers or redeemers of those 
products, and then money transmitters. And money transmitters 
and check cashers are the two largest.
    Senator Allard. Any other comments as far as my original 
question to Ms. Williams; the rest of the panel want to 
comment?
    Mr. Chairman, my time has expired.
    Chairman Shelby. Thank you.
    Are you saying that most of these nontraditional bank 
services serve a legitimate need; is that correct?
    Mr. Fox. Yes, sir.
    Chairman Shelby. And if they are driven underground they go 
for other forms of money and it generally costs more, and it 
would be hard to regulate; is that correct?
    Mr. Fox. That is my view, Mr. Chairman, yes.
    Chairman Shelby. Ms. Williams, could you at the 
Comptroller's Office, for example, as a regulator of national 
banks, let the banks know that you want them in business like 
this, you want them to be able to make legitimate loans to 
these operating companies, rather than let it dry up?
    Ms. Williams. Mr. Chairman, what we have reiterated in a 
variety of contexts, represented most recently by the 
interagency guidance that was issued today, is the importance 
of money services businesses in the economy, and what we expect 
banks to do, and what MSB's are expected to do in order to 
foster an environment where banks can have relationships with 
these types of businesses. MSB's are very important overall in 
the financial economy of this country.
    For completely separate and distinct reasons, we have also 
been trying to educate the banks that we supervise about 
opportunities to enhance the type of financial services that 
they provide to the underbanked and unbanked, to provide this 
type of service to a broader array of customers. It is a very 
important aspect of our financial system.
    Chairman Shelby. This system, nontraditional banking 
service, it will not go away. It is just a question of will it 
go underground, will the cost of the money go up if it is 
illegitimate money.
    Ms. Williams. Mr. Chairman, we agree with you completely. 
It is not going to go away.
    Chairman Shelby. And if it is underground money, 
illegitimate money, it is going to cost more generally, is it 
not?
    Ms. Williams. That tends to be the case.
    Chairman Shelby. That will be passed on to the people who 
can least afford it, the ones that use a nontraditional banking 
system; is that right, Mr. Brown?
    Mr. Brown. It is, and those organizations tend not to be 
insured or bonded, so you are placing the money at risk for the 
very people who cannot afford to have the money at risk.
    Chairman Shelby. How real is the threat here? Is it that 
real to drive them underground? If they cut off the banking 
legitimate money, that will drive them underground, will it 
not?
    Ms. Williams. I think the threat is real.
    Chairman Shelby. Mr. Fox.
    Mr. Fox. Absolutely, Mr. Chairman, absolutely.
    Chairman Shelby. You think you are going to be able to 
handle it?
    Mr. Fox. Well, sir, we sure are trying. I will tell you, I 
think that it is in many ways like turning an oil tanker in 
some respects, because financial institutions, banking 
organizations in particular, are not irrationally concerned 
about their reputation risk, the risk to their reputation and 
their regulatory risk. And I think there has been a lot of 
misperception about what risk is posed by this sector. There 
are clearly parts of the money services sector that are risky 
and that bear watching and that bear careful scrutiny by a 
banking institution and certainly by regulators.
    But I think the thing that we have to do and we have begun, 
there are really four things, Mr. Chairman. I think the first 
is guidance. We have to color in the gray, if you will, where 
there is some misperceptions, there are some misunderstandings 
about what is required.
    Chairman Shelby. Would the memorandum coming out today, 
will that deal with account openings, maintenance, and 
guidance?
    Mr. Fox. Yes, sir. I think the good part about this 
guidance, the thing that we are proud of--and again, my 
compliments to all around--is that it is specific and it does 
talk about a number of indicators, so it should give banking 
organizations some comfort.
    Chairman Shelby. Ms. Williams, a cursory review of the 
guidance reveals a type of ``hold harmless'' clause for banks 
that manage risks associated with all accounts. It is my 
understanding that it instructs that banking organizations will 
not be held responsible for their customers' compliance with 
the Bank Secrecy Act and other applicable Federal and State 
laws and regulations.
    At what point, if any, does a bank become responsible for 
the acts of the customers' compliance with the Bank Secrecy Act 
if it does at all?
    Ms. Williams. Mr. Chairman, I think this is one of the 
fundamental points here.
    Chairman Shelby. Central to all of this, is it not?
    Ms. Williams. It is very fundamental. It is fundamental to 
some of the concerns that the banking organizations have, and 
that is that banks are not designed to be the policemen of the 
conduct of their customers.
    Chairman Shelby. If you put that burden on them, you are 
putting a heck of a burden on the banking system period, are 
you not?
    Ms. Williams. That is an enormous burden; it is an enormous 
risk; and it is a substantial deterrent. If there is any 
uncertainty as to our expectations there, it is a substantial 
deterrent to banking institutions' willingness to take on these 
relationships.
    Chairman Shelby. Mr. Fox, when you last testified before 
us, you told the Banking Committee that FinCEN was 
recommissioning the Coopers & Lybrand study to get a better 
sense of the size, composition, and nature of the industry, as 
well as the potential for growth in the industry's component 
segments. As far as we know the study is still in progress. Is 
FinCEN still in the learning curve there?
    Mr. Fox. We are, Mr. Chairman. But I think we have to do 
some other things beyond studying.
    Chairman Shelby. You have to do something.
    Mr. Fox. Yes. The Coopers & Lybrand study will help. It is 
commissioned and it is in progress, and it will be helpful when 
it is finished.
    Chairman Shelby. You cannot study it forever though, can 
you?
    Mr. Fox. No, you cannot, sir. We do have registration 
information that we receive, and we should be reviewing that--I 
mean that registration information is given to us for a reason 
and it can provide us with information so that we can begin to 
assess what this industry is really all about. We can assess 
the risks associated with that industry, and then working with 
Kevin and his people over at the IRS, and actually pinpoint 
where we should be directing our efforts on both compliance and 
law enforcement. I mean we should be helping our law 
enforcement colleagues with this effort as well.
    So we are embarking on, trying to find out how we can look 
at the registration requirement, make sure we are getting what 
we need there, and if we are not, we will engage in rulemaking 
and get it. We are going to take that information and actually 
get busy with it, that and other information and start to make 
a difference here I think.
    Chairman Shelby. The percentage would be what I will just 
be using here. If 99 percent, 99 point something percent of all 
the transactions in the nonbank system, if they were, 
``legitimate''--I do not know if that is right, that figure 
might be too high, I do not know. It might not. Let us say it 
is 99 percent, because there are billions and billions of 
dollars moving. You do not want to kill the industry off 
because the industry would be deemed legitimate for a good 
purpose for people who generally do not have bank accounts. Is 
that correct, Mr. Brown?
    Mr. Brown. Yes, it is. That is exactly correct.
    Chairman Shelby. Will the Memorandum of Understanding, the 
guidance that you are putting up, will that make anyone feel 
more confident about keeping accounts open and so forth?
    Mr. Brown. We certainly hope so, Mr. Chairman, and if it 
does not, we will get busy and do what we need to get it done. 
We certainly hope that will be the case.
    Chairman Shelby. Ms. Taylor, in your testimony you say that 
you strongly believe that if MSB's are in compliance with BSA 
and AML, as interpreted by FinCEN, that this should be 
sufficient compliance standard for the banks, the regulators, 
and criminal law enforcement authorities. How do we avoid the 
Riggs problem where a financial institution fails to report and 
the regulator fails to detect or take sufficient examination 
and enforcement action upon first discovering compliance 
problems?
    Ms. Taylor. I am very glad you brought that up, Mr. 
Chairman. One of the things that I wanted to say in addition to 
the discussion which has taken place here about the banks is 
that----
    Chairman Shelby. In other words, what oversight is there of 
your department examiners in New York?
    Ms. Taylor. The other side of this equation is the MSB's 
themselves, and what kind of oversight we have of them, which 
is why it is so important that not only they be registered to 
do business with FinCEN and OFAC, but also licensed by the 
States. And we are making our examination and supervision 
procedures even more rigorous.
    For instance, when a potential licensee comes to us to ask 
for a license to do business in the State, we require several 
things of them. First, we require that they have policies and 
procedures in place, and internal controls designed to ensure 
compliance with BSA and AML requirements. Second, they actually 
have a compliance officer who is competent in this area to 
ensure the day-to-day compliance. Third, we require education 
and/or training programs of the appropriate personnel. And we 
also, as time goes on, require an independent review to monitor 
and maintain an adequate program. And that is for licensing.
    After they are licensed, this triggers our examination 
procedures, and we have an acronym that we use which is FILMS, 
and we go through various components of that, and we look at 
them every year or so, each one, to make sure that they are 
complying with all of their requirements. We are hoping that 
with those requirements and with our examination we will be 
able to catch any failures or systemic failures within that 
institution, and punish the perpetrators accordingly.
    Chairman Shelby. Ms. Williams, do you have a comment?
    Ms. Williams. I was going to jump in if you had not asked 
me to.
    One thing I noted in my opening statement is that we are 
absolutely committed to doing a good job with BSA examination 
and, where necessary, enforcement, and to improving what we do 
where it needs to be improved. We have put in place a number of 
new measures, and there are new systems within the OCC that are 
coming on stream that will help us to monitor emerging issues 
in this area throughout the national banking system and to 
monitor our follow-up on those issues to make sure that it is 
timely. They will also help us to risk assess the factors 
associated with different institutions to make sure that we are 
able to focus our resources quickly on those areas and those 
institutions that present the highest risk so that we can 
follow up appropriately and promptly.
    Chairman Shelby. Mr. Brown, your division of Internal 
Revenue Service is responsible for enforcing BSA compliance 
with respect to the estimated 160,000 money services businesses 
in the United States. That is a lot of people and a lot of 
firms. Despite this responsibility, it is my understanding that 
the IRS, Internal Revenue Service, has only about 325 people 
assigned to this mission with another 60 or so scheduled to be 
added. Even with these additional examiners, it is highly 
questionable whether IRS will have the resources--and that is 
important that you have the resources--to do your job, to 
ensure that the MSB compliance--you know, there is compliance 
there. Nobody expects you to say anything here today in 
contravention of OMB dictates. I know this. I am also an 
appropriator, as you know.
    [Laughter.]
    But it would be very helpful for the Committee here today, 
and perhaps to the Appropriations Committee, to have some sense 
of the gap between your requirements, which are vast, your 
responsibilities, and your resources. Do you feel comfortable 
to talk about that a little bit?
    Mr. Brown. Sure. I certainly feel a little more comfortable 
about our reach, given the Memorandum of Understanding we have 
entered into with the States. I mean that certainly leverages 
the resources that are available nationwide.
    Chairman Shelby. The first thing we can do is put the 
mandate on you, responsibility, and provide no resources.
    Mr. Brown. No, it is true. I do not think there is anyone 
in Washington who would tell you they would not like more 
resources, but I have been around long enough to know that 
bodies are not the answer to everything. There are a number of 
things we can do internally. We need to select our work in a 
better organized fashion to make sure that the examinations 
count. We have some new audit techniques, one that was 
selected, one that was recommended to us by FinCEN about doing 
centralized examinations that we think is going to prove very 
beneficial. The sharing of the information, as I mentioned, 
with the States should help quite a bit.
    There is one area of concern. I mean we are talking--and 
Bill can address this further--but insurance companies and 
dealers in precious metals will soon fall under this rubric, 
and there are roughly 1,500 insurance companies and 40,000 
jewelers who will fall under the auspices of the Bank Secrecy 
Act reporting requirements soon, and it is an area of concern 
for me and for those at the IRS.
    Chairman Shelby. It is also of cost, is it not, of cost of 
compliance for the banks, with all these businesses that we 
need to weigh as we go through this, do we not?
    Mr. Brown. There are costs on both sides. There are costs 
in the industry and there are costs in the Government.
    Chairman Shelby. It is.
    Mr. Fox, I have a couple of questions for you. As you are 
very aware, this Committee has been extremely concerned about 
preservation of appropriate levels of privacy with respect to 
personal information. The ChoicePoint case, in fact, was the 
subject of a recent Committee hearing. It is because of this 
concern that I feel compelled to raise this issue of the recent 
GAO report describing the vulnerability of the Bank Secrecy Act 
data and personal tax information, Mr. Brown, with IRS, to 
unwarranted intrusion by thousands of employees without a 
legitimate need to know. The information susceptible to abuse 
includes Social Security and driver's license numbers.
    Could you address, Mr. Fox, this concern, including in your 
comments the status of the BSA Direct Program which I 
understand should help alleviate the problem hopefully?
    Mr. Brown, this is also an IRS problem and I would like for 
you to comment on it after Mr. Fox.
    Mr. Fox. I will tell you, Mr. Chairman, we too are 
concerned, as I know the IRS is concerned about--and Mr. Brown 
will address that--the GAO's findings. I will tell you that we 
are working very closely with----
    Chairman Shelby. People are concerned.
    Mr. Fox. No, no, no. Yes, sir. And we are working very 
closely with the IRS to ensure that this data is kept safely 
and securely.
    We are pleased that the BSA Direct Project is on track for 
delivery this fall and that it will alleviate the problem 
eventually. I think that it is a very important project for 
this Agency. As you know, sir, you have personally supported 
that project, and we would not be where we are today if not for 
your personal support both in this Committee and in the 
Appropriations Committee.
    I will tell you that I have seen the first iteration of 
this system, and I am impressed with it. It is going to get a 
lot better between now and this fall, and eventually the 
responsibility for collecting, housing, and disseminating Bank 
Secrecy Act data will lie with the Financial Crimes Enforcement 
Network, sir. I think that is where it belongs because then you 
and the American people can hold us accountable for it in a way 
that we should be held accountable for it. It is very sensitive 
information, it is very important, and we are working very 
closely with the IRS on this transition from Detroit to BSA 
Direct. So it is going pretty well right now, and I think it 
will resolve the issue at least as far as BSA information goes.
    Chairman Shelby. Mr. Fox, Section 6302 of the Intelligence 
Reform and Terrorism Prevention Act of 2004 directs the 
establishment of a system for collecting data on cross-border 
transfers. Some of us, while certainly sympathetic with 
Treasury's requirement for information on such transactions 
remains skeptical of the plan's feasibility, the determination 
of which is a prerequisite for the plan's implementation.
    There are already complaints out there that you cannot 
process what you have. How will you ensure that you are not the 
recipient of a volume of information of dubious value, while 
the feasibility study is only in its initial stages, could you 
provide the Committee some sense what you have learned to date 
and where you are going?
    Mr. Fox. Thank you, Mr. Chairman. First of all, if you do 
not mind, I would take issue with those that say that we cannot 
process what we do have. I think we are doing that pretty well 
and----
    Chairman Shelby. You should answer that. This is a proper 
forum.
    Mr. Fox. I think we do that pretty well, and I think we are 
going to get much better at that with BSA Direct, so I think 
that is an exciting part about being at the Financial Crimes 
Enforcement Network now.
    Sir, I too share your skepticism about the feasibility of 
the cross-border wire transfer issue, and that is exactly why 
we have formed a group at FinCEN to study the feasibility of 
actually doing this. We will soon involve--in fact, we have 
already reached out to the Federal Reserve Board, which has a 
very big stake in these issues, to bring them into that working 
group, and we will bring other members of the Government in as 
well. We are going to brief the industry on where we are, on 
May 18 at the Bank Secrecy Act Advisory Group, and we will 
eventually include, or it is our intent to include, in that 
working group people with other interests such as privacy 
interests because I think we owe that in our feasibility report 
to the Secretary.
    It is more than just can we build the box? We can build the 
box, sir, but it is really about, is this a feasible way to do 
it?
    Chairman Shelby. It has to be a good box though, does it 
not?
    Mr. Fox. It does, sir, it does, but it can be built. I am 
certain of that.
    If I could leave you with two things. First of all, we know 
this data is incredibly valuable. My Agency just finished, some 
might call it a tome, on fund transfers for law enforcement, to 
train them in how to exploit and use this data to their benefit 
and mutual end. I think your staffs may have it. It is not a 
public document.
    We understand acutely how valuable this information is, 
particularly on issues relating to illicit finance and 
terrorist financing. The September 11 Commission found that, I 
believe, and certainly our counterparts in Canada and 
Australia, who received this information already, will verify 
that. Frankly, the wire information is every bit as valuable as 
suspicious activity reporting.
    That being said, we recognize that there are huge 
logistical issues. The United States, when you compare the 
United States banking system with Canada or with Australia, it 
is not even a comparison. You are talking about apples and 
oranges really. So we understand that there are huge logistical 
issues with this.
    We also are acutely aware of the privacy concerns and the 
policy issues that revolve around reporting of this data, 
because this would be the reporting of data that is not 
necessarily suspicious. It is actually more akin to our 
currency transaction reporting that currently exists. You are 
reporting data if it meets a certain criteria, assuming we get 
to that point where we would require it.
    What I want to leave you with, sir, is that we are taking 
this feasibility study very seriously and intend to issue a 
first class report to the Secretary, and I am absolutely 
certain the Secretary will be working with this Committee, as 
will we. We are very pleased to work with this Committee and 
other Members of Congress to deal with these issues. I think 
they are incredibly difficult issues, but I also think it is 
very important because the information that is in those wires, 
those cross-border wires in particular, sir, can really make a 
difference, and that is why I think it is important to do this 
and do it well.
    My deadline--not anyone else's--to our group, is to try to 
have this thing wrapped up by the end of the year. I think if 
we are going to meet the requirements of the statute, that is 
what we need to do. Then the Secretary can assess hopefully 
from that report the feasibility, and we can report back to the 
Congress. I am absolutely certain we will be working with your 
staffs and with you, sir, on these issues. They are incredibly 
big issues and I think important ones to fully vet.
    Chairman Shelby. Thank you, Mr. Fox.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I want to welcome the panel and I apologize. I was not able 
to be here at the outset, but there are two other hearings I 
have had to pay attention to this morning.
    I want to ask first a somewhat related matter, but it does 
not go directly to what you deal with. We held a hearing here 
on remittances. Dr. Manuel Orozco, a leading researcher on 
remittances at the Inter-American dialogue, told the Committee 
that remittances from the United States to Latin America had 
grown substantially, at that point to an estimated $20 billion. 
That is in 2001. The estimates now are $30 billion or in excess 
of $30 billion. Back when the figure was $20 billion he 
estimated between 15 to 20 percent, $3 to $4 billion of the $20 
billion was being lost in exchange rate fees and other 
transaction costs which are often hidden from the sender of the 
remittances, which would lead one to suspect at least that the 
abusive practices are taking place in the remittance market. We 
know that many of the people sending remittances tend to be 
relatively low-wage earners with modest formal education, or 
little experience in dealing with complex financial matters. 
And of course, the remittances are not covered by Federal 
consumer protection laws, including the disclosure of fees.
    In the course of addressing this issue--this is not 
directly your jurisdiction--but have you encountered this 
situation? I would like to hear from each of you if you have a 
take on this situation.
    Mr. Fox. Senator, I can only tell you that I know 
anecdotally that remittance systems do, or at least on 
occasion, have been--it has been alleged that remittance 
systems have charged on occasion exorbitant fees on the back-
end depending on clients and that thing. I am really not an 
expert in it. I can only tell you that anecdotally we have 
heard that from time to time.
    Ms. Taylor. I would like to address that, Mr. Senator, 
thank you. One of the things that we do in New York State is 
time and time again impress upon people or try to impress upon 
people the importance of using a licensed money transmitter as 
opposed to an unlicensed money transmitter. From licensed 
transmitters we require various disclosures. We require them to 
post the exchange rates for the countries they are transmitting 
money to, and we require them to disclose the fees that they 
are charging. I think a lot of these abuses happen in the 
unlicensed sector, but in the licensed sector we require these 
disclosures and we examine the companies to make sure that the 
disclosures are being followed. And then it is a competitive 
market. People can go from transmitter to transmitter if they 
are so inclined, to shop around and find the best rate. But 
anecdotally, we have also heard those stories.
    Ms. Williams. Senator, I do not claim to be an expert on 
remittances, but at the OCC we have looked at this area. We 
have a study on remittances that we did just a few months ago. 
One of the things that the study did surface is that the entry 
of banks into the remittance business seems to be viewed as a 
factor which is bringing down the costs overall, reducing the 
fees in connection with remittances. There are other regulatory 
issues from the bank perspective that are present in connection 
with banks being involved in remittance businesses. We 
highlight some of the issues in connection with having 
customers involved in that line of business in the study that 
we did.
    We also note that in connection with banks' obligations 
under the Community Reinvestment Act, where a bank itself may 
be providing low-cost services including remittance services in 
a community, that is something that would be favorably 
considered for CRA purposes. So there are a number of issues 
that the remittance business presents for banks either engaged 
in it directly or servicing those businesses that we do touch 
on in the study that we did recently.
    Senator Sarbanes. Well, the Chairman and I have requested 
the GAO to study this very issue, and we expect the report to 
come in sometime in the next few months, but I think it is a 
very important issue, and there is a considerable concern that 
people are really being skimmed off pretty heavily in terms of 
these remittances. And I think it is an issue we need to 
address. That is not today's issue.
    Today's Washington Post describes unlicensed money 
remitters in Maryland, and the steps taken by State regulators 
to try to address them. FinCEN constantly tell us that it has 
this large collection or multi-use database. Do you try to 
project, to identify unlicensed remitters? I mean if the States 
have a licensing requirement, why would it not behoove us to 
try to move out of the business unlicensed remitters at least 
as an important beginning step? That is not to suggest that 
licensed remitters are not engaged in some bad practices, but 
first of all, the unlicensed remitters are not meeting the 
standards that the States have set, which are often designed to 
provide important protections to their customers, and 
protections that may also bear on money laundering questions.
    Mr. Fox.
    Mr. Fox. Yes, Senator, I could not agree more. And we will 
embark on that. We have today entered into a Memorandum of 
Understanding with the New York Banking Superintendent and the 
New York Banking Agency.
    Senator Sarbanes. Yes, we are very pleased to hear that. In 
fact, had you not done so, I would have expected that to be a 
major focus.
    [Laughter.]
    That is always the benefit of hearings.
    [Laughter.]
    Mr. Fox. It is amazing how that works.
    I will tell you, sir, it is our intent to do that with 
every State that will sign on with us. We think that this will 
have a very good effect--I could not agree with you more. I 
think it is not just the State licensing requirement, Senator, 
it is the Federal registration requirement as well. We have to 
make sure that money services businesses are meeting their very 
most basic requirements under the law. That is to register with 
the Federal Government if they are required to do so, and then 
to be licensed under a State regime if they are required to do 
so.
    It seems to me that we need to study that and we need to 
work with our counterparts in the States collaboratively to 
ensure that at least those sectors are meeting that very basic 
requirement.
    I would love to tell you, sir, that we have already done 
that. We have not. But I can tell you that it is the plan. I 
mean it is part of what we are trying to do with the States in 
leveraging their abilities to get a handle on this industry.
    Senator Sarbanes. Ms. Taylor.
    Ms. Taylor. Thank Mr. Senator. First you have to find the 
unlicensed money transmitters and check cashers, for that 
matter, and in New York, as a high-intensity financial crimes 
area designation, we have formed a very close partnership with 
law enforcement, local law enforcement including the NYPD and 
the DA and the FBI, Secret Service, a lot of other law 
enforcement agencies. One of the big things that we are 
concentrating on is tracking down unlicensed money 
transmitters. As a matter of fact, I think it was 3 weeks ago 
at this point, we closed one down. It was called Vietnam 
Service, Inc. It was transferring millions of dollars a year 
from the New York City area to Vietnam. And we found them, and 
we closed them down. So that was an example of how we can work 
together with law enforcement.
    But you have to find them first.
    Senator Sarbanes. The New York State Banking Department I 
know has been very active in this area. What would you suggest 
to the Committee are other important steps that could be taken 
that have not yet been taken to get at this problem? I know if 
I had asked that question 24, 48 hours ago, there would have 
been this Memorandum of Understanding, but at least the 
memorandum is behind. We will see how it is carried out and 
implemented. But what other measures?
    Ms. Taylor. I think that keeping the pressure on all of us 
to continue the good work that we have been doing with these 
memoranda, and carrying them through to fruition is something 
that is very valuable.
    Also in my oral remarks I mentioned two areas. One, which 
is the perceived over-zealousness in some cases, in the law 
enforcement area with U.S. Attorneys and putting pressure on 
the Justice Department to create some uniform way of dealing 
with that across the country would be one thing I think we need 
to reach an understanding between the U.S. prosecutors and the 
financial services regulators as to where the lines of 
jurisdiction are what is considered to be criminal behavior and 
what should be dealt with in a regulatory way.
    The second issue I brought up is that I hope, in light of 
the OCC's preemption of State licensing requirements for 
operating subsidiaries of national banks, that there is some 
uniform national level of regulation for these industries.
    Ms. Williams. Senator, could I just say something? That is 
the second mention of the OCC preemption position in this 
context this morning. That is not an issue here. It has not 
been an issue. It will not be an issue.
    Ms. Taylor. Anecdotally, I know of several money 
transmitters who are proactively trying to become operating 
subsidiaries of nationally chartered banks, and the reason 
given is that they will not need a State license under those 
circumstances.
    Ms. Williams. They should not look to the national banking 
system as a safe haven.
    Senator Sarbanes. Well, we are pleased to hear that, 
although the OCC has created a lot of problems on the 
preemption issue. We just had a decision in Maryland in the 
Federal Court with respect to prepayment penalties, and of 
course the OCC has taken a position that those are preempted. I 
am in very sharp disagreement with you on that. I think it is a 
departure. The ruling you made is in departure from past 
practice, and it cripples the States from providing consumer 
protections in an area which does not substantially impede the 
operations of the national bank. But the OCC is--at least you 
are not extending it into this area, but you have created a lot 
of problems in other areas, and significantly diminished the 
consumer protections.
    Mr. Chairman, I see the red light is on. I have just one 
other question I want to put to Mr. Fox if I may?
    Chairman Shelby. You go right ahead.
    Senator Sarbanes. It has been 3\1/2\ years since we enacted 
the USA PATRIOT Act with a title dealing with the money 
laundering issue. Section 312, which dealt with correspondent 
accounts, was a major part of Title 3. The full implementing 
regulations have not yet been issued, as I understand it.
    Mr. Fox. That is correct, Senator.
    Senator Sarbanes. And you are the administrator of the Bank 
Security Act. When will these regulations be issued?
    Three-and-a-half years seems like a long time.
    Mr. Fox. It is a long time.
    Senator Sarbanes. Yes, it is. It is almost two-thirds of a 
Senate term.
    [Laughter.]
    Just to use a benchmark.
    Chairman Shelby. It is.
    Mr. Fox. It is a long time. The matter is under significant 
policy discussion at the Department of the Treasury. I can tell 
you it is my view that we are close, and it is our hope that 
those regulations will be issued very soon. I think they need 
to be issued. We need to implement that statute fully, and we 
are working hard to make sure that we get it done. But there is 
no excuse, Senator, it has been a long time, I agree.
    Senator Sarbanes. Does the Chairman need to schedule 
another hearing? I mean scheduling the hearing seems to have 
gotten action on the Memorandum of Understanding.
    Chairman Shelby. We will talk about it, Senator.
    [Laughter.]
    Senator Sarbanes. Do we need to do that?
    Chairman Shelby. We will, absolutely, the Members.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman.
    To our witnesses, thanks very much for joining us today. I 
have a couple of questions I would like to ask, and it may have 
been asked but I am just going to ask it again. Forgive me if 
it is repetitive. Do you feel that you need any additional 
authority to regulate the money services businesses to ensure 
that it is used for its correct purposes? I do not care who 
starts off with this, but I would like to hear from all of you.
    Ms. Williams. Senator, speaking about regulation of the 
banking industry, I think that we have sufficient statutory and 
regulatory tools.
    Senator Carper. Okay. Ms. Taylor.
    Ms. Taylor. In New York State, I think we also have 
sufficient statutory and regulatory tools at our disposal.
    Senator Carper. How about Mr. Fox?
    Mr. Fox. Senator, thank you. I agree. I think that the 
tools are there. You have given us the tools. We need to 
implement them fully and make sure they are the right ones, but 
I think they are there.
    Senator Carper. I cannot see your last name. What is your 
last name? Mr. Brown.
    Mr. Brown. I agree as well, Senator.
    Senator Carper. All right, thank you.
    A follow up question. Do you feel that you need additional 
resources from Congress or from some other source in order to 
carry out your mission?
    Ms. Williams. I think that we have sufficient resources to 
do the job that we need to do.
    Ms. Taylor. We always feel that we need additional 
resources. That is a State issue.
    [Laughter.]
    Senator Carper. But there is not much we can do about that, 
is there?
    Ms. Taylor. I think that from the Federal level, one of the 
things that has happened which is extremely helpful, is that we 
have been given access to examination and training materials by 
our sister agencies at the Federal level, for which we thank 
you very much.
    Senator Carper. Are there other things we can be doing? 
That is a good example.
    Ms. Taylor. I think that is a very good example, and that 
is I think how we can be helped the most. It is the most useful 
help that we could get.
    Senator Carper. Mr Fox.
    Mr. Fox. Senator, thank you again. Yes, you can always use 
more resources. What we are really focused on though is frankly 
sometimes--I think Commissioner Brown said it best earlier--you 
may not have been here--is that often times bodies are not the 
answer. I think the important thing is really figuring out what 
we can do with the bodies that we have in making sure that we 
have those bodies working on the real issues of the day. So 
that is what we are very much focused on, but thank you for the 
question.
    Senator Carper. Mr. Brown, did you really say that?
    [Laughter.]
    Mr. Brown. I did say that. To be fair, we are adding 28 
percent in terms of examiners over the course of the next year. 
We are going to augment----
    Senator Carper. I am sorry. Say that again.
    Mr. Brown. We are going to augment our front line examining 
workforce----
    Senator Carper. I heard 28 percent I thought. Say your 
whole sentence over.
    Mr. Brown. Yes. We are going to add 28 percent more 
examiners over the course of the next year, so I am concerned 
about the resource commitment here, but I echo Bill's remarks 
in that we also have an obligation to the taxpaying public and 
to the Congress to make sure we are using those resources 
wisely, to make sure we are examining the right institutions, 
to make sure that we are looking for the right things, to try 
different techniques, to make sure we are not duplicating 
efforts with the States. If Superintendent Taylor has touched 
someone in New York State, that should suffice. We do not need 
to have redundancy there. I think there are a lot of things we 
can do short of just adding bodies to this program to enhance 
it.
    Senator Carper. Let me come back to you, Mr. Fox, if I 
could. I understand that FinCEN held a public hearing. My guess 
is you have a lot of them. But one to discuss the money 
services business. And if you have already shared some insights 
from that, I apologize. I just missed that. But if you could 
just share with us some of the concerns that might have been 
raised at that meeting, and any ideas that you all may have in 
response to the concerns that were raised.
    Mr. Fox. Certainly, Senator. Actually, we do not hold that 
many public hearings, and I think this one was such a success 
we might change that orientation. I think public hearings are 
important. It is amazing what one learns in those fora.
    I will tell you that from the perspective of money services 
businesses what we heard was very clear, that they were losing 
banking account relationships at an alarming rate, and that 
causes us great concerns, not only because that sector being 
unbanked causes pinches, if you will. The money services sector 
is a very important sector for a large portion of our 
population, often the people who are unbanked, who do not have 
banking accounts. From our perspective at FinCEN, it is 
incredibly important that those money services businesses 
maintain accounts because we want them to be in the transparent 
financial system. The worst thing that can happen, I think, is 
to see those businesses lose that transparency and go 
underground.
    So we heard that clearly from the money services 
businesses.
    From the banking organizations, we heard a frustration and 
a concern about their reputation risk and regulatory risk for 
banking this sector. I think that concern is based in large 
measure on some misperceptions about the sector, which we 
recognize. If we took one thing from that hearing, the thing 
that we knew, we had to do it very quickly, is to go out with 
joint guidance to both sectors and color in the gray, if you 
will, to make sure that people understand better what actually 
is required.
    We believe that if banking organizations and the money 
services sector better understand what is required under the 
Bank Secrecy Act, that this will calm the water.
    And we have announced that guidance today, both with our 
colleagues in the Federal banking agencies, and then we, 
FinCEN, are issuing it to the money services sector. So we hope 
that this effort will calm the waters and resolve at least the 
majority of this problem. If it does not, sir, we will get busy 
and we will work until it does.
    Senator Carper. All right. Anybody else have anything else 
you want to add before I kick it back to the Chairman?
    Mr. Chairman, thanks so much. And thanks to all of you.
    Chairman Shelby. Thank you.
    I thank all of you on the first panel. I know it has been 
long, but we appreciate your participation. Thank you very 
much.
    Our second panel, Mr. John Byrne, Director, Center for 
Regulatory Compliance, American Bankers Association; Mr. Gerald 
Goldman, General Counsel, Financial Service Centers of America, 
Inc.; Mr. Dan O'Malley, a Vice President for the Americas, 
MoneyGram International; and Mr. David Landsman, Executive 
Director of the National Money Transmitters Association.
    Mr. Byrne, we will start with you, but all of your written 
testimony will be made part of the record. We are going to have 
a vote on the floor in a few minutes, but we can finish the 
panel and then have a break and come back for questions. Your 
written testimony will be made part of the record in its 
entirety, all of you, so sum up quickly what you want to say.

                   STATEMENT OF JOHN J. BYRNE

           DIRECTOR, CENTER FOR REGULATORY COMPLIANCE

                  AMERICAN BANKERS ASSOCIATION

    Mr. Byrne. Thank you, Mr. Chairman and Members of the 
Committee. ABA appreciates this opportunity to discuss how the 
financial industry is addressing compliance with the USA 
PATRIOT Act, as well as all the laws covering antimoney 
laundering.
    At this Committee's request we will focus specifically on 
how these challenges have impacted the banking industry's 
relationships with money services businesses. We offer the 
following three observations and recommendations.
    One, banks have been existing relationships with MSB's due 
to the severe lack of guidance as to what constitutes an 
acceptable due diligence program. Immediate direction is 
essential. Today's announcement by FinCEN and the Federal 
banking agencies will greatly assists banks in making 
determination on obtaining and maintaining business 
relationships. I would also say, Mr. Chairman, we should avoid 
the urge to be skeptical and really commend the agencies for 
working so quickly after the March 8 meeting to come up with 
this guidance, an interagency guidance, which again, we believe 
will be vastly helpful in determining what we need to do with 
MSB's to continue those relationships.
    Two, the lack of direction in the MSB area is emblematic of 
the overall problem with Bank Secrecy Act oversight, the 
labeling of an entity as ``high risk'' without accompanying 
guidance on how to mitigate that risk, and more importantly, 
second-guessing by examiners.
    And three, until the financial sector receives assistance 
in the form of, one, guidance, two, clear examples of what 
constitutes suspicious activity, and three, ensuring that 
appropriate deference is given to bankers that decline to file 
suspicious reports, the volume of SAR's will continue to 
skyrocket.
    As indicated in the letter for invitation for today's 
hearing, in dealing with MSB's there is a need to have, ``a 
consistent and equal policy.'' Again, today's interpretive 
guidance is a welcome response to that charge. The industry 
certainly understands and appreciates the need to analyze the 
levels of risk involved with maintaining MSB relationships. The 
problem, however, is how much analysis is sufficient? At times 
banks will appropriately exit relationships due to the risks 
inherent with a particular MSB. At other times, banks want to 
continue these valued relationships. We know the importance of 
providing all segments of society with banking services. For 
some, remittances are an essential financial product and MSB's 
frequently provide that service.
    If the environment does not change these important services 
will continue to be severely hampered by regulatory excess. 
Again, we wrote this statement last week. We really appreciate 
today's statement because I think today's interagency guidance 
will really go a long way toward helping.
    I just want to make two quick points. The one reason to 
remedy this problem I think can be summed up--which is in my 
written statement--with a community banker, who on March 8 said 
the following: ``One of the common types of small businesses in 
our community is the small grocery store or convenience store. 
These are the businesses that often serve the immigrant and 
less advantaged community. These businesses are the connecting 
point for many in our society to the economic system. They are 
legitimate businesses serving a genuine need. Under the current 
regulatory scheme, we can no longer serve them.''
    Mr. Chairman, in the interest of time, let me make one 
final point. The agencies will also be issuing at the end of 
June interagency procedures on examining banks for Bank Secrecy 
Act compliance. We believe that will go, again, a tremendous 
long way toward giving us some direction, some road map as to 
what is considered adequate compliance.
    Today, we do not have that. Today, we have problems in the 
field where examiners unfortunately are not getting the correct 
interpretations from Washington, not because Washington has not 
been giving them, by the way, because for some reason they feel 
a need to find minor problems. They feel a need to tell bankers 
to eliminate accounts. They tell bankers that they are going to 
cite them for failure to file suspicious reports. This June 
document will be like this MSB guidance, it will be 
tremendously helpful.
    What we would ask the Committee though is to make sure that 
the document gets rolled out around the country, that there are 
regional meetings with the examiners and the bankers so that we 
can ask the appropriate questions as to what is between the 
lines of the document. If we do that, I think you will get less 
and less complaints from the industry about exam problems.
    Finally, Mr. Chairman, we commend the Treasury Department, 
the banking agencies, and FinCEN for their recent efforts to 
ensure a workable and efficient process. ABA will continue our 
support for these efforts.
    Thank you. We would be happy to answer any questions.
    Chairman Shelby. Mr. Goldman.

         STATEMENT OF GERALD GOLDMAN, GENERAL COUNSEL,

           FINANCIAL SERVICE CENTERS OF AMERICA, INC.

    Mr. Goldman. Thank you, Mr. Chairman. FiSCA represents more 
than 5,000 neighborhood financial service providers serving----
    Chairman Shelby. Did you say 5,000?
    Mr. Goldman. Yes, 5,000.
    Chairman Shelby. Okay.
    Mr. Goldman. Serving hundreds of thousands of customers, 
both banked and unbanked.
    The recent statement by Treasury Secretary Snow, Acting 
Comptroller Williams, and FinCEN Director Fox, acknowledge that 
check cashers play a vital role in the national economy and are 
a key component of a healthy financial sector, and it is 
important that they have access to banking services.
    This is music to our ears. We have waited to hear this 
shift in focus for a long time. We commend FinCEN and the 
Federal banking agencies for their issuance today of MSB 
guidelines. It is a first step and we look forward to 
commenting after further study.
    However, I must tell you that we are skeptical. We are not 
certain that guidelines will be enough to undo the damage done 
to our banking relationships. The key to finding a solution to 
bank discontinuance will require a real direct action between 
the regulators, the banks, and the MSB's. They cannot just be 
talking to themselves.
    According to American Banker, 50 percent of banks that have 
been serving our industry, check cashing industry, have 
recently stopped. This is a staggering number. It took us 50 
years to nurture these relationships and in one fell swoop they 
were ended or damaged. The example of JP Morgan Chase, which 
served our industry for 50 years, during that time they said 
they had one loss in 50 years in this industry. Yet recently 
our 50-year-old friend notified all 500 of its licensed check 
cashers that it was terminating their accounts. Chase, 
including Bank One, Am South, Citibank, Fleet, Sovereign, Sun 
National, Bank of America, and others, have indiscriminately 
terminated the accounts of thousands of check cashing 
locations.
    What if the banks announced that they would no longer 
provide services to Members of Congress? Could they do it? Yes. 
Banks could cut Members of Congress as a group out of the 
banking system, and essentially that is what they are doing to 
our industry. The irony is that banks do not make serving our 
customers the priority that we do, yet they have the power to 
stop us from serving them. It makes no sense. It is not fair.
    The question is, why is this happening? Our industry is 
sound. It is stable. It is responsible and profitable. We do 
not operate underground. We are licensed and regulated in 38 
States and are regulated by the BSA and USA PATRIOT Act.
    According to FinCEN itself, check cashers--and this is for 
past 4 years--check cashers, ``have set the standard for 
financial services industry in the fight against money 
laundering, financial crimes, and terrorism.'' That is an 
irony. While we were setting the standard, our banking 
relationships were being terminated.
    Among the reasons cited are: One, OCC designation of check 
cashers is high risk for money laundering. I do not think that 
has changed.
    The high cost and administrative burden of compliance and 
pressure from regulators. No industry should be subject to the 
awesome power of blanket termination at will. Until this very 
issue of blanket termination at will is addressed, the 
overreaction and the indiscriminate use of power by some will 
continue to prevail. We would like to see this Committee really 
tackle not only the injustice that has occurred, but also to 
define the responsibilities of banks in serving MSB's based 
upon the merits of the individual MSB so that access to the 
banking system will be available to all, particularly the 
unbanked.
    We need to stop the bleeding.
    We have five items that we would like to suggest.
    One, set definite standards, develop definite standards 
before agencies can assign the label ``high risk'' on an 
industry, and only after appropriate due process; two, Congress 
should consider passing a ``Banking Services Continuation Act'' 
that would permit banks to discontinue the accounts of MSB's 
only after the customer has failed to meet its compliance 
standards; three, a group should be created--and possibly 
through legislation--by the Secretary of the Treasury, made up 
of regulators, banks, check cashers and money transmitters, 
with the sole purpose of ensuring access to banking services; 
four, give CRA credit to banks that serve MSB's in 
neighborhoods that serve low and moderate income consumers; and 
five, there should be more transparency in the bank examination 
process to ensure that regulatory directives do not punish the 
law abiding, as we are, but only the law breakers.
    Thank you, Mr. Chairman.
    Chairman Shelby. Go ahead.

                   STATEMENT OF DAN O'MALLEY

                VICE PRESIDENT OF THE AMERICAS,

                 MONEYGRAM INTERNATIONAL, INC.

    Mr. O'Malley. Mr. Chairman, Senator Allard, MoneyGram 
International is a payment services company conducting 
businesses in 170 countries through more than 79,000 locations. 
I am pleased to testify about our compliance program and the 
problems MSB's are having with bank accounts.
    MoneyGram was founded in 1940 under the name Traveler's 
Express, a money order company. Over the years it has grown to 
be a leading international payment services company that offers 
services through a network of agent locations that include 
banks, supermarkets, and many small, independently owned mom-
and-pop convenience stores, which along with many check cashers 
are the MoneyGram agents experiencing the majority of the 
banking problems.
    MoneyGram offers consumers three primary services, the 
MoneyGram money transfer service, Traveler's Express money 
orders, and check processing for financial institutions. These 
services are closely regulated and licensed by the various 
State banking departments.
    MoneyGram also has a comprehensive compliance program that 
is fully compliant with that Bank Secrecy Act and the USA 
PATRIOT Act. The compliance program is built around three main 
components: Training employees and agents, monitoring 
transactions, and reporting suspicious activity. My written 
testimony describes in detail MoneyGram's compliance program 
which exceeds or at minimum meets the current regulation in 
many ways and many areas.
    Now, I would like to address the problems that many MSB's 
and their agents are experiencing with bank accounts. For 
MoneyGram agents it appears that the small mom-and-pop shops 
and check cashers are the ones who are being targeted for 
account closings. These businesses are being told by banks, 
which they have had relationships with for years, that they now 
must choose to either close their account or cease conducting 
any kind of MSB activity.
    When they ask their bankers why, they are frequently told 
that the bank's regulators have informed them that MSB's are 
high risk and the bank is advised to avoid doing business with 
such entities.
    In order to help our agents MoneyGram has been negotiating 
with banks around the country to offer special accounts. In 
some situations we have negotiated a master MoneyGram account 
with subaccounts for our agents. While this may sound like the 
ideal solution, it is not. It is far more costly for MoneyGram 
and it is far less convenient for our agents. In order to 
retain some agents, MoneyGram is now paying for armored car 
services to collect the agent's funds, which adds even more 
costs to conducting business, and is even more inconvenient.
    MoneyGram would like to offer two suggestions on how the 
bank accounts issue might be addressed, and how compliance with 
the USA PATRIOT Act might be improved. The two are somewhat 
tied together since improving USA PATRIOT Act compliance will 
help banks and their regulators gain confidence in MSB's.
    With regard to the bank account issue MoneyGram believes 
part of the problem stems from the fact that banks and their 
regulators do not understand the existing State licensing 
regime that applies to MSB's. That is why MoneyGram recommends 
the Committee consider legislation that would establish a dual-
chartering system for MSB's, analogous to what banks and credit 
unions enjoy.
    The establishment of a primary Federal regulator may 
significantly reduce the concerns and misperceptions about the 
oversight of the industry, as Mr. Goldman referenced. Too often 
MoneyGram has heard from banks, regulators, and law enforcement 
officials, as well as in the press, that MSB's are largely 
unregulated. This is not true, but it is a perception that 
simply will not go away. A primary Federal regulator would 
instill greater confidence by banks, their regulators, and the 
public in MSB's.
    MoneyGram would also like to offer a recommendation that 
would add clarity to the USA PATRIOT Act requirements. One 
requirement is that MSB's conduct a periodic review of their 
compliance program. For banks and licensed MSB's such a 
requirement is appropriate, but for thousands of mom-and-pop 
convenience stores that sell money orders or money transfers 
only as an agent, this requirement is largely unintelligible. 
These businesses need greater direction from FinCEN as to what 
constitutes an adequate review and who can conduct the review.
    For example, a simple one-page form could be developed that 
the owner of the business would be required to complete on an 
annual basis confirming compliance with the USA PATRIOT Act. It 
will also help those businesses better demonstrate to their 
bankers that they are aware of their compliance obligations.
    In conclusion, I want to thank you, Mr. Chairman and 
Senator Allard, for the honor of presenting testimony on behalf 
of MoneyGram International. We at MoneyGram are proud of our 
company's strong efforts in our vigilance in antimoney 
laundering and the prevention of terrorist financing, and we 
remain dedicated, and again, vigilant to working with 
regulators and law enforcement officials to defeat the attempts 
by criminals to use any of our services for illegal actions.
    Thank you.
    Chairman Shelby. Mr. Landsman.

        STATEMENT OF DAVID LANDSMAN, EXECUTIVE DIRECTOR

       THE NATIONAL MONEY TRANSMITTERS ASSOCIATION, INC.

    Mr. Landsman. Mr. Chairman, we appreciate the opportunity 
the Committee has given us today to have our grievances on this 
subject heard.
    We are also grateful to New York Superintendent of Banking, 
Diana Taylor, for meeting with us last month on this issue.
    FinCEN has worked hard with the Federal bank regulators to 
publish guidelines. For this we are also grateful and we 
applaud the stance they have taken. They are doing what they 
can to fix the problem and correct this injustice, an injustice 
that has ominous implications for other industries untouched by 
this problem as yet.
    Yet relief will not come soon enough for many of us. If 
nothing is done, and done quickly, many licensed remittance 
companies will lose their last bank account in 3 days, and 
probably breathe their last.
    In the March 30 joint statement, FinCEN publicly 
acknowledged for the first time that there may have been a 
misperception of the requirements of the Bank Secrecy Act and 
the erroneous view that money service businesses present a 
uniform and highly unacceptable risk of money laundering or 
other illicit activity. This is an understatement.
    Clarification of best practices will help, but most of 
these guidelines have already been in the public domain for 
years, available to us and the banks.
    Now regulators are properly alarmed at the idea that two 
entire licensed industries, money transmitters and check 
cashers, can be so red-flagged as to make it impossible for 
even the best of them to get an account anywhere.
    That the acceleration of these closings has coincided with 
the accelerating rate of bank prosecutions, fines, enforcement 
actions, and scandals is no accident. The more heat that is 
brought on the regulators by Congress, the more they will crack 
down on the banking industry. The more heat that is brought on 
the banking industry, the less it can afford to appear to be 
associated with those who look even slightly suspicious to some 
eyes.
    In most cases, these closings have occurred not because of 
any actual problem in our history or deficiency in our 
compliance programs, but simply because we are in a business 
designated ``high risk'' by Federal banking regulators. Banks 
no longer feel they can do enough due diligence on us no matter 
how much time and money is spent. They do not feel secure, nor 
do they feel they can ever satisfy the probing questions of 
their examiners in this regard.
    We seek a national money transmitters act that will require 
a national money transmitters license, not to deal with safety 
and soundness, but with antimoney laundering requirements. The 
purpose of this new license would not be to add more regulatory 
burdens, but to ensure uniform and universal application of our 
antimoney laundering laws, eliminate duplicative exams, and 
provide a certification that banks may rely on. We seek a 
broad, clear national definition of money transfer and when a 
money transfer license is required, even application of the 
licensing requirement, respect for the license itself, and 
meaningful punishment for those who willfully refuse to get a 
license.
    The banks are not wrong to be fearful of our accounts, but 
the greatest risk they face with our accounts is getting into 
serious trouble with their regulators.
    We are not looking for leniency. To the contrary, we 
licensed MSB's welcome stringent regulation and we demand 
vigorous enforcement. At no time have we thought that the 
problem was due to regulations that were too stringent. To the 
contrary, closing accounts is a total abdication of 
responsibility. All we are asking for is a level playing field 
and a fair chance.
    What may have started out as legitimate money laundering 
concern on the part of Government and banks has turned into 
nothing less than a denial of civil rights, not only to the 
community-based businesses we represent, but also to the 
broader public they serve.
    Money is the lifeblood of our business and banks control 
the pipeline. Access to a bank account is the access to life. 
It is a public accommodation working under public charter, and 
should not be unreasonably denied to any class of people.
    The challenge of a free society in the war on drugs and 
money laundering and the war on terror is to separate and stop 
the tainted money while letting the good money through, and 
especially to separate the flows of migrant worker remittances 
from the flows of nefarious schemes. The only way to do that is 
to encourage a vital, transparent, nonbank sector.
    Thank you.
    Chairman Shelby. I thank all of you. We have a vote on the 
floor. We are going to come back, and I have a number of 
questions. We will be in recess until we can come back. I would 
say 10 to 12 minutes. Thank you.
    [Recess.]
    Chairman Shelby. The hearing will come to order.
    Mr. O'Malley, in your testimony you explained that 
MoneyGram believes that part of the account termination problem 
stems from the fact that banks and their regulators do not 
understand the existing State licensing regime that applies to 
MSB's. Thus, you propose that Congress should consider 
legislation to establish a dual chartering system for MSB's 
similar to what banks and credit unions already enjoy. Under 
this plan an MSB that operates in only one or a couple of 
States could choose to be State-chartered while others could 
seek a Federal charter, have an option if they wanted. You 
conclude that the establishment of a primary Federal regulator 
would instill greater confidence by banks and their regulators 
while significantly reducing the misperceptions about the 
oversight of the industry.
    Do you think that such new legislation to provide for State 
or Federal MSB charters, optional charter, and a primary 
Federal regulator would benefit only the three or four largest 
MSB's by eliminating so much of the State regulation currently 
imposed on the category of MSB and not have much impact on the 
rest of the industry? Other than the new Federal regulator what 
else can be done to ease the jitters in the banking community, 
in your opinion?
    Mr. O'Malley. To answer the first part of your question, 
the dual chartering, I think the critical part there is making 
sure that we do not end up with additional regulatory bodies on 
top so that we do not layer that.
    Chairman Shelby. That costs money, doesn't it?
    Mr. O'Malley. That costs money and it also may add to the 
problem by creating further misperceptions or lack of focus on 
what we should be working with.
    The critical piece there is, will it benefit a couple of 
the major players? Certainly it will. But it would also benefit 
all of the customers that are associated with those major 
players. For example, a larger retailer that works across State 
lines has to comply with those State regulatory bodies as well, 
and we have a difficult time trying to explain and provide 
consistency across State levels because of all the reasons and 
issues you have heard on both panels today.
    The second part of the question on the following up for 
other things that could also add value there, I think was the 
furthering of your question. I think the misperception that is 
created today is because what ends up being translated out of 
the OCC or out of the banking regulatory bodies, it ends up 
being pushed out and the banks specifically are unaware of 
exactly what that means. I think the guidance that was 
presented today, Memorandum of Understanding, goes a long way, 
but to some degree we are sitting looking for what does that 
guidance and what will it actually provide? So it potentially 
helps assist with the problem, but again, until it gets 
translated to the furthest extent of the banking channels many 
people still have issues with, how do I comply with that? It is 
much easier just to say, do not bank MSB's.
    Chairman Shelby. Mr. Goldman, in your testimony you 
proposed to have Congress enact a banking service continuation 
act that would permit banks to discontinue MSB accounts only 
after it could be shown that the customer has failed to meet 
its statutory and regulatory antimoney laundering obligations, 
or for legitimate business reasons unrelated to the cost of 
compliance. What other industry has such protections that you 
know of ?
    Mr. Goldman. I cannot think of any.
    Mr. Landsman. What other industry needs it?
    Chairman Shelby. That might be a good question.
    Mr. Goldman. I think here you have a very unusual 
relationship between the banks and the industry that we 
represent. We rely solely on them for our business, so we have 
to find a way to ameliorate what is happening so that we can 
continue to provide services.
    Chairman Shelby. They also could be a competitor of yours, 
could they not?
    Mr. Goldman. That is absolutely true. In fact, some of them 
are. Some of them do own check cashing businesses, believe it 
or not.
    Chairman Shelby. Mr. Landsman, in your testimony you 
proposed that Congress should enact a national money 
transmitters act that would give money transmitters a license 
based on antimoney laundering requirements. How exactly would 
this help and should it be MSB industrywide? Do you want to 
elaborate on that a little?
    Mr. Landsman. Yes, I do believe it should be industrywide. 
I do not believe the States are ever going to give up their 
right to regulate, and therefore my concept is not quite a dual 
regulatory scheme in the sense that you meant it where an MSB 
could choose which one he wanted.
    Chairman Shelby. Is it like an optional charter?
    Mr. Landsman. Yes. It would not be like that. Everybody 
would have to have this. The States have traditionally left the 
antimoney laundering problems to the Federal Government. The 
States are not experts. The States do not write the laws on 
antimoney laundering. They have enough on their hands to 
enforce the safety and soundness aspects of their license. In a 
like manner, the Federal Government is having enough trouble 
enforcing the antimoney laundering parts of their charge, of 
their mandate, so it would make sense to divide the duties and 
get the Federal Government more involved.
    Right now, what we have, as a FinCEN registration, is 
basically a two-page form. I am not sure, beyond identifying 
who is an MSB, what good that does anybody. I know that we have 
a very small cadre of examiners and trainers. We need to train 
the whole country and examine the whole country. We do not need 
to examine every 200,000 of those MSB's, but we do need to 
examine the larger ones, and everybody needs to know what the 
rules are. That is why I think it should be Federal.
    Chairman Shelby. MoneyGram's global profile. According to 
your prepared remarks, MoneyGram offers money transfer services 
at 79,000 locations in 170 countries in addition to its 60,000 
U.S. locations. You note with only 1,800 employees and over 
100,000 locations it is easy to see why MoneyGram relies on 
your agents to sell its services. So that is 79,000 foreign 
locations and 1,800 employees worldwide. It is my 
understanding, of the 1,800 employees only 36 are responsible 
for ensuring compliance industrywide with U.S. antimoney 
laundering and Bank Secrecy Act laws and regulations.
    Is that a sufficient number of compliance officers to 
ensure compliance throughout the MoneyGram empire, and can you 
provide some description of how those 36 people function on a 
daily basis? In other words, give us some idea of how you work.
    Mr. O'Malley. First let me clarify. The 79,000 locations is 
in total for our wire transfer services, so there is some mix 
for some of our money order products. But if you are looking on 
global basis----
    Chairman Shelby. It means you are doing well. That is not a 
bad----
    Mr. O'Malley. It means we are doing well. I wish it were 
larger and that would be a good thing. But I just want to make 
sure we get the numbers correct.
    So if you are focusing back on how do we manage compliance 
and the number of people, the 36 people, not unlike what we 
heard from the first panel, as far as resources, we would all 
be looking for and trying to manage toward more resources. But 
in the end I agree with the previous statement, that people do 
not always solve that problem.
    We have a stringent compliance and regulatory program 
across our business, from the training of our employees up 
front, from the CEO down to the person that handles the last 
call from our customers. So we are supporting across a vast of 
individuals from our sales people to our compliance people that 
are in the street, specifically for compliance, but we manage 
compliance throughout our organization and across all 1,800 
employees. It is one of the critical measures and activity that 
is a requirement of our employment for our organization is a 
training program on compliance.
    Having said that, managing across the other expectations of 
our product base we also have a monitoring program that our 
systems are constantly monitoring for compliance, antimoney 
laundering, structuring, go across the gamut of activities from 
a compliance perspective and from an antimoney laundering 
perspective. So we have very large resources dedicated from a 
dollar and a computer perspective, managing and pushing that 
information out to our strict compliance people. But we are 
vigilant across our agent base to do the exact same thing.
    Chairman Shelby. The question of risk is at the center of 
issue of whether banks should open and maintain accounts for 
MSB's. In your prepared remarks, Mr. Landsman, you address the 
specter of racism and civil rights violations should MSB's be 
denied access to banks without a certain level of due process. 
The implication being that MSB's associated with certain ethnic 
groups are targeted for discriminatory treatment. A rational 
assessment of risk has to entail a degree of geographic 
targeting. Wire transfer companies sending a large percentage 
of transactions to the Middle East or South Asia, for example, 
could be expected I think to draw more scrutiny than is the 
case with other regions. I think that is just commonsense.
    Could each of you provide an assessment of how you assess 
risk? Is there an ethnic or geographic dimension? What makes 
one line of business riskier than other?
    Mr. Byrne, we will start with you.
    Mr. Byrne. The cornerstones of the problem, Senator, has 
been the fact that----
    Chairman Shelby. Let's talk about it banks.
    Mr. Byrne. The agencies are pushing risk assessment and 
risk-based focus regarding antimoney laundering. So we have to 
make up that goal by putting in place programs to assess risk. 
What are the risks----
    Chairman Shelby. You are doing that is, assessing risk, in 
dealing with MSB's.
    Mr. Byrne. Right. You do look at geography, you do look at 
the products. Are they more complicated than basic products? 
The wire transfer business or transmission business, if they 
are sent to certain parts of the world where historically there 
have been risks, we have to increase our due diligence.
    I should say, today's document by the Agency though spells 
out what is considered low risk and high risk, and when you hit 
high risk then it would be that time to ask the MSB for more 
information. We think that is the way to go. Before today it 
was not clear that the risk we did was enough and the second 
guessing continue. So from our perspective, you look at 
geography, you look at products, and you certainly look at 
jurisdictions where the funds go.
    Chairman Shelby. Are there geographic regions that are 
assumed or scientifically determined to be higher risk than 
others?
    Mr. Byrne? Geographic outside of the United States?
    Chairman Shelby. Yes.
    Mr. Byrne. Just based on previous statements by our 
Government and others, the noncooperative country list that we 
have seen from FATIF, certainly again the Middle East has been 
an area where we have to spend more time and energy.
    Chairman Shelby. It is where a lot of terrorists have come 
from.
    Mr. Byrne. Exactly. So from that perspective we have to--it 
does not mean we do not do business. It simply means our due 
diligence has to be increased.
    Chairman Shelby. Do licensed MSB's catering predominantly 
to higher risk regions automatically disqualify them for 
consideration?
    Mr. Byrne. No.
    Chairman Shelby. In other words, they could be totally 
legitimate and doing a service for people in the Middle East, 
could they not, and be clean as they could be?
    Mr. Byrne. Absolutely. Before today, some banks certainly 
would opt to say, there is too much risk there. We are not sure 
how to mitigate the risk. I think after today's announcement 
they know that they should continue those relationships as they 
feel that they have done enough to ask the MSB, are you 
licensed, are you registered? What are your antimoney 
laundering programs? If we do those things that should be no 
reason to close down the account simply because they transfer 
money to the Middle East.
    Chairman Shelby. Mr. Goldman.
    Mr. Goldman. I think there are two items I would like to 
mention with respect to assessing risk for at least the 
industry that I represent. Number one, I think it is fair to 
look at the record and the record will indicate that in the 
last 5 years the number of indiscretions and violations in our 
industry is nominal.
    Chairman Shelby. Very small, is it not, considering 
everything?
    Mr. Goldman. Nominal. Therefore, the designation of high 
risk makes no sense. It is just somebody in some department 
decided that we were high risk and put us on a list. When I 
addressed that question 4 years ago to the then-Director of 
FinCEN his response to me was that your industry is no greater 
risk than any other business for money laundering violations. 
So here we are 5 years later, tabbed as high risk, with nominal 
violations and the Director of FinCEN having said that we 
should not even be designated as high risk. The result of that 
was the jitteriness of banks and the loss of the service of 
banks.
    Chairman Shelby. Do you have any comment, Mr. Landsman?
    Mr. Landsman. My only comment was that trying to do a risk-
based management of a bank or a country or of a law enforcement 
program, the trouble you might run into is racial profiling. I 
think your question was quite right, and Mr. Byrne knows better 
than I do, but if I were a banker I would want to avoid anybody 
sending money to the Middle East. It used to be that Latin 
America was considered high risk because of the drugs but the 
Middle East has trumped that.
    So the logic is, if you only have a certain number of 
policemen, of course you are going to send them to the high 
intensity crime areas first. But that does not mean that you 
should write laws and write policies that make different 
standards for different kinds of people.
    Chairman Shelby. Mr. O'Malley, do you have a comment?
    Mr. O'Malley. I do. In understanding this business I think 
it is important to understand the corridor activity. Not unlike 
you or I, the concentration of individuals that like to do 
business with people that look like them, speak like them, 
culturally have similarities is very important to the overall 
industry. It is not every part of it but it is somewhat a part 
of the industry.
    I think from MoneyGram's perspective, we look at every 
single transaction of runs through an OFAC review. We run our 
agents through the OFAC review as well. Criminal and credit 
checks and background checks that are making sure that we have 
the highest quality of business partners that we are doing 
business with and doing transactions. Mr. Byrne mentioned the 
Middle East. Certainly, we look to make sure we understand who 
we are doing business with. But that is across all segments and 
all ethnicities.
    Chairman Shelby. Mr. Goldman, according to the Financial 
Services Centers of America, members of your organization 
process 180 million checks a year worth $55 billion. As general 
counsel, do you have data on how many of those transactions 
involve fraudulent activity or were used to launder money? Out 
of all the legitimate--you said it was nominal.
    Mr. Goldman. Fraud and antimoney laundering are two 
different areas. We do get checks that are fraudulent so that 
is a major problem, particularly now with modern day 
technology. But with respect to check cashing related to money 
laundering it is nominal.
    Chairman Shelby. I used one of your services and wanted to 
send $5,000 to someone in Damascus, would that be suspicious? 
Is that a higher amount than you normally send?
    Mr. Goldman. I have to rely on----
    Mr. Landsman. Nobody I know is sending money to Damascus.
    Chairman Shelby. Mr. O'Malley, could you----
    Mr. Landsman. Somebody is doing it, but I do not know who 
they are.
    Mr. O'Malley. To your point, the activity of transactions 
in any particular segment, we run through the BSA activities 
behind suspicious activity reports and our agents do the same 
thing. So we are monitoring and running through compliance 
activities through our systems to make sure that we are 
focusing on any particular transaction, but we would be looking 
for suspicious activity across any send to any received 
transaction.
    Chairman Shelby. Who uses the services of your member 
businesses? Is there a demographic or professional profile of 
some kind that is apparent? How are know-your-customer 
requirements met by the 5,000 member service providers that 
comprise the Financial Service Centers of America? How much of 
your membership has been denied banking sentences to date?
    Mr. Goldman. I would say, as I said in an ABA random 
survey, half of the banks that served us have recently 
determined not to serve us. So we have lost half the industry. 
I think that at this point in New York alone I know that there 
are 40 companies that have not been able to find other banks. 
The only thing that happened in New York was--we are now in New 
York with 660 locations in the State of New York alone, are 
being served primarily by one bank. It is a State bank. If that 
bank decides to go, there is nothing left. So we are on the 
edge of the potential for disaster.
    Chairman Shelby. Uniformity of regulation. Some of you were 
here earlier when we asked the Government panel, we agree 
uniformity is necessary in MSB and bank regulation. Should that 
direction be provided at the Federal or State level? And is 
there any effort within the industry to set an internal set of 
standards?
    Mr. Landsman. We were going to do it recently but then we 
decided to wait until today, what I received today. We will be 
studying that----
    Chairman Shelby. Seeing what----
    Mr. Landsman. Yes. We are going to try to move into 
training. After we succeed in training and getting good at 
training we are going to try to move into certification. 
Certification of the outside compliance monitors who review 
these MSB's is essential because a bank needs to be able to 
rely--if you go into any other business sector you will ask 
somebody for a CPA report because we rely on CPA's--with some 
problem in some cases; Enron, something like that. But we do 
need people to be certified to review, and it is a specialty. 
You cannot just take any CPA and rely on that.
    The banks need to able to feel that they are not just 
delegating out the responsibility and they will be criticized 
for it, but that they can rely on somebody else doing a review. 
It is required by Section 352 of the USA PATRIOT Act that we 
have these outside reviews anyway. We are doing that.
    Chairman Shelby. Do you have any comment?
    Mr. O'Malley. We work with other partners in our industry 
in looking at where we can try to standardize or offer 
suggestions for standardization. At the same point, we are very 
encouraged at looking at the guidance that was released today. 
I would also state that I think it would be helpful if we had 
better input into those types of guidance in advance of them 
actually being released. I think the industry itself can help 
in making sure that they are practiceable activities as opposed 
to a guidance that may not be able to be put into practice.
    Chairman Shelby. Mr. Goldman.
    Mr. Goldman. We proudly have a substantial national 
compliance program, both in terms of books, documents, videos, 
teaching programs which have all, again, been commended as 
exemplary by FinCEN itself, which again goes to the point, we 
have no significant record of violations, we have a significant 
record of compliance, uniform compliance and compliance with 
the Bank Secrecy Act and yet we are still high risk and still 
suffering from the loss of our banking relationships.
    Chairman Shelby. Mr. Byrne, do you have any comment?
    Mr. Byrne. Senator, I would say the key, I believe, is 
still making sure that the examiners that examine banks around 
the country get this in their hands so that when they are 
assessing whether or not we have done enough to do due 
diligence with the MSB's that they will be guided by this 
rather than their own perceptions of what is and is not high 
risk.
    I would just add that on March 30 we did a national 
telephone conference with about 2,000 bankers to talk about the 
value both of remittances and, more importantly, dealing with 
MSB's in this environment. So we really believe it should be up 
to the bank, not up to----
    Chairman Shelby. What was the response of that conference?
    Mr. Byrne. It was very positive. They were anticipating 
today's announcement, but we believe that outreach will 
continue from our end, and certainly the people on this panel 
here will work with us to see if we cannot try to get through 
this level of confusion, to let them make their decisions based 
on pure Government direction that we did not have before.
    Chairman Shelby. A lot of us do not want you to be the 
unintended victim of what we are trying to do to combat 
terrorist financing, money laundering, because you are 
legitimate businesses. And if you are legitimate businesses, 
you want to stay in business, you want to have access to 
capital, and you want to comply with the regulations and the 
law, because if you do not, you will not be here long anyway, 
would you?
    Mr. O'Malley. That is correct.
    Chairman Shelby. Gentlemen, we thank you for your 
testimony, and your patience, especially with the break today.
    The hearing is adjourned.
    [Whereupon, at 12:39 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

    Good morning, Chairman Shelby, Ranking Member Sarbanes, and 
witnesses. Combating money laundering in the aftermath of September 11 
has proven to be critical. We have long seen money laundering 
associated with illegal activities such as drug trafficking. These 
activities pose on-going serious challenges to our country, but now we 
must also look at the fight against money laundering as one to ensure 
our basic national security.
    Our task since September 11 has not been a simple one. However, 
this Committee acted swiftly and aggressively after the attacks to 
address terrorist financing.
    I am proud to have been an active participant in that debate by 
insisting that we authorize Treasury regulations to ensure that client 
funds moving through a financial institution's administrative accounts 
do not move anonymously, but are marked with the client name.
    We now have an ongoing responsibility to examine the implementation 
of legislation to combat money laundering. I am very anxious to hear 
the testimony of our witnesses about the promulgation of regulations 
related to combating money laundering. I also welcome their insight 
into what Congress can further do to help combat terrorist financing.
    The free movement of money across borders, unnoticed and untracked 
is so critical to the work of terrorists. By acting quickly to cut off 
the supply of money, we limit their ability to act. This is key. As I 
have said in this Committee before, in this new era, economic warfare 
will be one of our strongest weapons against terrorism. It is an irony 
that terrorists who would destroy our way of life need our institutions 
in order to thrive.
    Mr. Chairman, the problem of money laundering is a daunting and 
complex one. Money laundering is nothing more than the use of our 
legitimate economic infrastructure to support and strengthen illegal 
activities. It is done by those who have no respect for the law, who 
have no respect for our democratic institutions, and by those who have 
no respect for the common values that we all share.
    Money is such a fundamental tool of this international cabal of 
terrorists. It sustains them. It paid for the flight training of those 
who hijacked the planes on September 11 and it pays for the explosives 
that are killing our soldiers in Iraq nearly everyday. By acting 
quickly to cut off the supply of money, we limit their ability to act.
    Clearly, we need to address this issue. But, we must be mindful 
that the very institutions that we must more heavily regulate--nonbank 
money remitters, for instance--are the very money centers that vast 
portions of our constituents rely on everyday to live.
    So, we must be circumspect when looking at regulations which may 
have the unintended consequence of limiting access of law abiding 
citizens to these money centers.
    As we continue to strengthen our response to terrorism, I look 
forward to hearing the testimony of the witnesses today and 
specifically how they are implementing regulations to

                               ----------

               PREPARED STATEMENT OF SENATOR WAYNE ALLARD

    I would like to thank Chairman Shelby for holding this hearing to 
examine more closely money services business compliance with the Bank 
Secrecy Act and USA PATRIOT Regulation.
    Title III of the USA PATRIOT Act significantly expanded antimoney 
laundering efforts in the United States, requiring specific changes to 
the policies and procedures of many financial institutions.
    These changes, however, have apparently caused a significant amount 
of confusion for regulators and industry, and are adversely impacting 
money services businesses.
    A lack of guidance by regulators and the banks' fear of increased 
liability have hampered the ability of many unbanked Americans to send 
funds to relatives within the United States or overseas.
    This Committee held a hearing last September to examine the Federal 
Government's policies to enforce the Bank Secrecy Act and antimoney 
laundering provisions of the USA PATRIOT Act.
    I appreciate the Chairman's thorough examination of the antimoney 
laundering provisions of the Bank Secrecy Act and the USA PATRIOT Act, 
because it is only with an appropriate regulatory framework that this 
country will be able to effectively curb the financing of terrorism.
    I look forward to hearing from the banking regulators today about 
the compliance guidance they will issue to industry so that money 
services businesses and other financial institutions will be able to 
comply with antimoney laundering laws.
    I also look forward to hearing from the industry about their 
recommendations for improving compliance and interpretation in a 
difficult regulatory environment.
    I would like to thank our witnesses agreeing to appear before the 
Committee today. I look forward to your testimony.

                               ----------

                PREPARED STATEMENT OF JULIE L. WILLIAMS
                   Acting Comptroller of the Currency

                             April 26, 2005

Introduction
    Chairman Shelby, Ranking Member Sarbanes, Members of the Committee, 
I appreciate the opportunity to appear before you today to discuss 
issues arising in our nation's antimoney laundering efforts in the 
context of money services businesses (MSB's). My testimony will focus 
on the nature of money laundering risks posed by MSB's, MSBs' loss of 
access to banking services, and the OCC's position concerning banks' 
relationships with MSB's. We very much appreciate your leadership, and 
that of the Committee, in this vital area.
Money Services Businesses
    A ``money services business'' is an umbrella term encompassing many 
different types of financial service providers. MSB's are defined 
broadly in the BSA regulations to include: (1) currency dealers or 
exchangers; (2) check cashers; (3) issuers of traveler's checks, money 
orders, or stored value; (4) sellers or redeemers of traveler's checks, 
money orders, or stored value; and (5) money transmitters. According to 
a 1997 study by Coopers & Lybrand that was commissioned by FinCEN, and 
is currently in the process of being updated, it was estimated that 
there were over 200,000 MSB's operating in the United States providing 
financial services involving approximately $200 billion annually. Of 
these MSB's, approximately 40,000 were outlets of the U.S. Postal 
Service, which sell money orders. This 1997 study also estimated that 
check cashers and money transmitters would grow at a rate of at least 
11 percent per year. The MSB industry is extremely broad and very 
diverse, ranging from Fortune 500 companies with numerous outlets 
worldwide, to small independent ``mom-and-pop'' convenience stores 
offering check cashing or other financial services.
    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, and we recognize the positive role that MSB's 
can play in this process. MSB's provide financial services to segments 
of our society that do not have accounts with mainstream banks or for 
other reasons do not feel comfortable in a formal banking environment. 
MSB's generally offer convenience, neighborhood locations and a variety 
of financial services that appeal to these customers. Furthermore, some 
of the products and services offered by MSB's (for example, foreign 
remittance services) may not be available at the local neighborhood 
bank. According to industry trade group information, up to 40 million 
Americans do not have mainstream bank accounts and satisfy most of 
their financial needs using MSB's.
    However, some MSB's can also present a heightened risk of money 
laundering or terrorist financing. These businesses generally engage in 
a high volume of cash transactions and usually offer several types of 
services, including check cashing, money transmission, currency 
exchange, money orders, traveler's checks, and stored value mechanisms. 
They engage in transactions with third party customers who are unknown 
to the bank and, as a result of this indirect relationship, the bank 
has neither verified the identities nor obtained first-hand knowledge 
of these customers. As a result, transactions involving such entities 
could have the effect of moving the placement stage of money laundering 
one step away from the bank.
    OCC compliance examinations over the years have also noted 
situations where extraordinary amounts of cash were deposited at 
national banks by MSB's. In such situations, the OCC or the national 
bank filed a suspicious activity report (SAR) and reported the 
transactions to law enforcement. The OCC is also aware of situations 
where money launderers actually established MSB's (check cashers) to 
disburse and launder their excess cash to unsuspecting customers. 
Similar examples of money laundering through MSB's are noted by the 
Financial Action Task Force on Money Laundering in its Report on Money 
Laundering Typologies 2001-2002. The 2003 National Money Laundering 
Strategy, prepared jointly by the Department of the Treasury and the 
Department of Justice, also specifically makes references to MSB's 
being used as conduits in various terrorist financing arrangements. For 
these reasons and others, the OCC has traditionally viewed MSB's as 
``high-risk'' for money laundering.
    State licensing, regulation and oversight of MSB's also varies. For 
example, some States require no licensing, some States license only 
certain segments of the money services businesses (for example, check 
cashers or money transmitters) while other States exercise strong 
regulatory oversight over all facets of the MSB industry. Furthermore, 
according to FinCEN, as of December 2004, only approximately 22,000 
MSB's have registered with FinCEN as required by law. One could surmise 
from the 1997 study and its projections, that only about 10 percent of 
the over 200,000 MSB's that may be operating nationwide have complied 
with these registration requirements.
    Notwithstanding the foregoing, not all MSB's are equally risky and 
most MSB's have never been tainted by or associated with money 
laundering. Some are nationally recognized and respected companies that 
have strong AML programs and are licensed and supervised, while others 
are small businesses such as local grocery stores whose products, 
services and customer base present little to no risk of money 
laundering or terrorist financing. The challenge for all of us is to 
ensure that banks recognize these differences and that we, as 
regulators, are clear about our supervisory expectations to the banking 
industry with respect to MSB accounts.
Loss of Access to Banking Services
    The OCC is well aware of, and concerned about the problems that 
MSB's are experiencing in obtaining banking services. As with any 
business enterprise, a bank account is essential for the success of an 
MSB's business. The reasons for MSBs' loss of access to banking 
services are complex and derive from a multitude of factors, including 
concerns about regulatory scrutiny, uncertainty about regulatory 
expectations, the risks presented by some MSB accounts, and the costs 
and burdens associated with maintaining MSB accounts.
    Given the sheer number and the variety of services offered by 
MSB's, the differences in risk profiles among MSB's can be profound. 
For example, a small grocer cashing checks as a convenience to its 
customers has a much different risk profile from a money remitter that 
cashes checks, sells money orders, and sends wire transfers to 
customers in high-risk geographies.
    Banks must expend resources just to identify those MSB's that are 
high risk and those that are not. In general, at a minimum they must: 
(1) apply their customer identification program requirements; (2) 
confirm FinCEN registration, if required; (3) confirm compliance with 
State or local licensing requirements, if applicable; (4) confirm agent 
status, if applicable; and (5) conduct basic risk assessment to 
determine the level of risk associated with the account. If the MSB is 
categorized as high risk, additional resources must be expended by the 
bank to ensure that it is fulfilling its obligations under the Bank 
Secrecy Act (BSA).
    It is easy to see from this process that the costs and resources 
that must be expended by a bank to open and maintain an MSB account, 
while complying with its obligations under the BSA, can be significant. 
As in all businesses, these additional costs are factored into the 
pricing of the products offered to MSB's, and certainly some banks have 
found that the costs are too high or that they are unable to transfer 
the costs to the MSB customer. Thus, due to market forces, some banks 
may simply decide to close the accounts or discontinue the business 
relationship.
    These problems are further compounded by the huge number of 
unregistered and unlicensed MSB's, and the uneven regulatory scheme 
under which MSB's are supervised. Registration with FinCEN, if 
required, and compliance with any State-based licensing requirements 
represent the most basic of compliance obligations for MSB's, and an 
MSB operating in contravention of registration and licensing 
requirements would be violating Federal and possibly State laws. 
Nonetheless, there are tens of thousands of MSB's that are not 
registered with FinCEN, and there are a significant number of MSB's 
that are not licensed by the States.
    Another factor is the lack of clear guidance on certain issues 
concerning supervisory expectations of banks that provide financial 
services to MSB's. This is especially true in the case of unregistered 
MSB's where clarity was needed as to whether banks are expected to file 
SAR's, close accounts, or take some other action upon discovery that 
its MSB customer has not complied with Federal or State licensing 
requirements. Similarly, we needed to clarify what minimal level of due 
diligence should be conducted on low-risk MSB's, or even the amount of 
due diligence expected of banks to conduct a risk assessment of their 
MSB customers. Additionally, the general characterization of MSB's as 
``high-risk'' by regulators over the years at times failed to highlight 
the fact that the risk profiles of MSB's vary depending on the 
circumstances of a particular MSB. Thus, incomplete or unclear guidance 
from regulators may have discouraged banks from doing business with 
certain MSB's even though most have never been tainted by or associated 
with money laundering.
    Banks are also concerned about the risks of doing business with 
MSB's, including reputation risk. This may be due, at least in part, to 
several high-profile criminal cases brought against banks that have 
relationships with MSB's. For example, in January 2003, Banco Popular 
of Puerto Rico forfeited $21.6 million (the forfeiture to the 
Government satisfied a civil money penalty of like amount assessed by 
the Federal Reserve and FinCEN) and entered into a deferred prosecution 
agreement with the Justice Department in a case involving a single 
count of failing to file a SAR on an MSB customer in violation of the 
BSA.
    In October 2003, Delta National Bank and Trust Company, which has 
its principal office in New York City, paid a $950,000 criminal fine 
and pled guilty to a criminal information charging the bank with one 
count of failure to file a SAR in connection with transactions 
involving two MSB accounts at the bank.
    Finally, in March 2004, Hudson United Bank, a State-chartered bank 
which has its principal office in Mahwah, New Jersey, agreed to a $5 
million fine to settle accusations by the Manhattan District Attorney's 
Office that one of its New York City branches failed to monitor certain 
MSB accounts as required by the BSA.
    These and other cases have understandably caused considerable 
anxiety among bankers that have MSB accounts. In some cases, where a 
bank has been criminally investigated or prosecuted, the investigation 
began as an investigation of the MSB customer of the bank, and 
eventually led to the bank itself becoming a target of the 
investigation because it allegedly failed to properly administer the 
MSB account. Moreover, many bankers are concerned with what they 
characterize as the ``criminalization'' of the SAR process, and in 
light of the billions of transactions going through the U.S. banking 
system, at least one banker has analogized this process as running a 
railroad and being expected to monitor everyone who takes your train to 
see if their trip is legitimate.
    Without question, the stakes in this area have been raised in part 
due to the risk of terrorist financing and national security concerns, 
consequently, the risk exposure of guessing wrong is very high. In the 
current environment, banks have become understandably highly risk-
averse and may simply close the accounts of businesses that present 
more risk than they are willing to tolerate.
The OCC's Position Concerning Banks' Relationships with MSB's
    To accomplish our supervisory responsibilities, the OCC conducts 
regular examinations of national banks and Federal branches and 
agencies of foreign banks in the United States. These examinations 
cover all aspects of the institution's operations, including compliance 
with the BSA. The OCC's examination procedures were developed in 
conjunction with the other Federal banking agencies, based on our 
experience in supervising and examining national banks in the area of 
BSA compliance. The procedures are risk-based, focusing our examination 
resources on high-risk banks and high-risk areas within banks. We 
continue to work to improve our supervision in this area and we will 
revise and adjust our procedures to keep pace with industry changes, 
technological developments and the increasing sophistication of money 
launderers and terrorist financers. In this regard, we are presently 
working with FinCEN and the other Federal banking agencies to issue a 
new, interagency BSA examination handbook by June 30 of this year. This 
is a major step toward interagency consistency in how we conduct our 
exams in this area.
    We have also provided specific guidance on MSB's to our examiners 
and to national banks. Since September 1996, the OCC has had guidance 
in its BSA Handbook addressing nontraditional financial entities, 
including MSB's. Last year, in 
response to concerns about unregistered and unlicensed MSB's, the OCC 
issued Advisory Letter 2004-7, providing guidance to banks with respect 
to unregistered or unlicensed MSB customers. FinCEN and the Federal 
banking regulators are providing additional guidance to banks about 
MSB's and we will adjust our existing guidance to conform to this 
interagency guidance.
    On several occasions in the last 6 months, the OCC has participated 
in various forums to better understand MSB issues and to educate the 
industry and our staff. For example, OCC representatives attended the 
March 8, 2005 hearing on MSB's hosted by FinCEN. Also, in March of this 
year, the OCC hosted a teleconference for the national banking industry 
in which we discussed a variety of BSA concerns, including MSB issues. 
Approximately 1,000 sites listened to the teleconference, mostly at 
national bank locations. These sites included between 4,000 and 5,000 
listeners. We conducted the same teleconference for our examination 
staff in the week preceding the industry call.
    As our knowledge and understanding of MSB's and their issues have 
continued to grow, our guidance has continued to evolve and develop. On 
March 30 of this year, the Federal banking agencies and FinCEN issued 
an Interagency Policy Statement to address our expectations regarding 
banking institutions' obligations under the BSA for MSB's. This 
Statement specifically states that the BSA does not require, and 
neither FinCEN nor the Federal banking agencies expect, banking 
associations to serve as the de facto regulator of the MSB industry. It 
provides that banking organizations that open or maintain accounts for 
MSB's should apply the requirements of the BSA on a risk-assessed 
basis, as they do for all customers, taking into account the products 
and services offered and the individual circumstances. Accordingly, a 
decision to accept or maintain an account with an MSB should be made by 
the banking institution's management, under standards and guidelines 
approved by its board of directors, and should be based on the banking 
institution's assessment of risks associated with the particular 
account and its capacity to manage those risks.
    Along with FinCEN and the other Federal banking agencies, we also 
are issuing Interagency Interpretive Guidance on Providing Banking 
Services to MSB's to further clarify our expectations for banking 
organizations when providing banking services to MSB's. The guidance 
sets forth the minimum steps that a bank should take when providing 
banking services to MSB's, specific steps beyond minimum compliance 
obligations that should be taken by banking organizations to address 
higher risks, as well as due diligence, ongoing account monitoring, and 
examples of suspicious activity that may occur through MSB accounts. 
The guidance is intended to provide additional clarity regarding 
existing antimoney laundering program responsibilities but is not 
intended to create new requirements for banking organizations.
    Concurrent with this guidance, FinCEN will issue guidance to MSB's 
to emphasize their BSA regulatory obligations and to notify them of the 
type of information that they may be expected to produce to a banking 
organization in the course of opening or maintaining an account 
relationship. We are hopeful that this guidance will further clarify 
our expectations regarding banks' relationships with their MSB 
customers. The OCC will continue to work with FinCEN and the other 
Federal banking agencies to provide guidance to the banking industry 
that is clear and consistent, and we commend the efforts of Director 
Fox for the leadership he has shown in addressing this important issue. 
His efforts to foster interagency collaboration and cooperation have 
been extraordinary.
    The BSA has been the focus of regulatory, Congressional, and media 
attention for much of the last year. Clearly, these are very important 
issues to the banking industry, the OCC, and the United States. This 
emphasis and attention on BSA has prompted the industry to feel that 
the regulators have adopted a ``zero tolerance'' approach to BSA/AML 
supervision and enforcement--that any deficiency in a bank's BSA 
processes equates to a violation triggering a cease-and-desist order. 
At the OCC we take this assertion seriously--because it is flat wrong. 
Perhaps it arose in response to monetary fines related to money 
laundering and to enforcement actions by the bank regulators, yet the 
actual number of actions is less than what one might think, given the 
level of concerns raised. For example, the OCC fined two banks for BSA 
violations in the past 12 months. During the fourth quarter of 2004, we 
conducted 368 examinations at which BSA compliance was reviewed, and 
cited four banks for violations of our BSA compliance program 
requirement. Overall, in 2004, we issued eleven cease-and-desist orders 
concerning BSA--less than 1 percent of our population of national 
banks.
    The intense focus on BSA compliance has led to other misperceptions 
about the OCC's policies and practices relating to MSB accounts at 
national banks. In concluding, let me set the record straight on 
several key points: First and foremost, the OCC does not supervise 
MSB's and does not expect national banks to supervise their MSB 
customers. Rather, it is our job to assess the systems and controls 
that banks employ to comply with the BSA, and it is the banks' job then 
to develop and successfully implement such systems and controls.
    Second, the OCC, does not, as a matter of policy, require any 
national bank to close the accounts of an MSB or any other customer 
(except in the context of administrative enforcement actions, where due 
process protections apply). The determination of whether to open, 
close, or maintain an account is a business decision made by the bank 
following its own assessment of the risks presented, in accordance with 
policies and procedures approved by the bank's board.
    Third, the OCC expects banking organizations that open and maintain 
accounts for money services businesses to apply the requirements of the 
BSA, as they do with all accountholders, on a risk-assessed basis. We 
recognize that, depending upon the circumstances of a particular MSB, 
the risks presented are not the same and it is essential that banking 
organizations neither define nor treat all MSB's as posing the same 
level of risk. Banks need to calibrate the level of due diligence that 
they apply to MSB's, and it is entirely appropriate to conduct a lower 
level of diligence for those MSB's that present lower levels of risk.
    Moreover, we absolutely are not saying that because a particular 
type of business or product is high-risk, that a national bank should 
not be involved with it. We absolutely are saying, however, that 
national banks must have systems commensurate with--and adequate to 
identify, monitor, manage, and control--those risks. A crucial question 
today may well be whether a bank has or is willing to incur the cost to 
have such a system of due diligence and controls sufficient to reduce 
the bank's risk to a level that satisfies the regulatory standards that 
apply and is within the bank's own risk appetite.
Conclusion
    Mr. Chairman, Senator Sarbanes, and Members of the Committee, the 
OCC salutes your leadership in this vital area and strongly shares the 
Committee's goal of preventing and detecting money laundering, 
terrorist financing, and other criminal acts and the misuse of our 
Nation's financial institutions. We also believe that important 
objectives are achieved when MSB's have access to banking services, 
consistent with the goals of the antimoney laundering and terrorist 
financing laws. We stand ready to work with Congress, FinCEN, the other 
financial institutions regulatory agencies, and the banking industry to 
achieve these goals.

                               ----------

                   PREPARED STATEMENT OF KEVIN BROWN
          Commissioner, Small Business/Self-Employed Division
                        Internal Revenue Service

                             April 26, 2005

    Good morning, Mr. Chairman and distinguished Members of the 
Committee. I appreciate the opportunity to be here today to discuss the 
Internal Revenue Service's (IRS) efforts involving the Bank Secrecy Act 
(BSA) and to update you on the progress we have made since last 
September.

IRS Enforcement
    Under the leadership of Commissioner Everson, we have strengthened 
the focus on enforcement at the IRS, while maintaining appropriate 
service to taxpayers. We have four enforcement priorities, which are 
to:

 Discourage and deter noncompliance, with emphasis on corrosive 
    activity by corporations, high-income individual taxpayers, and 
    other contributors to the tax gap;
 Assure that attorneys, accountants, and other tax 
    practitioners adhere to professional standards and follow the law;
 Detect and deter domestic and offshore-based tax and financial 
    criminal activity; and,
 Discourage and deter noncompliance within tax-exempt and 
    Government entities and misuse of such entities by third parties 
    for tax avoidance.

    Detecting and investigating money laundering activity is an 
important part of tax compliance for the IRS. In addition, the failure 
to file Forms 8300 and criminal violations of the BSA, including the 
structuring of deposits to avoid currency transaction reporting 
requirements, often have a direct link to both tax evasion and money 
laundering. In some cases, because the schemes are sophisticated and 
because we may not be able to obtain evidence from some foreign 
countries, it is almost impossible to conduct traditional tax 
investigations. In these circumstances, money-laundering violations 
frequently are the only possible means to detect tax evaders.
    Money laundering not only is used by domestic and international 
criminal enterprises to conceal the illegal, untaxed proceeds of 
narcotics trafficking, arms trafficking, extortion, public corruption, 
terrorist financing, and other criminal activities; but it is also an 
essential element of many tax evasion schemes. With the globalization 
of the world economy and financial systems, many tax evaders exploit 
domestic and international funds transfer methods to hide untaxed 
income. These schemes often involve the same methods to hide money from 
illegal sources and to hide unreported income. Both activities 
generally use nominees, currency, wire transfers, multiple bank 
accounts, and international ``tax havens'' to avoid detection.
    Money laundering is the financial side of virtually all crime for 
profit. To enjoy the fruits of their crime, criminals must find a way 
to insert the illicit proceeds of that activity into the stream of 
legitimate commerce in order to provide the resources necessary for 
criminal organizations to conduct their ongoing affairs.
    As part of its core tax administration mission, the IRS addresses 
both the civil and criminal aspects of money laundering. On the civil 
side, the Department of the Treasury has delegated to the IRS 
responsibility for ensuring compliance with the BSA for all nonbanking 
financial institutions not otherwise subject to examination by another 
Federal functional regulator, including money service businesses 
(MSB's), casinos, and certain credit unions. Under this delegation, the 
IRS is responsible for three elements of compliance--(i) the 
identification of MSB's, (ii) educational outreach to all these types 
of organizations, and (iii) the examination of those entities suspected 
of noncompliance.
    IRS' Criminal Investigation (CI) Division is responsible for the 
criminal enforcement of BSA violations and money laundering statutes 
related to tax crimes. CI uses the BSA and money laundering statutes to 
detect, investigate, and prosecute criminal conduct related to tax 
administration, such as abusive schemes, offshore tax evasion, and 
corporate fraud. CI also investigates the nonfiling of Forms 8300 and 
criminal violations of the BSA, including the structuring of deposits 
to avoid currency transaction reporting requirements, which frequently 
have a direct link to both tax evasion and money laundering.

BSA Program in IRS' Small Business/Self-Employed (SB/SE) Division
    In October 2004, SB/SE officially established a new organization, 
the Office of Fraud/BSA, which reports directly to the Commissioner of 
SB/SE. The director, an IRS executive, has end-to-end accountability 
for compliance with BSA including policy formation, operations, and BSA 
data management. The director's operational responsibility includes 
line authority over all field activities, as well as the data 
management.
    The Office of Fraud/BSA consists of four territories, with 
approximately 300 field examiners located in 33 field offices 
nationwide. In addition to this field operation, which is managed by 31 
group managers, technical BSA staffing also includes eight headquarters 
analysts located throughout the country. Our hiring plans call for us 
to have between 320 and 325 field examiners on board by the end of 
fiscal year 2005. In addition, we plan to hire an additional 60 BSA 
examiners in fiscal year 2006.
    As new examiners are brought on board, they receive specialized BSA 
training, including the identification of noncompliant MSB's, detection 
of structuring, and identification of transactions going to OFAC 
(Office of Foreign Asset Control) blocked countries. We also provide 
continuing professional education training classes for our BSA 
examiners in topics such as: (i) Audit Techniques for Anti-Money 
Laundering (AML) Compliance Examinations; (ii) Civil Penalties/
Referrals to FinCEN; (iii) Disclosure; (iv) Currency Banking and 
Retrieval System (CBRS) Analysis; and, (v) Foreign Bank and Financial 
Account Reports (FBAR). To further support the development and 
identification of criminal activities (fraud) during BSA examinations, 
we also provided fraud training for our BSA examiners and Title 31 
training to our Fraud Technical Advisors (FTA's). As a result of this 
cross-training, our FTA's and BSA examiners can work together more 
effectively and ensure that the cases we refer to our Criminal 
Investigation Division are thoroughly developed.
    All of our BSA examiners and their managers devote 100 percent of 
their time to examinations of BSA-related cases. This contrasts with 
years past, when the BSA examiners were required to spend a substantial 
portion of their time on unrelated work, such as traditional income tax 
audits. Additional support personnel (28 employees) provide assistance 
to the examiners, including workload identification. Working in close 
collaboration with Treasury's Financial Crimes Enforcement Network 
(FinCEN), the IRS also conducts community outreach to ensure that MSB's 
are aware of their requirements under the BSA.

Bank Secrecy Act Data
    The IRS currently has responsibility for processing and warehousing 
all BSA documents into CBRS at the IRS Detroit Computing Center. 
However, FinCEN will assume this role in the future upon completion and 
implementation of a new system, BSA Direct, which will replace CBRS. 
BSA documents include FBAR's, Currency Transaction Reports (CTR's),\1\ 
Forms 8300 (Report of Cash Payments Over $10,000 Received in a Trade or 
Business), CMIR's,\2\ and Suspicious Activity Reports (SAR's).\3\ 
Managing the BSA data involves three separate but related functions 
that include: (i) collecting and inputting BSA data from reporting 
institutions; (ii) housing and controlling access to the BSA data after 
it is entered into the central database; and (iii) supporting the IRS 
and other law enforcement query systems to mine BSA data in support of 
law enforcement investigations. Currently, CBRS has approximately 144 
million BSA documents on file. All documents entered into the CBRS 
(approximately 15 million annually) are made available, at FinCEN's 
direction, to other law enforcement agencies (Federal, State, local, 
and international) and regulatory agencies, in addition to the IRS. It 
bears noting that the IRS is one of the largest users of CBRS data.
---------------------------------------------------------------------------
    \1\ CTR's include FinCEN Form 104 and FinCEN Form 103 (filed by 
casinos).
    \2\ Report of International Transportation of Currency or Monetary 
Instruments.
    \3\ SAR's are filed by financial institutions to report suspicious 
activity.
---------------------------------------------------------------------------
    We are aware that the U.S. Government Accountability Office (GAO) 
recently discovered security weaknesses at the Detroit Computing 
Center. We are mindful of those problems, and, in a recent letter to 
GAO, Acting Deputy Secretary Havens outlined the steps that we are 
taking to resolve those problems.

Usefulness of Bank Secrecy Act Data
    The combined currency information in CBRS is very important for tax 
administration and law enforcement. The information provides a paper 
trail or roadmap for investigations of financial crimes and illegal 
activities, including tax evasion, embezzlement, and money laundering. 
The detailed information in these currency reports routinely is used by 
IRS CI special agents and Assistant U.S. Attorneys to successfully 
pursue investigations and prosecutions.
    In civil matters, the IRS uses the CBRS database to identify cases 
for potential examination. For example, in many of our offshore trust 
schemes a search of CTR's can produce a wealth of information. IRS 
field examiners also access BSA documents to assist in on-going 
examinations. The CBRS database is used to assist in case building 
prior to beginning an examination.
    The IRS CI Division has increased its emphasis on BSA 
responsibilities significantly, with particular focus on improving the 
effectiveness and efficiency of Suspicious Activity Report (SAR) Review 
Teams. CI now hosts 64 SAR Review Teams located throughout its 33 
Criminal Investigation field offices. This expansion allows each team 
to focus specifically on SAR's filed in its geographic area. Over 300 
law enforcement agencies participate in some manner in the review of 
SAR's, and IRS has at least 100 special agents and 36 investigative 
analysts assigned, either full or part-time, to these SAR Review Teams. 
CI routinely reviews between 12,000 and 15,000 SAR's per month and uses 
data mining tools to assist teams in efficiently analyzing the ever 
increasing number of SAR's being filed. Training on the use of these 
tools is ongoing. In June, CI will host a national meeting to train 
teams on a recordkeeping program and policy changes designed to improve 
the efficiency of SAR Review Teams.

IRS Coordination with FinCEN
    In carrying out our responsibilities under the Bank Secrecy Act, we 
are engaged in a close partnership with FinCEN. Most recently, we have 
worked with FinCEN's newly established Office of Compliance to finalize 
an information sharing agreement that provides for the routine exchange 
of BSA compliance information, including information concerning 
financial institutions identified as having significant BSA compliance 
deficiencies or violations. These exchanges, spelled out in a 
Memorandum of Understanding (MOU), are intended to help FinCEN in 
fulfilling its role as administrator of the BSA and to assist the IRS 
in conducting examinations of certain financial institutions to assess 
BSA compliance. The IRS and FinCEN expect this MOU will improve and 
enhance the level of interagency cooperation and enable both 
organizations to maximize their resources as they identify, deter, and 
interdict terrorist financing and money laundering. I am happy to 
report that IRS and FinCEN signed the MOU yesterday, with plans for 
immediate implementation.
    IRS Headquarters senior analysts from both SB/SE and CI participate 
in several working groups involving Treasury and other agencies. As 
members of the Informal Value Transfer System Working Group, we are 
working with representatives of FinCEN, the Federal Bureau of 
Investigation (FBI), Immigration and Customs Enforcement (ICE), and the 
Drug Enforcement Administration (DEA) in an effort to identify 
unregistered MSB's. The working group was assembled to develop 
procedures relative to investigative intelligence gathering and 
outreach efforts to MSB's across the country.
    IRS also is a member of the Money Laundering Threat Assessment 
working group, as is FinCEN. The focus of this group is to identify 
money laundering threats throughout the United States through 
investigations conducted by all law enforcement agencies.
    The IRS assigns senior analysts to act as liaisons to FinCEN in 
both civil and criminal matters. Key areas of coordination include:

 Conducting joint monthly meetings to discuss BSA issues, 
    trends, andexamination results;
 Establishing examination priorities;
 Using data-driven analysis to assist in the risk-based 
    identification of cases as well as to identify geographic locations 
    of potential noncompliance;
 Improving the quality of referrals for enforcement;
 Having FinCEN participate in IRS BSA training classes and 
    managers' meetings;
 Incorporating feedback from FinCEN on IRS outreach materials; 
    and,
 Establishing production schedules at DCC for new forms and 
    form revisions.

    Since fiscal year 2003, funding from FinCEN has allowed the IRS to 
add 82 additional full-time employees (FTE's) to its BSA program.
Recent Accomplishments
    Since I appeared before this Committee in September 2004, we have 
made considerable progress at the IRS in enhancing the operation of our 
BSA program:

 MSB Audits--Our goal for MSB examinations is to close more 
    than 3,500 cases during fiscal year 2005, or about 1.8 percent of 
    the estimated 200,000 MSB's. With 3,200 examinations in progress or 
    closed as of March 31, 2005, we fully expect to meet this target. 
    The principal issues we are finding with MSB's include:

 Lack of sufficient recordkeeping;
 Lack of an AML compliance program or one that is not tailored 
    to the entity's risk;
 Failure to identify and investigate suspicious activity, or to 
    identify structuring; and,
 Nonfiling of CTR's.

    As advocated by FinCEN, we also are conducting examinations of some 
larger MSB's at the entity's corporate headquarters level. Five of 
these examinations are underway, with plans to begin additional 
examinations later in 2005. Through this centralized approach we are 
able to work with the businesses to identify their agents with the 
highest risk of noncompliance and then use our examination resources 
accordingly. The result is more carefully focused examinations for the 
MSB's and improved use of our resources. In particular, these 
centralized examinations give us the potential to impact the compliance 
behavior of a much larger number of MSB's. For example, there are 
29,000 MSB's related to the five corporate entities now under 
examination.
    The IRS also is employing for the first time, an examination 
technique known as a ``saturation audit.'' Specifically, we are 
conducting simultaneous examinations of all MSB's located within 
particular ZIP Codes in two cities, which were selected in coordination 
with other law enforcement agencies. In addition to examining the MSB's 
for BSA compliance, this saturation approach allows our BSA examiners 
to identify individuals with unusual patterns of financial activity 
which fall below the reporting threshold. Upon completion of these two 
pilot examinations, we will analyze the results and determine whether 
to initiate similar examinations in additional cities.
 Increased Coordination with the States--Since the last hearing 
    in September 2004, we have obtained the concurrence of the 
    Conference of State Bank Supervisors (CSBS) on our model Fed/State 
    MOU. This past month, IRS and FinCEN conducted joint presentations 
    to CSBS districts to promote the MOU, which provides both the IRS 
    and the participating State the opportunity to leverage resources 
    for examinations, outreach, and training. CSBS also is assisting us 
    as we ``market'' this MOU to the States. I am pleased to tell you 
    that just last week New York State signed the MOU--the first State 
    to do so. We expect that additional States will sign the MOU in the 
    near future.
 Centralized Case Selection--We are moving the responsibility 
    for identifying BSA workload and building these cases from the 
    general IRS Examination program to the Fraud/BSA organization. This 
    newly created operation will incorporate leads from the field and 
    CI, as well as CBRS analysis, and is on track to be fully 
    operational by October 1, 2005. We expect that this approach will 
    ensure consistency in risk-based case selection and result in 
    improved case selection and results.
 Improved Workload Identification--We are exploring two new 
    methods for identifying BSA workload. The first uses a risk-based 
    scoring system based on criteria such as BSA workload priorities, 
    prior compliance history, and BSA reports filed. It is intended to 
    give our classifiers additional information to pinpoint which cases 
    in the potential universe are most in need of examination. The 
    criteria used to select a particular case for examination are 
    included in the case file so that the group manager and the 
    examiner know why the case was selected. Our classifiers in the 
    Western Territory for BSA are using this methodology currently to 
    select all of its BSA cases and will be evaluating the results. If 
    this scoring system proves successful for classifying cases, we 
    plan to implement it nationwide in October 2005, when we have our 
    centralized workload selection unit in place.

    In the second related effort, we are researching the feasibility of 
using CBRS data to create an automated national workload identification 
and selection system for Title 31 cases. The first phase of the 
project--documenting current workload selection practices and 
translating these into rule-based selection factors--is complete. The 
second phase, which entails combining the selection factors into 
formulas that will be run against the CBRS, is just getting under way. 
In the third phase, we will be testing the effectiveness of the 
selection formulas in identifying appropriate BSA workload, and making 
any necessary adjustments. If this technique is successful in 
identifying the universe of potential cases, we will begin employing 
the new methodology early in 2006--most likely in tandem with the 
classification method descried above.
 Reengineering--To increase the effectiveness and efficiency of 
    our BSA examiners, we are reengineering the examination process. We 
    have developed standardized workpapers for BSA examinations that 
    delineate clearly the audit steps the examiner must complete to 
    ensure that the recordkeeping and reporting requirements of the 
    entity under examination are being met. The workpapers also provide 
    guidance on evaluating the entity's AML compliance program to 
    determine if it is 
    commensurate with the risk that the entity could be used as a 
    vehicle for money laundering or terrorist financing.

    Other aspects of the BSA reengineering include managerial review 
meetings with the examiner after the initial interview with the entity, 
and a requirement to set a mutual commitment date for the completion of 
the examination which will be shared with the entity and the manager.
    We anticipate that we will begin training our employees in June 
2005 on the use of standardized workpapers to document their cases, as 
well as the other requirements of the reengineered examination process. 
All of the standardized documents will be available on the examiners' 
computers.

 Better Education and Outreach--The national strategy for 
    education and outreach related to antimoney laundering (AML) was 
    designed in conjunction with FinCEN, SB/SE, and CI to increase 
    compliance of MSB's and casinos with the BSA and is carried out by 
    SB/SE's Taxpayer Education and Communication (TEC) Division. Our 
    BSA outreach specialists are located in the six top HIFCA (High 
    Risk Money Laundering and Related Financial Crimes Areas)--Miami, 
    New York, Chicago, Houston, San Francisco, and Los Angeles. They 
    work frequently with MSB trade associations to reach large numbers 
    of stakeholders. Since October 2004, the TEC BSA specialists have 
    contacted 158 new entities in an effort to establish relationships 
    for AML/BSA outreach. They also have participated in 80 AML 
    outreach events where they interacted with more than 8,000 
    individuals. In March 2005, Tax Talk Today featured a presentation 
    for practitioners, payroll professionals, and financial planners on 
    BSA. The viewership of this live, Internet program cosponsored by 
    IRS has grown to almost 55,000 registered sites.
 Streamlined Quality Review--IRS also is in the process of 
    implementing a centralized closed case review process which is 
    intended to identify compliance trends and training needs for 
    particular programs, including BSA.

Conclusion
    As I stated earlier in this testimony, the fight against money 
laundering and terrorist financing are top priorities for the Internal 
Revenue Service. We are prepared to increase our commitment to the BSA 
Program, and we will continue to coordinate our efforts closely with 
FinCEN.
    Mr. Chairman, I thank you for this opportunity to appear before 
this distinguished Committee and I will be happy to answer any 
questions you and the other Members of the Committee may have.

                  PREPARED STATEMENT OF WILLIAM J. FOX
             Director, Financial Crimes Enforcement Network
                    U.S. Department Of the Treasury

                             April 26, 2005

    Chairman Shelby, Senator Sarbanes, and distinguished Members of the 
Committee, I appreciate the opportunity to appear before you again to 
discuss the programs the Financial Crimes Enforcement Network is 
implementing under the Bank Secrecy Act, as amended, relating to the 
money services business sector. We very much appreciate the support and 
policy guidance you and Members of this Committee have offered to us. 
Your leadership and commitment to understand and publicly discuss the 
issues facing the money services business sector is critical not only 
to the safety of our financial system, but also to our Nation's 
security.
    I am honored to be here today with Acting Comptroller Julie 
Williams from the Office of the Comptroller of the Currency; 
Commissioner Kevin Brown of the Small Business/Self-Employed Division 
of the Internal Revenue Service; and, Superintendent Diana Taylor from 
the State of New York Banking Department. All of these officials lead 
agencies that play critical roles in implementing a rational Bank 
Secrecy Act regulatory regime on the money services business sector. I 
am pleased to advise this Committee that we have continued to build on 
our very good working relationship with each of these agencies, as well 
as with other Federal and State regulatory agencies that share our 
efforts. The importance of our working relationship with these and 
other agencies cannot be overstated. In fact, if we are to be 
successful in achieving the goals of the Bank Secrecy Act, we must 
ensure that the government--policymakers, regulators, and law 
enforcement--speaks with one voice on these issues. The confusion 
resulting from different messages has serious ramifications, which can 
be devastating. The need for such close coordination to meet the 
challenges under the Bank Secrecy Act is particularly acute with 
respect to the money services business industry.
    When I appeared before you last June, I outlined a plan for 
establishing more aggressive and coordinated administration of the 
regulatory implementation of the Bank Secrecy Act. In September, I 
updated you on that plan. Since that time, we have made extensive 
progress in the following areas:

 We have executed agreements with the five Federal banking 
    agencies and the Internal Revenue Service to provide information to 
    us in both specific and aggregate fashion to give us a better 
    understanding of the overall level of Bank Secrecy Act compliance 
    in the industry. This understanding will enable us to better 
    oversee the various sectors in the financial industry we regulate 
    and administer the Bank Secrecy Act. In each of those agreements, 
    we have committed our direct involvement and support to those 
    regulators in helping them discharge their regulatory obligations. 
    We are currently working hard to get similar agreements with the 
    Securities and Exchange Commission and the Commodity Futures 
    Trading Commission.
 Working closely with the Conference of State Bank Supervisors, 
    we have developed a model information-sharing agreement that we 
    will seek to execute with all States that regulate banks, money 
    services businesses, and other types of financial institutions for 
    compliance with the Bank Secrecy Act or similar antimoney 
    laundering requirements. This agreement is patterned after the 
    agreement we have executed with the Federal banking agencies and 
    the Internal Revenue Service. In fact, I am pleased to tell you 
    that the first State banking regulator with whom we have executed 
    the model agreement is the State of New York Banking Department. 
    These agreements will, in my view, take our oversight and 
    administration of these programs to the next level. We will have a 
    much clearer picture of the various financial industries we 
    regulate, including money services businesses; our collective 
    actions and concerns can be better coordinated; and we will better 
    leverage information and resources as a result of these agreements.
 Our new Office of Compliance, established last year with the 
    support of the Congress and the Department of the Treasury, 
    particularly this Committee, is well on its way to full staffing. 
    This office will be devoted solely to overseeing the implementation 
    of the Bank Secrecy Act regulatory regime by the regulators with 
    delegated examination authority. We are in the process of staffing 
    the 18 positions provided by the Congress and purchasing the desks, 
    computers, and other equipment needed to support them. Several of 
    these individuals have already reported for duty.
 As I committed to you last June, we have established a new 
    Office of Regulatory Support in our Analytics Division, thereby 
    devoting for the first time in the history of the Financial Crimes 
    Enforcement Network, a significant part of our analytic muscle to 
    our regulatory programs. We now have devoted over one quarter of 
    our analysts solely to this mission. Among other things, these 
    analysts are being used to identify compliance weaknesses in the 
    reporting submitted by regulated industries as well as trends, 
    patterns and threats. The analysts are and will continue to assist 
    our Office of Compliance and the other delegated supervisory 
    regulators to be smarter about their programs for Bank Secrecy Act 
    compliance.
 Finally, we have established a secure web site that will form 
    the platform for much deeper information sharing under the 
    authority of Section 314(a) of the USA PATRIOT Act. Section 314(a) 
    contemplated a ``two-way'' conversation between the Government and 
    private sector on relevant issues relating to money laundering, 
    terrorism and other illicit finance. Soon, we will begin providing 
    information to the financial industry--on both a macro and micro 
    level--that will help them assess the risks related to their 
    business lines and customers, which will enable them to better 
    discharge their responsibilities under the Bank Secrecy Act.

    When I appeared before this Committee last September, my statement 
provided an overview of money services businesses and outlined the 
challenges we collectively face to ensure a healthy, yet safe and 
transparent sector. Because that is already part of the Committee's 
developing record on these issues, I will not repeat that information 
here today. Instead, my testimony will focus on several specific issues 
of concern that have arisen since last fall regarding money services 
businesses. I will also set out for you what we have accomplished, as 
well as the issues that we believe still need to be addressed.
    It is fair to say that the Bank Secrecy Act regulatory climate has 
changed dramatically since I appeared before you last September. One 
result of this change has been an increase in what we call the 
``defensive filing'' of suspicious activity reports. We believe this 
climate change has also caused many institutions to reassess the risks 
associated with large portions of their customer base. This 
reassessment of risk is not a bad thing; in fact, many in the financial 
industry have told us that the heightened scrutiny on Bank Secrecy Act 
compliance has caused their institutions to ``know'' their customers 
better. However, the reassessment of risk has also led many 
institutions to conclude that certain customers pose too much risk for 
the institution to continue to maintain an account relationship. These 
institutions have begun to terminate their ``risky'' account 
relationships and the money services businesses sector is an industry 
sector that has suffered the wide-spread termination of banking 
services. Unfortunately, we are concerned that often decisions to 
terminate account relationships may be based upon fear and confusion, 
or on a misperception of the level of risk posed by money services 
businesses.
    Once we recognized that account termination was becoming a wide-
spread problem, and at the direction of Secretary Snow, we and the Bank 
Secrecy Act Advisory Group's Non-Bank Financial Institutions and 
Examinations subcommittees held a public fact-finding meeting to elicit 
the perspectives of money services businesses and banks why these 
account relationships were being terminated. The meeting, held on March 
8 of this year, confirmed that money services businesses of all types 
and sizes are losing their bank accounts at an alarming rate, even when 
those money services businesses appeared to be complying with the Bank 
Secrecy Act and State-based regulatory requirements. We also heard an 
unprecedented level of concern among small and large banking 
institutions alike that opening or maintaining accounts for money 
services businesses will be too costly, pose too great a threat of 
reputational risk, or will continue to subject them to heightened 
regulatory scrutiny from examiners. These concerns are exacerbated by 
the perceived risks presented by money services business accounts, and 
the costs and burdens associated with maintaining such accounts, the 
perception that banks are being evaluated against regulatory standards 
that have not been explained, misperceptions about the requirements of 
the Bank Secrecy Act, and the erroneous view that money services 
businesses present a uniform and unacceptably high risk of money 
laundering or other illicit activity.
    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. It is long-standing Treasury 
policy that a transparent, well regulated money services business 
sector is vital to the health of the world's economy. It is important 
that money services businesses that comply with the requirements of the 
Bank Secrecy Act and applicable State laws remain within the formal 
financial sector, subject to appropriate antimoney laundering controls. 
Equally as important is ensuring that the money services business 
industry maintain the same level of transparency, including the 
implementation of a full range of antimoney laundering controls as 
required by law, as do other financial institutions. If account 
relationships are terminated on a wide-spread basis, we believe 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 our achieving the goals of the Bank 
Secrecy Act.
    As my colleagues in the regulatory agencies and I are well aware, 
financial industry members across the spectrum are genuinely concerned 
about the heightened levels of scrutiny placed upon their institutions. 
Unfortunately, we continue to see 
institutions with very basic compliance failures that have a 
significant impact, while at the same time, we see institutions across 
the spectrum working harder than ever to ensure compliance with this 
regulatory regime. These institutions perceive a significant regulatory 
and reputation risk being placed upon their institutions by examiners, 
prosecutors, and the press. This perception is not irrational. 
Institutions are trying hard to determine what it takes to comply with 
the Bank Secrecy Act regulatory regime in this time of heightened 
scrutiny.
    Based upon what we learned at the March 8 meeting, and in 
discussing these issues with other Federal regulators, we have 
developed and are implementing a three-point plan for addressing these 
issues:

Guidance--Develop Guidance Jointly with the Federal Banking Agencies
to Outline with Specificity Bank Secrecy Act Compliance Expectations
when Banks Maintain Accounts For Money Services Businesses
    On March 30, 2005, the Federal banking agencies and we took the 
first step toward addressing these issues by issuing a Joint Statement 
on Providing Banking Services to Money Services Businesses. The purpose 
of the Joint Statement was to assert clearly that the Bank Secrecy Act 
does not require, and neither the Federal banking agencies nor we 
expect, banking institutions to serve as de facto regulators of the 
money services business industry. The Joint Statement also made it 
clear that banking organizations that open or maintain accounts for 
money services businesses are expected to apply the requirements of the 
Bank Secrecy Act to money services business customers on a risk-
assessed basis, as they would for any other customer, taking into 
account the products and services offered and the individual 
circumstances.
    This was just a first step. In the Joint Statement, we pledged to 
issue further, more specific guidance that would outline further our 
collective compliance expectations for both banking institutions and 
money services businesses. We believe this guidance will help clarify 
the Bank Secrecy Act requirements and supervisory expectations as 
applied to accounts opened or maintained for money services businesses. 
We are not so naive as to believe that this guidance will solve all 
issues, nor that it will repair all relationships between money 
services businesses and banking organizations. We are, however, 
committed to continue to work with the Federal banking agencies and our 
other Federal and State partners to do everything we can as responsible 
and responsive regulators, to issue guidance, clarify expectations, and 
answer questions.

Education--Provide to the Banking Industry 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
    We will build on the significant steps that the Federal banking 
agencies and we have taken toward establishing the framework and 
mechanism for providing educational outreach. For example, we are 
working together with the Federal banking agencies to develop a unified 
set of examination procedures for Bank Secrecy Act compliance, which 
will include a section devoted to money services businesses. Moreover, 
we have already begun joint examiner training through a partnership 
with the Federal Financial Institutions Examination Council that will 
provide a forum to provide training on the money services business 
industry. Finally, at the Financial Crimes Enforcement Network, we are 
developing a series of free training seminars for industry, regulators, 
and law enforcement that will undertake many of the issues that are 
currently vexing all interested parties.

Regulation--Strengthen The Existing Federal Regulatory And Examination
Regime For Money Service Businesses, Including Coordinating With State
Regulators To Better Ensure Consistency And Leverage Examination
Resources
    We will continue to evaluate and modify, if necessary, the existing 
Bank Secrecy Act regulatory requirements relating to money services 
businesses. This is an important exercise not just for money services 
businesses, but for all regulatory requirements. Our regulatory regime 
is not and cannot become static. We must be willing to change course 
when required to ensure the goals of the Bank Secrecy Act are being 
met. We have started this effort for money services businesses. For 
example, after consulting with law enforcement, we recently proposed to 
revise, simplify, and shorten the money services businesses suspicious 
activity form. This action will enhance the industry's ease of 
completing the form while still obtaining critical information needed 
by law enforcement. We will reexamine our registration requirement for 
money services businesses and ensure that it is achieving the purpose 
intended in the law; that is, to identify the universe of lawfully 
operating money services businesses so law enforcement can focus on 
those businesses that are operating outside the bounds of the law. We 
will also take a hard at our definitions about what is a money services 
business and ensure we have not captured entities that pose little or 
no money laundering or illicit finance risk.
    We will 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, as I noted 
previously, we have worked and will 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 
to better leverage some of the good work and resources of those 
agencies.
    We also will continue to work to develop indicators that can be 
used by 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 the regulatory 
regime. It remains vital that we strike the appropriate balance between 
education and outreach to those businesses that remain ignorant of the 
regulatory requirements, and aggressive criminal enforcement of those 
businesses operating underground.
    Perhaps the best outcome of the events of late has been the express 
recognition of the need for all the stakeholders in the Bank Secrecy 
Act arena to work more closely together to reach our collective goals 
in a consistent manner. We are working closer with the regulatory 
agencies that have delegated examination authority for the Bank Secrecy 
Act than ever before. Not only are we issuing joint guidance and 
developing uniform examination procedures, but we also are sharing 
information in a deeper and broader way, as well as developing 
synergies to the benefit of the regulatory regime as a whole. We are 
also working more closely with law enforcement. We have formed an 
interagency working group that brings together regulators and law 
enforcement to work together to identify and address money services 
businesses that may not be complying with the law and regulations. 
Finally, we are setting the stage by building platforms, systems and 
technologies such as BSA Direct that will allow us to leverage 
information in a way that we never have before.
    We understand that we must move with all possible speed we can 
muster and that when we move we must get it right. September 11 raised 
the stakes. The old paradigm of a Nation being able to defend its 
citizens from outside threats with walls and military might--a paradigm 
that has been with the world since Rome--have vanished on that terribly 
brilliant day three and a half years ago. That day proved a terrible 
new reality we all face: The threat to our Nation's security can come 
from within; from people living next door to us, shopping at the same 
supermarkets, getting gas at the same gas stations, receiving cash from 
the same ATM's, and taking the same flight.
    This threat demands a different way of looking at things--a 
different way of protecting our citizenry. No longer can citizens be 
passive about the defense of our country. The Government cannot do it 
alone. What we know about this new reality is that information is now 
central to the security of the Nation. And the simple fact is that 
information is what the Bank Secrecy Act regulatory regime is all 
about. This regulatory regime should be directed at safeguarding the 
financial industry from the threats posed by money laundering and 
illicit finance and it should be directed at providing the Government 
with the right information; relevant, robust and actionable information 
that will be highly useful to law enforcement and others. It is my view 
that best way to achieve these goals is to work in a closer, more 
collaborative way with the financial industry. This regime demands a 
partnership and an on-going dialogue between the Government and the 
financial industry if it is ever going to realize its true potential. I 
am convinced that the vast majority of our financial industry members 
are committed to this partnership. Our goal is to do all we can to 
ensure that the Government lives up to its side of the bargain.
    Mr. Chairman, Senator Sarbanes, distinguished Members of the 
Committee, the importance of your personal and direct support of these 
efforts cannot be overstated. Your oversight will ensure that we meet 
the challenges that we are facing. I know how critical it is that we do 
so and we hope you know how committed we are to meeting those 
challenges. Thank you.

                               ----------

                 PREPARED STATEMENT OF DIANA L. TAYLOR
                 New York State Superintendent of Banks

                             April 26, 2005

Introduction
    Good morning Chairman Shelby and Ranking Member Sarbanes, I am 
Diana Taylor, Superintendent of Banks for the State of New York and a 
Member of the Board of Directors for the Conference of State Bank 
Supervisors.
    Thank you for holding this hearing on an issue that is of great 
interest to those of us who oversee the financial services industry at 
the State level, and who are very concerned about the sometimes 
conflicting priorities of regulation, law enforcement, and the ability 
of necessary businesses to operate. This has become a very serious 
concern as issues of financial crimes, especially money laundering, 
figure so prominently today.
    Seven months ago, this Committee brought the issue of compliance 
with the Bank Secrecy Act and antimoney laundering provisions of the 
law (BSA/AML) in the Money Services Businesses (MSB's) to the Nation's 
attention with its initial oversight hearing. I testified at that 
hearing and I thank you for this opportunity to continue the 
discussion.

Who We Are
    The New York State Banking Department is the regulator for more 
than 3,400 financial institutions and financial service firms in New 
York State. This number includes State-chartered banking institutions, 
the vast majority of U.S. offices of international banking 
institutions, all of New York State's money transmitters, check 
cashers, mortgage brokers, mortgage bankers, and budget planners. The 
aggregate assets of the companies and institutions supervised by the 
Banking Department are nearly $2 trillion.
    Relevant to today's hearing, the Department is responsible for 
licensing, supervising, examining, and regulating the check cashing and 
money transmitting businesses which operate in New York State.
    We currently license 213 check cashers with 964 locations, 
employing 4,000 people. In 2003, in New York State alone, licensed 
check cashers cashed more than 36.4 million checks with an aggregate 
face value of some $14.9 billion.
    Nationwide, according to the trade group representing check 
cashers, this sector comprises some 11,000 neighborhood locations, 
which cash upward of 180 million checks annually with an aggregate face 
value of more than $55 billion.
    Beyond the check cashers, there are 72 licensed money transmitters 
operating in New York through approximately 28,000 agents in New York 
State, employing more than 63,000 people. In 2004, these licensed money 
transmitters processed more than 90 million travelers checks, money 
orders, official checks issued on behalf of banks and remittances with 
an aggregate face value of over $101 billion in New York alone.
    These figures represent just one State. I do not have comparable 
nationwide figures, but a quick extrapolation would indicate that check 
cashers and money transmitters constitute a very large presence which 
serves a very large market. Check cashers and money transmitters need 
banks to conduct their business. This is how they move money. Thus, the 
banks become portals into our financial system. It goes without saying 
that the scope of the task of overseeing this large and growing sector 
of the financial services industry is enormous.
    MSB's fill a real need by providing financial services in areas 
where there are very few if any bank branches. These are typically very 
low income areas. MSB's exist in immigrant and minority communities 
where people have varying levels of comfort with the banking system for 
a broad range of reasons, from cultural to educational to personal 
preference. MSB's provide an alternative to banks--they are easy to 
access, and they are convenient in terms of cost, proximity to their 
markets and hours of operation. In addition, an MSB location may 
provide a wide variety of other services. One might ask why banks are 
not providing these services, but that is outside the scope of today's 
discussion.
    We need to keep this industry viable. There are thousands of people 
for whom check cashers and money transmitters are the sole means of 
access to their cash, and the sole means of moving that cash. Many are 
immigrants who make use of this system to send money back to families 
and loved ones in their countries of origin. A significant portion of 
the economies of many third world countries are dependent upon these 
resources.

The MSB Industry
    The following chart diagrams how the MSB industry interfaces with 
the banks and with its customers.



    As with any financial service business, MSB's have particular risk 
factors, or vulnerabilities. One of the goals of law, regulation, and 
compliance systems is to reduce those factors as much as possible, 
while at the same time allowing legitimate business to be conducted.
    The first vulnerability to consider with MSB's is the customer 
base. We have to acknowledge that there will always be those who are 
looking for ways to exploit MSB's, and indeed the financial system, for 
the purpose of laundering funds and other illegal activities. Second, 
legitimate customers and businesses are vulnerable to the practices of 
unlicensed or unregistered MSB's, or unauthorized agents as may be 
applicable, where they are not afforded the same level of consumer 
protection as with a licensed MSB.
    Third, licensed MSB's are open to reputational risk or guilt by 
association as a result of the activities of those unlicensed MSB's.

Regulation and Supervision of MSB's--New York State's Top-Down
Approach
    State regulators are a very important component in the effort to 
reduce the risks and vulnerabilities of this industry. Many States are 
actively involved in ensuring compliance with BSA/AML requirements. At 
least 45 States are now reviewing financial institutions for BSA 
compliance. A growing number of States are also examining for BSA in 
money services businesses.
    In New York, we are empowered to enforce the provisions of the USA 
PATRIOT and Bank Secrecy Acts through our supervisory powers over 
MSB's. We are in the process of significantly enhancing our ability to 
carry out our responsibility to ensure that MSB's are sound, that they 
are obeying the law and that customers are protected.
    We hope that by strengthening our regulation and examination 
processes and personnel, banks will develop a sufficient level of 
confidence that New York State licensed MSB's are operated in a safe 
and sound--and legitimate--manner.
    In general terms, we look at safety and soundness of all 
institutions we regulate banks and nonbanks--with an eye to the 
preservation of our monetary system as a whole, as well as providing 
consumer protection.
    For MSB's in particular, our licensing criteria include, but are 
not limited to, character and fitness standards; safety and soundness 
standards as may be evidenced by net worth, liquidity and bonding 
requirements; and compliance, inclusive of BSA/AML standards, for 
example policies and procedures which are in place and being followed 
effectively, and a designated compliance officer experienced in the 
field.
    For us, BSA/AML standards are pertinent from the moment an 
applicant seeks permission to open a money services business in New 
York State. We require, among other information, an Anti-Money 
Laundering Compliance Manual, and an affidavit indicating compliance 
with the USA PATRIOT Act, inclusive of the four requirements for an 
effective antimoney laundering compliance program:

 First, policies, procedures and internal controls designed to 
    ensurecompliance with BSA/AML requirements;
 Second, a compliance officer responsible for day-to-day 
    compliance with the BSA/AML and a compliance program;
 Third, education and/or training of appropriate personnel; and
 Fourth, an independent review to monitor and maintain an 
    adequate program.

    At a minimum, the first three points must be in place prior to our 
issuing a license. This allows the Department to assess the BSA/AML 
knowledge base of the applicant and ensure--from the very beginning--
that the compliance program is adequate.
    The subsequent examination process allows the Department to test 
the implementation of the compliance program presented during the 
application process.
    The core BSA/AML examination program that we use for both banks and 
MSB's is the same as that used for banks by the Federal agencies. 
Although a standardized examination program is available, it is a 
flexible format that may be tailored to the risk profile of a given 
licensee. In addition, all sources of information available are used to 
determine a licensee risk profile, for example Cash Transaction Reports 
and Suspicious Activity Reports filed with FinCEN. In the field, 
transaction testing is performed using a variety of sampling 
techniques.

Supervision of Licensed MSB's
    There are many similarities in how we look at banks and at MSB's as 
businesses. Because they differ in that MSB's are not depository 
institutions, we have come up with a slightly different protocol. While 
we (along with the Federal Reserve Board) use the CAMELS system for 
banks, we have developed an assessment protocol known as FILMS for 
MSB's.

 F--is for Financial Condition. Our examiners look at balance 
    sheets, levels of permissible investment, level and quality of 
    capital, the quality and quantity of earnings, trends and stability 
    and they analyze liquidity, profitability and leverage.
 I--is for Internal Controls and Auditing. How effective are 
    the MSB's controls and overall internal control environment?
 L--is for Legal and Regulatory Compliance. This is critical--
    how good is the business at adhering to applicable State and 
    Federal laws and regulations? How effective is compliance and can 
    management spot and correct any compliance issues or gaps? Is the 
    BSA/AML program effective or deficient?
 M--is for Management. Examiners look at the overall 
    performance and the licensee's ability to identify, measure, and 
    monitor risks. Succession plans are also important as is 
    responsiveness to recommendations by auditors and supervisors.
 S--is for Systems and Technology. An important part of the 
    exam, particularly for money transmitters, is the IT audit, testing 
    the management, development, and support of information systems.

Law Enforcement--Bottom-Up Approach
    We have found that law enforcement agencies and their bottom-up 
approach dovetails very well with our top-down method of regulation and 
supervision of the MSB industry. Law enforcement can identify 
information at the street level in terms of the type of suspicious 
activity, including hawalas, or patterns of activity that may be 
flowing through both licensees or unlicensed entities. Partnering with 
law enforcement for information sharing and coordination provides a 
solid basis to identify inappropriate or unlicensed activity and 
assists in targeting where this activity might be taking place.
    In New York State, we have formed a very successful in partnership 
with law enforcement and we have been effective in shutting down 
unlicensed MSB's, and licensed MSB's who may be conducting illegal 
activities. For example, most recently, on March 24, 2005, through the 
cooperative effort of the Department and the FDIC, the Manhattan 
District Attorney announced the indictment of an unlicensed money 
transmitter known as Vietnam Service, Inc. and its owners on charges of 
moving almost $25 million to Vietnam in the last 3 years.

The Challenge
    BSA/AML concerns have overshadowed the MSB industry to the point 
where very few banks will do business with them. This does not 
necessarily mean these businesses will disappear--the demand for their 
services is very strong. It does mean that they will have to find 
alternative means to move money. This result would defeat the intent of 
the law. Imagine the crisis this would engender: Planes and trucks 
loaded with cash traversing borders. Following the money under 
circumstances such as these would be made even more difficult.
    One of New York's largest banks, which has historically represented 
the majority of the market for MSB's, sent discontinuance letters to 
two dozen wire transfer businesses just last month, citing compliance 
burdens associated with servicing these firms. These businesses, and 
others, have come to us asking us to intervene. They have been 
experiencing profound difficulty in interesting any other banks in 
working with them. We are very worried that many of these transmitters 
may have no alternative but to shut down their businesses, leaving 
thousands of legitimate customers in the lurch.
    This problem of banks being reluctant to open accounts for MSB's 
stems in large part from their concerns over the lack of regulatory and 
supervisory guidance in the area of BSA/AML which creates uncertainty 
in the market. There has been a history of deferred prosecutorial 
agreements and very large penalties being extracted from institutions 
for what is arguably not criminal behavior. In addition, regulators 
have told them this is a high risk area of business. Many banks have 
decided the cost of setting up the compliance systems and uncertainty 
about their own role with regard to regulation. Moreover, the fear of 
monetary penalties and loss of reputation at best and the fear of 
prosecution by law enforcement agencies at worst is just not worth it.

The Solutions, Next Steps
    Now that these problems have been recognized, and defined, there 
are several steps that should be taken to resolve these issues. Each 
one of these elements is important. They range from clarification of 
the law, to working together cooperatively, to making sure examiners 
are trained appropriately and the industry is educated as to what is 
required, to the need more uniformity of standards across the country.

Guidance
    First and most important, FinCEN and the Federal banking 
supervisors recently announced that guidance on BSA/AML compliance 
would be issued soon. This is very welcome news and promises a strong 
step in the direction of providing more clarity to the banks as to 
their BSA/AML requirements with respect to MSB customers. This guidance 
will assist banks in determining the measures they should undertake. 
One very important issue that was made clear is that banks are not 
expected to become or act as MSB regulators.
    One issue that I hope to see clarified in the forthcoming guidance 
has to do with the OCC preemption of State depository and lending laws. 
Under the current OCC rules, operating subsidiaries of nationally 
chartered banks, including MSB's, may ignore any State licensing or 
other regulatory requirement. I think it is important under these 
circumstances that a means be crafted to establish national standards 
regarding these entities, along with a very clear understanding of who 
is responsible for what in this area.

Coordination Among Regulatory Agencies
    I am so pleased to report that since that initial hearing last 
September we have all made significant progress toward a plan to 
achieve a coordinated approach through communications. I especially 
want to thank this Committee for recognizing that the State regulators 
are an important part of the solution. Over the last few months, the 
Conference of State Bank Supervisors (CSBS) has worked diligently with 
all of the States, our Federal bank regulatory counterparts, FinCEN and 
the IRS to produce two model Memoranda Of Understanding (MOU's) setting 
forth procedures for the exchange of certain BSA information between 
the States and FinCEN and the IRS, respectively. In addition, these 
efforts resulted in the creation of a model side letter agreement 
between the States and the Federal banking agencies to facilitate 
sharing by the State and Federal banking regulators of jointly held BSA 
examination material with FinCEN and the IRS.
    In return, the States will receive analytical tools from FinCEN 
that will maximize resources and highlight areas and businesses with 
higher risk for money laundering. The agreement with the IRS will allow 
for examination-sharing to reduce duplicative efforts and establish an 
ongoing working relationship.
    This is an unprecedented cooperative agreement. We have all 
recognized that no one of us can be effective in this area without the 
others. Each one of us has resources needed by the others to do their 
jobs effectively.
    Both FinCEN and the IRS have been exceptionally cooperative in 
outreach efforts to answer all State questions about the agreements, 
and as a regulator who is keenly concerned about the MSB's enjoying a 
viable and visible future, I am deeply grateful for this.
    Throughout the process of developing these agreements, CSBS has 
worked with other organizations of state MSB regulators, including the 
Money Transmitters Regulatory Association (MTRA). The information-
sharing agreement templates are designed to be signed by any State 
regulator with jurisdiction over those entities that fall within the 
purview of BSA/AML issues.
    In March, the CSBS Board of Directors endorsed the information-
sharing agreements and strongly urged all State banking departments to 
join as signatories on the MOU's. CSBS is distributing the information 
sharing agreements to the State banking departments.
    On behalf of New York, I have signed the MOU's with the IRS and 
FinCEN. Our goal is to obtain signatures from all 50 States to cement 
this relationship with both FinCEN and the IRS. Not only will these 
agreements provide additional information to the regulators, but also 
the more information FinCEN receives and is able to analyze, the better 
the guidance from State and Federal regulators will be.
    These MOU's highlight the recognition by FinCEN and the IRS of the 
vital role that States play in BSA/AML supervision and enforcement for 
both banks and MSB's. These MOU's provide the mechanism for increased 
communication and enforcement, leading to more effective compliance for 
banks and MSB's. Also, importantly, the MOU's provide for the sharing 
of training and examination and other program materials, addressing 
resource issues at both the State and Federal levels.

Coordination with Law Enforcement
    Addressing the banks' fear of prosecution is a challenge. Some 
prosecutors seem to be of the opinion that all instances of criminal 
behavior can be and should be prevented. I am in absolute agreement 
that criminal behavior, especially in the area of BSA/AML issues is 
serious, and must be punished appropriately. However, there is no 
system in the world that is going to catch every single case 
immediately, if ever. This is not to say we should not try, but we must 
be realistic about it or we will render inoperable a system which has 
served us all very well. Regulatory matters such as BSA/AML compliance 
failures are being criminalized and weaknesses, deficiencies and 
mistakes are being prosecuted in ways which I think are 
counterproductive.
    I believe it is more constructive for us to work with banks, in a 
supervisory mode, to build strong compliance with BSA/AML. The powerful 
supervisory tools of administrative action and enforcement sanctions 
can be used toward this end.
    But, in order to do this, we as regulators, the banks and the users 
of the financial system need to know what the rules are, which is why 
FinCEN's guidance is so critical.
    Our supervisory and regulatory powers can be very helpful to law 
enforcement in weeding out and prosecuting violators of the law. It is 
we the regulators who can require these entities to have effective BSA/
AML compliance programs in place; it is we the regulators who examine 
and detect noncompliance with BSA/AML; issue enforcement actions to 
correct and penalize violations; and it is we the regulators who 
oversee compliance with corrective actions. It is law enforcement that 
prosecutes criminal behavior when regulators are ignored, or not doing 
their jobs.
    I strongly believe that if MSB's are in compliance with BSA/AML as 
interpreted by FinCEN, that this should be a sufficient compliance 
standard for the banks, their regulators and criminal law enforcement 
authorities. I do not believe that banks or their principal management 
should be subject to criminal prosecution if the appropriate regulator 
has determined the compliance standards of the banks are sufficient 
under the law and I believe that criminal prosecution should only 
extend to a bank or any bank personnel that is knowingly violating BSA/
AML standards for criminal purposes.
    The real lesson of this discussion is that to have a real and 
lasting effect on illegal activity in this area, it is essential that 
the agencies involved in the regulatory, investigative and enforcement 
frameworks for MSB's proactively cooperate with each other. To that 
end, we have formed a working group in New York State which includes 
representatives from State and Federal Homeland Security, the NYS 
Department of Criminal Justice Services, the New York County District 
Attorney's office, the FBI, IRS, ICE, and the NYPD. As a designated 
High Intensity Financial Crime Area, (HIFCA) we have a template for 
this level of cooperation. No one agency can combat this illegal 
activity on its own.

Examiner Training
    Another part of the solution is rigorous examiner training. Because 
MSB's are not banks, they require a different examiner perspective than 
the one used in bank examination. Certain organizations, such as the 
MTRA, do offer industry-specific examination training. This could be 
useful for States with a less specific protocol than New York's. In my 
testimony last fall, I suggested that the Federal Government might play 
a roll in funding training for State bank examiners to ensure a 
uniformly high level of competence.
    Continuous BSA/AML training programs for the general examination 
staff is essential. We take advantage of external training resources 
when available but we also have developed our own training programs in-
house that are based upon our regulatory and supervisory requirements, 
industry best practices and real life examination experiences. In 
addition, we have specialists for internal controls, BSA/AML compliance 
and systems technology. Special training is needed in each of these 
areas.
    In developing a national standard, it is key that these training 
opportunities and resources can be effectively shared among the States. 
This may be accomplished by sharing training programs and examination 
manuals that may be available for MSB's. Hands-on examination 
experience can be obtained through joint or coordinated examinations as 
evidenced through the efforts of the MTRA. In addition, the CSBS is 
currently working on plans for a BSA examiner ``boot camp'' training 
program that will be offered nationwide later this year. Federal 
assistance in these areas would be very valuable.

Industry Education
    Education must not be restricted to the regulators. Both the MSB 
and banking industries need to be thoroughly knowledgeable concerning 
BSA regulatory and supervisory standards.
    I firmly believe that it is the regulator's job to ensure that the 
entities--all the entities--under its purview fully understand what is 
expected of them through the exam process and in day-to-day behavior. 
This is, for many people, where we experience the disconnect, or 
misconnection, between law enforcement and regulators. Our job is to 
help banks and MSB's understand what the law is, what the regulations 
do, and ensure they have the systems set up to comply, which will help 
avoid prosecution which can harm the reputation of an entire industry 
and close down a business.
    We continue to work with the MSB industry to ``raise the bar'' of 
supervisory standards and communicate those standards and our 
supervisory expectations. The banking industry must be informed of our 
standards for MSB's and what they should expect from their MSB 
customers in terms of compliance, for example licensing, FinCEN 
registration and compliance programs. Something as simple as the 
requirement by banks that any MSB opening an account prove that they 
are licensed and registered would go a long way. This question has not 
always been asked.
    We are planning a conference to take place at the end of this 
quarter to which we will invite both MSB and banking industry 
participants to discuss the regulation and supervision of MSB's. This 
conference will include regulators as well as representatives of law 
enforcement who will explain how they view the industry and will give 
us all an idea of what they consider to be behavior that could be 
subject to criminal prosecution.
The Need for More Consistency Nationwide
    I have described my Department's approach to MSB supervision and 
mentioned a need to push for national consistency in our approach to 
monitoring the MSB's and their relationship to the banking industry. As 
you may know, across the country, supervision and regulation of this 
industry as a whole remains uneven.
    On the bright side, this is an area that the State regulators 
collectively have worked on and will continue to work on by sharing 
best practices either on a one-on-one, State-to-State basis or through 
organizations such as the MTRA.
    To ensure that both banks and MSB's know what is expected of them 
we need to create more than a rulebook--we need a uniform supervisory 
system, we need all States to adopt stringent safety and soundness 
requirements if they have not already done so. We are working through 
CSBS and other organizations of State regulators of MSB's to make that 
happen.

Conclusion
    There are serious regulatory challenges posed by the MSB's. These 
companies deliver services that are necessary for many legitimate 
customers, most of whom are low income, immigrant populations. We must 
devise a system that allows them to operate while at the same time 
assuring that our laws and regulations are obeyed. We have made a great 
start toward reaching this goal through a clearer understanding of the 
law, through cooperation by and among all the regulatory agencies 
involved, and through all of our cooperation with law enforcement and 
vice versa. But we still have a long way to go.
    Thank you again, Mr. Chairman for allowing me to share the New York 
view of where we are, what the challenges are and what we need to do 
about them. In holding this hearing, you have performed a valuable 
service for us all.
                               ----------

                  PREPARED STATEMENT OF JOHN J. BYRNE
     Director, Center for Regulatory Compliance, American Bankers 
                              Association

                             April 26, 2005

    Mr. Chairman and Members of the Committee, I am John Byrne, 
Director of the Center for Regulatory Compliance with the American 
Bankers Association (ABA). ABA appreciates this opportunity to discuss 
how the financial industry is addressing compliance with the USA 
PATRIOT Act as well as with all laws covering antimoney laundering 
(AML) obligations in this current regulatory environment. At the 
Committee's request, we will focus on how these challenges have 
impacted the banking industry's relationships with money services 
businesses (MSB's).
    ABA, on behalf of the more than two million men and women who work 
in the Nation's banks, brings together all categories of banking 
institutions to best represent the interests of this rapidly changing 
industry. Its membership--which includes community, regional, and money 
center banks and holding companies, as well as savings associations, 
trust companies, and savings banks--makes ABA the largest banking trade 
association in the country.
    ABA and our members continue to work closely with our Government 
partners in the challenging area of detecting and reporting the myriad 
of financial crimes that involve money laundering and terrorist 
financing. Despite our mutual support for cooperation, there are a 
number of concerns regarding how to achieve compliance. These problems 
can best be seen in the immediate issue of MSB's.
    We offer the following three observations:

 Banks are exiting relationships with MSB's due to the severe 
    lack of guidance as to what constitutes an acceptable due diligence 
    program. Immediate direction is essential;
 The lack of direction in the MSB area is emblematic of the 
    overall problem with Bank Secrecy Act (BSA) oversight--the labeling 
    of an entity as ``high risk'' without accompanying guidance on how 
    to mitigate that risk; and,
 Until the financial sector receives assistance in the form of 
    guidance and clear examples of what constitutes suspicious 
    activity, the volume of suspicious activity reports (SAR's) will 
    continue to skyrocket.

    In order to address these issues, ABA recommends a series of steps 
similar to the themes in our January 20 joint letter sent together with 
the 50 State banking associations to all Federal banking agencies, the 
Department of the Treasury, and the Financial Crimes Enforcement 
Network (FinCEN). The letter is attached,* but I would like to restate 
its three main points:
---------------------------------------------------------------------------
    * Held in Committee files.

 There is a need for joint industry/Government training of 
    bankers and examiners on BSA/AML obligations and procedures that 
    are expected in June;
 A BSA staff commentary, a list of answers to frequently asked 
    questions, and/or centralized regulatory guidance to achieve 
    consistency in BSA/ AML interpretations in areas such as 
    implementing proper risk assessment is needed; and,
 The establishment of a Bank Secrecy Act Advisory Group (BSAAG) 
    subcommittee to look at the variety of issues arising from the SAR 
    process, particularly the problem of defensive filing, is called 
    for.

    While the Federal banking agencies have responded to our letter 
with a strong statement for the need for consistency in applying the 
requirements of the BSA, the current actions of examiners suggest that 
the policy of consistency has not yet been fully implemented.
Industry Efforts in Addressing AML/BSA/SAR Challenges
    Mr. Chairman, ABA has worked together with the Government to 
provide assistance to the industry on the ongoing challenges regarding 
compliance with the many requirements of BSA. Among other things, ABA 
holds an annual conference with the American Bar Association on money 
laundering enforcement, produces a weekly electronic newsletter on 
money laundering and terrorist financing issues, offers on-line 
training on BSA compliance requirements, and has a standing committee 
of more than 80 bankers who have AML responsibilities in their 
institutions. In addition, we have provided telephone seminars on 
important issues such as the one we address today, the banking of MSB's 
in the current confusing environment, and compliance with Section 326 
of the USA PATRIOT Act. We plan to address the expected interagency 
BSA/AML examination procedures later this summer. The industry's 
commitment to deterring money laundering continues unabated, and we 
have trained hundreds of thousands of bankers since the passage of the 
Money Laundering Control Act in 1986.\1\
---------------------------------------------------------------------------
    \1\ A 2003 survey by ABA Banking Journal and Banker Systems Inc. 
found that Bank Secrecy/ AML/OFAC was the number one compliance area in 
terms of cost in the banking industry. It is also interesting to note 
that in banks under $5 billion in assets, 75.6 percent of the employees 
said that compliance was not their only job.
---------------------------------------------------------------------------
    In addition to this training, ABA has been collecting examples from 
our membership on problems with BSA examination oversight. It is clear 
that communication to examiners on how to implement BSA oversight has 
been mixed at best, despite the good intentions of the agency 
representatives in Washington and around the nation. The hearing today 
focuses on the area where that lack of consistent communication has 
been the most profound--working with MSB's.

MSB's and Banks: Direction on Compliance is Confusing
    As indicated in the letter of invitation for today's hearing, in 
dealing with MSB's, there is a need to have a ``consistent and equal 
policy used to prevent potential abuse of the financial system while at 
the same time enabling that system to provide sound access to its 
services.'' In order to achieve that goal, the current state of 
confusion must end.
    The industry certainly understands and appreciates the need to 
analyze the levels of risk involved with maintaining MSB relationships. 
The problem, however, is how much analysis is sufficient. At times, 
banks will appropriately exit relationships due to the risk inherent 
with a particular MSB. At other times, banks want to continue valued 
relationships. We know the importance of providing all segments of 
society with banking services. For some, remittances are an essential 
financial product and MSB's frequently provide the service.
    Remittance flows are an important and stable source of funds for 
many countries and constitute a substantial part of financial inflows 
for countries with a large migrant labor force working abroad.
    Officially recorded remittances received by developing countries 
are estimated to have exceeded $93 billion in 2003. They are now second 
only to foreign direct investment (around $133 billion) as a source of 
external finance for developing countries. In 36 out of 153 developing 
countries, remittances were larger than all capital flows, public and 
private.
    Remittance flows go through both formal and informal remittance 
systems. Because of the importance of such flows to recipient 
countries, governments have made significant efforts in recent years to 
remove impediments and increase such flows. At the same time, however, 
there has been heightened concern about the potential for remittance 
systems, particularly those operating outside of the formal banking 
system, to be used as vehicles for money laundering and the financing 
of terrorism.
    It is believed that the risk of misuse of remittance systems would 
be reduced if transfers were channeled through remittance systems that 
are subject to regulation by governments.
    To address the risks, a two-prong approach is evolving--one prong 
involves efforts by governments to encourage the use of formal systems 
(such as banks) by lowering the cost and increasing the access of users 
and recipients to the formal financial sector. Such efforts should 
concentrate on the reduction of artificial barriers such as unnecessary 
regulatory standards that impose costs ultimately borne by consumers.
    The second prong includes initiatives by governments to implement 
antimoney laundering standards for entities such as MSB's. These 
initiatives are progressing in the United States and, as we have heard 
from other witnesses, the MSB regulatory infrastructure is robust and 
effective.
    An underlying challenge is that there exists in most countries a 
large pool of ``unbanked'' individuals. Such individuals are often 
accustomed to using both formal (and regulated) financial institutions 
and very informal (unregulated) financial services providers. Economic 
and social incentives that move this group toward ``underground'' 
financial services providers ultimately harm the interests of the 
unbanked, of law-abiding financial services providers, and of the 
general public. Moreover, the underground financial services providers 
may service law-abiding unbanked persons as well as criminals. Thus, 
governmental actions that discourage the unbanked from entering 
depository institutions may have the effect of also making antimoney 
laundering goals far more difficult to achieve. Therefore, it is the 
view of ABA that the current MSB-bank regulatory environment must 
change in order to advance the goals of reducing money laundering and 
combating terrorist financing.
    If the environment does not change, the important services offered 
by MSB's will continue to be severely hampered by regulatory excess. 
While the Federal banking agencies issued an interagency policy 
statement on March 30, the promised guidance (not yet released as of 
this writing) supplementing the statement must be specific and be 
clearly communicated to the examiners.
The Current Regulatory Confusion is Having a Dramatic Negative Effect
    On March 8, I had the opportunity to co-chair a meeting of BSAAG on 
the MSB problem. For eight hours we heard 44 witnesses discuss dramatic 
examples of lost business, economic failures, and rampant regulatory 
confusion. The theme of confusion was echoed by all of the banks. For 
example, Alex Sanchez, head of the Florida Bankers Association told us:

        Financial institutions are closing legitimate accounts. 
        Particularly in the area of money services businesses or MSB's, 
        financial institutions feel compelled to close their accounts. 
        Most of these are the accounts of perfectly legitimate 
        businesses. Many of them in Florida are businesses run by small 
        entrepreneurs. They are gas stations, convenience stores, and 
        grocery stores. They serve as a place where paychecks can be 
        cashed. Some of them serve as agents of regulated money 
        transmitters. These accounts are closed not because there is 
        any evidence that they are engaged in improper activity, but 
        because they fit into a regulatory profile.

    The Florida Bankers Association also surveyed its members and found 
that 58 percent have curtailed activities with MSB's and 83 percent 
experienced the change of attitude or approach of examiners conducting 
examinations in this area.
    Another banker emphasized the value of small MSB's:

        One of the common types of small businesses in our community is 
        the small grocery store or convenience store. These are the 
        businesses that often serve the immigrant and less advantaged 
        community. These businesses are the connecting point for many 
        in our society to the economic system. They are legitimate 
        businesses serving a genuine need. Under the current regulatory 
        scheme, we can no longer serve them.

    Finally, the problem was best illustrated by a recent agency 
training session on BSA that used a slide featuring the following text:

      Two Important Things to Remember about MSB's:

 May be high risk for money laundering;
 Play a vital role in the financial services of the United 
    States.

    Mr. Chairman, this statement sends the ultimate mixed message.
    FinCEN and the Federal banking agencies are to be commended for 
working toward a guidance to address this policy morass. We urge the 
agencies to act swiftly and immediately inform the examiners to adjust 
their review of how banks work with MSB's. As we finally improve this 
situation with MSB oversight, it is time to move to address overall BSA 
examination inconsistency.

Uniform USA PATRIOT Act/BSA/AML Examination Procedures Are Needed
    ABA has previously emphasized that the banking agencies need to 
reach agreement on how the financial services industry will be examined 
for compliance under the USA PATRIOT Act and the other AML 
requirements. As we indicated at the time, ``too often, institutions of 
the same approximate size, in the same geographic area and offering the 
same financial products are treated differently for compliance 
purposes. This should not continue.''
    There is formal movement to coordination of examination procedures 
by the agencies but the process is not complete and there are some 
outstanding issues. We will discuss one glaring problem--assessment of 
the adequacy of SAR programs, later in this testimony.
    While we repeat our 2003 and 2004 calls for Congress to ask the 
regulatory agencies to report on efforts in this area, ABA has seen a 
commitment to consistency in 2005. For example, not only has FinCEN 
Director Fox expressed public support for uniform assessments, but he 
has also directed BSAAG to form a subcommittee on examination issues. 
This subcommittee, co-chaired by ABA and the Federal Reserve Board, has 
met several times to discuss the pending interagency examination 
procedures and we are meeting again on April 29.
    Mr. Chairman, uniform exam procedures will assist with the industry 
concerns about examination inconsistency and the continued threat of 
``zero tolerance'' by some examiners. However, we strongly urge 
Congress to ensure that all banking agencies engage in industry 
outreach when the AML exam procedures are made public.

Lack of SAR Guidance Results in Unnecessary Filings
    With the increased number of entities required to file SAR's, as 
well as the heightened scrutiny by regulators on SAR policies and 
programs, it is essential for the regulatory agencies, law enforcement, 
and FinCEN to assist SAR filers with issues as they arise. This need is 
particularly obvious in the area of terrorist financing. This crime is 
difficult, if not impossible, to discern as it often appears as a 
normal transaction. We have learned from many Government experts that 
the financing of terrorist activities often can occur in fairly low 
dollar amounts and with basic financial products (for example retail 
checking accounts). Guidance in this area is essential if there is to 
be effective and accurate industry reporting. The bottom line is that 
terrorist financing can only be deterred by Government intelligence.
    For money laundering and other financial crimes, Government 
advisories and other publications are a critical source for recognizing 
trends and typologies. As the industry emphasizes in the April 2005 
issue of the interagency-authored publication, SAR Activity Review, 
there are a number of examples of activities that represent reported 
financial crimes. This information is extremely useful for training 
purposes. As the private sector co-chair of the SAR Activity Review, I 
can assure you ABA supports the efforts of FinCEN and the participating 
agencies in crafting a publication that provides necessary statistical 
feedback to the SAR filing community. The SAR Activity Review has 
provided a variety of examples of the characteristics of such diverse 
suspicious activity as identity theft, bank fraud, and computer 
intrusion.
    We are pleased that the 2004 edition of the SAR Activity Review 
provided for the first time the summary characterization of all of the 
suspicious activity categories. This summary should assist filers in 
advancing their understanding of the reporting requirements.
    As stated above, there are several problems affecting banks in the 
AML exam process related to SAR's. ABA has previously mentioned the 
many examples of examiner criticisms received by our members in reviews 
of their SAR programs. Whether it has been criticism of the number of 
SAR's that the institution has flied or the ``second-guessing'' by 
examiners as to why a SAR was not filed, this situation demands 
immediate attention.
    In addition, banks have been reacting to the recent concerns echoed 
by the Federal banking agencies that threatened prosecutions for BSA 
regulatory matters is also adding to the increase in SAR filings. As 
the agencies emphasized in their April 18 letter to ABA and the State 
banking associations, the Federal banking agencies and FinCEN are 
working with the Department of Justice to better define the 
``appropriate role for criminal prosecutions of banks under the BSA.''
    We applaud these efforts and hope they succeed in ensuring that 
regulatory problems do not turn into criminal actions.
    Moreover, regulatory scrutiny of SAR filings (and the recent civil 
penalties assessed against banks for SAR deficiencies) has caused many 
institutions to file SAR's as a purely defensive tactic (the ``when in 
doubt, file'' syndrome) to stave off unwarranted criticism or ``second 
guessing'' of an institution's suspicious activity 
determinations. As FinCEN Director Bill Fox stated so eloquently in the 
April SAR Activity Review:

        While the volume of filings alone may not reveal a problem, it 
        fuels our concern that financial institutions are becoming 
        increasingly convinced that the key to avoiding regulatory and 
        criminal scrutiny under the Bank Secrecy Act to file more 
        reports, regardless of whether the conduct or transaction 
        identified is suspicious. These ``defensive filings'' populate 
        our database with reports that have little value, degrade the 
        valuable reports in the database and implicate privacy 
        concerns.

    We would like to commend Mr. Fox for addressing our third 
recommendation and creating a BSAAG subcommittee on SAR issues. We hope 
and expect that the subcommittee will tackle the issue of SAR confusion 
head on.
    Mr. Chairman, our members share the concerns expressed by Mr. Fox 
but there are no other options to defensive SAR filings without 
improved examiner training. Our hope is that the examination procedures 
and a mechanism for receiving interpretations on SAR issues will result 
in returning suspicious activity reports to their original place--forms 
filed only after careful analysis and investigations with no second-
guessing by regulators.

Conclusion
    Mr. Chairman and Members of the Committee, ABA has been in the 
forefront of the industry efforts to develop a strong public-private 
partnership in the areas of money laundering and now terrorist 
financing. This partnership has achieved much success but we know that 
more can be accomplished. We commend the Treasury Department, banking 
agencies, and FinCEN for their recent efforts to ensure a workable and 
efficient process. ABA will continue our support for these efforts.
    Thank you. I would be happy to answer any questions.

                               ----------

                  PREPARED STATEMENT OF GERALD GOLDMAN
      General Counsel, Financial Service Centers of America, Inc.

                             April 26, 2005

    Mr. Chairman, Members of the Committee, my name is Gerald Goldman. 
I serve as General Counsel to the Financial Service Centers of America, 
also known as FiSCA. I thank you for the opportunity to appear today to 
present our views on the relationship of money services businesses and 
banks in the current environment of examinations and enforcement 
actions. Those view will provide the experience of check cashers, as 
one segment of the MSB industry, with the phenomenon that we call 
``bank discontinuance.'' In simple terms, bank discontinuance is the 
indiscriminate termination by banks of the accounts of all of the 
members of an industry.
    FiSCA is a national trade association that represents more than 
5,000 neighborhood financial service providers throughout the United 
States. Our members provide nontraditional financial services including 
check cashing, money orders, wire transfers, and utility bill payment 
services. We serve hundreds of thousands of customers, banked and 
unbanked, who use us for the advantages that we provide: Convenient 
access, service, and the ability to obtain instant liquidity. The most 
common service that we provide is a place for hard-working people to 
cash their paychecks; a necessary service that they cannot always 
obtain at a bank, or choose not to.
    Our industry is also transitioning into one that provides customers 
with a portal to traditional financial services. We do this in 
partnership with certain banks and credit unions, through Point of 
Banking facilities. In fact, in the next 2 weeks, our industry will 
unveil a revolutionary national savings program for the unbanked. 
Perhaps our most important trait as an industry is that we evolve to 
meet the needs of our customers, instead of requiring our customers to 
fit into a predetermined model of what they need.
    The value that our members provide to our customers and our role as 
a key component of a healthy financial sector has been recently 
recognized by public officials. For example, on February 10, 2005, U.S. 
Treasury Secretary John Snow stated that money services businesses are 
a key component of a healthy financial sector and ``. . . it is very 
important that they have access to banking services.''

    On March 11, 2005, Julie L. Williams, the Acting Comptroller of the 
Currency, said:
        MSB's play a vital role in the national economy, providing 
        financial services to individuals who are not otherwise part of 
        the mainstream financial system

    and

        [i]t is absolutely not OCC's intent that national banks should 
        be forced to sever their relationships with money service 
        businesses.

    In a letter dated October 13, 2004, to Congresswoman Carolyn 
Maloney, former Comptroller John Hawke said:

        I would also like to make it clear that the OCC recognizes the 
        important role that check cashers and similar money services 
        businesses (MSB's) play in providing financial services to 
        segments of our society that do not have access to the banking 
        system. Check cashers generally offer convenience, neighborhood 
        locations, and a variety of financial services that appeal to 
        certain consumers.

    We also were for a long time recognized as good customers by our 
banks, and we worked hard to nurture the banking relationships that we 
had. Witness the statement of JP Morgan Chase Vice President Peter 
Grassl, who, a mere year or so ago, said:

        The Chase and predecessor banks have been servicing the check 
        cashing industry in New York State for close to 50 years. In 
        the 90's, we started servicing check cashers in our neighboring 
        states of New Jersey and Connecticut, and we are now the 
        leading bank serving the industry in the tristate area. We're 
        looking to expand our business to Philadelphia and also to 
        Texas. We've developed a mutually beneficial relationship with 
        the industry over these years.
        Over the last 20 years, we've had only one loss and that's a 
        pretty good record.
        Obviously our experience over the years has been favorable. We 
        wouldn't stay in it if it weren't.

    Nevertheless, just 6 months ago, our 50-year old friend, JP Morgan 
Chase, notified its 500 licensed check casher customers that it had 
made a general business decision to: `` . . . no longer maintain credit 
relationships with or provide other financial accommodations or 
services to check cashing businesses.''
    In addition to Chase, over the past several years scores of banks, 
including Bank One, Am South, Citibank, Fleet Bank, Chamber One, 
Sovereign, Sun National, Bank of America and others, have 
indiscriminately terminated the accounts of thousands of check cashing 
locations and financial service centers.
    The results of a recent survey conducted by the American Banker 
reported that 70 percent of banks do not lend to check cashers or that 
there are none in their market area. Of the remaining 30 percent of the 
banks that responded, 50 percent said that they had ``recently 
stopped'' lending to check cashers. This is a staggering number and has 
caused thousands of check cashers to scramble to find new banks among 
an already limited number. Apart from the check cashers, the ones most 
directly impacted are the hundreds of thousands of customers that they 
serve.
    What has essentially happened can best be described by an 
exemplified hypothetical which might bring this matter close to home, 
your home. What if the banks in the United States announced that they 
would no longer provide banking services to Members of Congress and 
that they were doing it for business reasons. Could they do it? Yes. 
Banks could cut Members of Congress out of the banking system and 
essentially that is what they are doing to our industry.
    The irony is: Banks do not make serving our customers the priority 
that we do. Yet, they have the power to stop us from serving them. It 
makes no sense and it is not fair.
    The question is, ``why is this happening?'' The facts should point 
otherwise. Our industry is financially sound, it is stable, it is 
responsible, and it is profitable for banks as well as ourselves. We 
use our own money, we pay our bills, and we do not go bankrupt. In 
surveys of customers, we have even higher satisfaction ratings from our 
customers than most banks do from their customers.
    Our industry is not one that operates underground. Our businesses 
are licensed and regulated in 38 States, in many instances by the same 
agencies that regulate banks. We are regulated under the Bank Secrecy 
Act and the USA PATRIOT Act, including the requirement that we register 
with the Internal Revenue Service as MSB's. And, we have an exemplary 
record of compliance with Federal and State antimoney laundering laws. 
In fact, James Sloan the former Director of FinCEN, stated that check 
cashers ``have set the standard for the financial services industry in 
the fight against money laundering, financial crimes and terrorism.''
    Among the reasons that we can identify for banks discontinuing 
check cashers is the designation by the OCC in Advisory Letter 2000-3, 
of check cashers as businesses that are a ``high risk'' for money 
laundering. AL 2000-3 was followed by the Comptroller's Handbook, 
released in September 2000, addressing BSA Anti-Money Laundering. In 
its Handbook, the OCC advised its examiners that certain types of 
businesses, including nontraditional financial entities such as check 
cashing facilities, could be a potential source of money laundering. 
Interestingly, also included among the list of high-risk businesses 
were professional service providers, such as lawyers, accountants, and 
investment brokers. What followed since 2000 was not a spate of 
terminations of the accounts of lawyers and accountants, but a rash of 
terminations of the accounts of check cashers and other nontraditional 
financial entities. This knee-jerk reaction has occurred despite the 
fact that many regulators, including former FinCEN Director Sloan, have 
publicly stated that, in his view, the check cashing industry is no 
more a risk than any other business.
    Following the release of AL 2000-3, we warned the regulators that 
the unintended result of the ``high risk'' designation would be the 
indiscriminate termination of bank accounts. I myself, as a charter 
member of FinCEN's Bank Secrecy Act Advisory Group, started beating the 
drum in November 2000 and repeated the warning many times thereafter. 
Our warnings fell on deaf ears, but our predictions came true; and the 
bleeding has continued for 4 years.
    So again we ask ``why is this happening?'' There is no better 
evidence than the statements of banks themselves. For example, in a 
January 3, 2005 letter from Sun National Bank, which terminated all of 
its check casher clients, we were told:

        . . . the Bank Secrecy Act and its required due diligence 
        program are intended to control money laundering activities . . 
        . these relatively new and expanded regulatory requirements 
        place an administrative burden on national banks far beyond the 
        anticipated scope. Consequently, Sun National Bank has made a 
        decision that we will no longer be able to service this type of 
        business.

    A similar sentiment was expressed in a letter to the Federal 
Reserve Board, written by Fleet Bank Vice President Jonathan Fine, who 
wrote:

        In making its determination, FleetBoston weighed the costs 
        associated with implementing and maintaining the additional 
        control systems necessary to monitor its relationships with 
        service providers to ensure the legitimacy of transactions 
        being processed, the legal and enterprise risks associated with 
        maintaining such relationships, and the benefits of maintaining 
        such relationships. On this basis alone, FleetBoston determined 
        that the risk and cost associated with having service providers 
        as customers out-weighed the benefits.
    These letters are examples of letters that we have received from 
banks throughout the United States.
    Finally, after the damage was done, former Comptroller Hawke, in a 
letter to Congresswoman Carolyn Maloney dated October 13, 2004, said:

        Absent extraordinary circumstances, the OCC will not direct or 
        encourage any national bank to open, close, or refuse a 
        particular account or relationship.

    Just 6 months earlier, OCC Commissioner Hawke, appearing before the 
House Financial Institutions Subcommittee, had stated:

        . . . I would say that we've done nothing that should have 
        resulted in banks dropping check cashers as a class, and I 
        think that's one of the things that has to be looked at on a 
        case-by-case basis.

    The irony is that all of this discontinuance activity is done in 
the name of fighting terrorists and money laundering, both goals that 
we all support. However, the activity has had the unintended effect of 
punishing law abiding business owners and the customers that they 
serve. Where are the bad guys? It is the good guys who are being 
penalized. What we have is overkill imposed by regulators, and adopted 
by banks.
    Most recently, a parade of public officials, including FinCEN 
Director William Fox, have been decrying bank discontinuance. On March 
8, 2005, FinCEN conducted a hearing at which representatives of MSB's 
were permitted to testify on the extent of this problem.
    Following the Hearing, on March 30, 2005, FinCEN, the Federal 
Reserve, FDIC, the National Credit Union Administration, the OCC, and 
OTS, issued a Joint Statement, in which it was officially recognized 
that:

        Money services businesses are losing access to banking services 
        as a result of concerns about regulatory scrutiny, the risks 
        presented by money services business accounts, and the costs 
        and burdens associated with maintaining such accounts.

    The Statement went on to say that the concern of banks:

        . . . may stem, in part, from a misperception of the 
        requirements of the Bank Secrecy Act, and the erroneous view 
        that money services businesses present a uniform and 
        unacceptably high risk of money laundering or other illicit 
        activity.

    We do wish to commend FinCEN and the Federal banking agencies for 
their recent efforts to respond to the bank discontinuance problem. 
FinCEN has also promised to issue a Guidance on account relationships 
with money services businesses that will clarify the Bank Secrecy Act 
requirements and supervisory expectations for the accounts of money 
services businesses. We remain skeptical, however, as to the effects of 
the Guidance, unless it aids in retaining and bringing banks back to 
our segment of the market.
    And we are not certain that even a successful clarification of 
compliance requirements will undo the damage done to our banking 
relationships. We see no evidence of banks coming forward since 
FinCEN's Joint Statement.
    No industry, including Congress, should be subject to the awesome 
power of blanket termination at will. Until this issue of blanket 
termination at will is addressed, the mistakes made and the arrogance 
of power of some will continue to prevail. We would like to see this 
Committee really tackle not only the injustice that has occurred, but 
also to define the responsibilities of banks in serving MSB's based 
upon the merits of the individual MSB, so that access to the banking 
system will be available to all, particularly to the unbanked.
    When we were invited to speak here today, we were asked to help in 
finding solutions to this problem. During the FinCEN hearing, we 
proposed one immediate solution, but that solution was designed merely 
to preserve the status quo, to stop the bleeding. We proposed that 
FinCEN and the Federal banking agencies immediately issue a statement 
encouraging a voluntary moratorium on the blanket discontinuance by 
banks of MSB accounts. We repeat that call today, and ask this 
Committee to consider expressing support for this interim solution.
    We also stand ready with ideas, borne from the ingenuity that comes 
from entrepreneurial minds, to assist in finding concrete, long term 
solutions to this problem. Among our thoughts are the following:

 Definite standards should be developed before agencies can 
    assign the label ``high risk'' to an industry;
 The labeling of an industry as ``high risk'' should be done 
    only after appropriate due process, including fact finding hearings 
    with the right of the targeted industry to be heard;
 Congress should consider passing a ``Banking Services 
    Continuation Act'' that would permit banks to discontinue the 
    accounts of MSB's only after it could be shown that the customer 
    has failed to meet its statutory and regulatory antimoney 
    laundering obligations, or for legitimate business reasons 
    unrelated to the costs of compliance;
 A group should be created by the Secretary of the Treasury, 
    made up of representatives of the Federal banking agencies, banks, 
    check cashers, and money transmitters, with the sole purpose of 
    ensuring access to banking services;
 CRA Credit should be given to banks that serve MSB's in 
    neighborhoods that serve low- and moderate-income consumers; and
 There should be more transparency in the bank examination 
    process, so that all can be assured that regulatory directives that 
    are designed to ensure the safety of our financial system, and to 
    keep it free from terrorist and other unlawful financing, do not 
    punish the law-abiding, but only the law breakers.

    In sum, there must be a process created so no group can be denied 
access, directly or indirectly, to the Nation's financial system, of 
which banks are the trustees.
    We once again thank you, Mr. Chairman, and the entire Committee, 
for the opportunity to appear before you today and present the views of 
our industry.
                               ----------

                   PREPARED STATEMENT OF DAN O'MALLEY

     Vice President of the Americas, Moneygram International, Inc.

                             April 26, 2005

    Good morning Mr. Chairman and Members of the Committee, my name is 
Dan O'Malley, and I am Vice President of the Americas for MoneyGram 
International. MoneyGram is an international payment services company 
conducting business in more than 170 countries, through more than 
79,000 locations. In the United States, MoneyGram is licensed and 
regulated as a money transmitter by each State's banking department. In 
addition, MoneyGram fully complies with the antimoney laundering laws 
promulgated by the Bank Secrecy Act and the USA PATRIOT Act, and is 
registered with the Treasury Department as a money services business. 
Today, I am pleased to have the opportunity to provide background 
information on my company, discuss MoneyGram's antimoney laundering 
compliance program, and offer a few comments on the recent problems 
that members of the money services business \1\ industry are 
experiencing with maintaining and establishing bank accounts. I should 
also mention that I am joined today by Tom Haider, MoneyGram's Chief 
Compliance Officer and Vice President of Government Affairs, who can 
also assist in answering any of your questions.
---------------------------------------------------------------------------
    \1\ Money services businesses ``MSB's'' are defined in 31 CFR 
103.11uu, and include money transmitters, money order issuers and 
sellers, check cashers, travelers check issuers and sellers, and stored 
value providers.
---------------------------------------------------------------------------
Company Background
    MoneyGram was founded in 1940 under the name Travelers Express as a 
money order company in Minneapolis, MN. Over the years, the company has 
grown to be a leading international payment services company that 
remains headquartered in Minneapolis, but which now has major 
operations centers in Denver, CO, and Miami, FL, with international 
offices in London, Hong Kong, Dubai, Moscow, Frankfurt, and 
Johannesburg. Just last summer, MoneyGram became a publicly traded 
company and is now listed on the NYSE. The company employs nearly 1,800 
people worldwide, and offers its money transfer service through more 
than 79,000 locations in 170 countries, and its money orders at 60,000 
locations throughout the United States. With only 1,800 employees 
worldwide, and over 100,000 locations worldwide, it is easy to see that 
MoneyGram is a company that must rely on agents to sell its services. 
The agents who sell MoneyGram's services include banks, credit unions, 
supermarkets, convenience stores, and many other retail locations. 
MoneyGram's services are sold through such well-known businesses as 
Wal-Mart, Albertsons, CVS Pharmacy, US Bank, and many small, 
independently owned ``mom-and-pop'' convenience and corner grocery 
stores. These ``mom-and-pop'' locations, along with many check casher 
outlets, are the MoneyGram agents that are experiencing the majority of 
the banking relationship problems, which I will address in greater 
detail later in my testimony.
    MoneyGram offers consumers three primary services. First is the 
MoneyGram money transfer service that provides consumers an affordable, 
reliable, and convenient means to send money across the country or 
around the world in a matter of minutes. MoneyGram conducts its money 
transfer service through a network of ``agents'' which enable consumers 
to send money from one MoneyGram agent to another. The way it works is 
that a consumer walks into a MoneyGram location and tells the merchant 
how much money they wish to send, and where and to whom they want the 
money sent. After the sender pays for the transaction they are given a 
transaction number (similar to a PIN) that the sender then relays to 
their recipient, generally by way of a phone call. The recipient can 
then go to any MoneyGram location, and with proper identification and 
the transaction number, collect the money that was sent. This entire 
process can be completed in a matter of minutes. For example, if a 
sender was in a MoneyGram location in Chicago they could be on their 
cell phone with their recipient who was in a MoneyGram location in 
Paris. As soon as the sender receives the transaction number they could 
tell it to the recipient who could then go to the counter and pick up 
the funds in the local currency. It is a fast, safe, and reliable 
service that is used mainly by workers to send money home to their 
friends and family, and the average amount of a MoneyGram money 
transfer is less than $300. In addition to its regular money transfer 
service, MoneyGram also offers an emergency bill payment service called 
Express Payment. This service is offered at all MoneyGram locations in 
the United States. Express Payment allows consumers to manage the 
payment of their bills by paying them on the exact due date. It also 
provides billers with the assurance of a guaranteed payment in those 
situations where a consumer may have become delinquent and is required 
to make an immediate payment in order to avoid a collection proceeding.
    Our company started as Travelers Express, a money order issuer, and 
today it is the Nation's largest issuer of money orders. While most 
consumers pay their bills with a check, there remain millions of 
consumers who pay their regular monthly bills with money orders, which 
are often less expensive and more convenient than a personal checking 
account. Travelers Express money orders are sold in many of the same 
locations that sell MoneyGram money transfers throughout the United 
States, and the average face amount of a Travelers Express money order 
is approximately $150. Finally, MoneyGram provides check-processing 
services for several thousand banks and credit unions in the United 
States. This service processes ``official checks'' which consist of 
cashiers', tellers', and other bank checks that are most commonly 
associated with mortgage closings and other large transactions.
    It is important to note that the services provided by MoneyGram are 
closely regulated, and that the company is licensed by State banking 
departments as a money transmitter and an issuer of money orders. The 
State banking departments impose many of the same requirements on money 
services businesses that they impose on State-chartered banks, such as 
audited financial statements, investment restrictions, surety bonds, 
and on-site safety and soundness exams. In a typical year, MoneyGram 
will submit more than 600 licensing reports to its various State 
regulators, and undergo about 10 on-site exams that can last from a few 
days to several weeks. Thus, even though there is no Federal regulator 
for money services businesses, licensed companies like MoneyGram are 
well regulated by the States.

Anti-Money Laundering Compliance Program
    Shifting gears slightly, I would now like to focus on antimoney 
laundering compliance. While I cannot speak for the entire money 
services business industry, I can address the issue as it relates to 
MoneyGram, and by analogy to other responsible money services 
businesses. MoneyGram has a comprehensive antimoney laundering 
compliance program that has been in place for many years, even before 
such programs were mandated by the USA PATRIOT Act. Likewise, MoneyGram 
was voluntarily filing Suspicious Activity Reports with the IRS long 
before such reporting was mandated for money service businesses. At 
MoneyGram, we are very proud of our compliance efforts and I would like 
to note that in 1996 MoneyGram's subsidiary, Travelers Express, was 
given a $100,000 reward by the IRS for its help in cracking a major 
money laundering ring. We have since continued to make significant 
investments in our compliance and antimoney laundering programs.
    MoneyGram's antimoney laundering compliance program is built around 
three main components: Training; monitoring; and reporting. From a 
training perspective, MoneyGram trains and tests all of its employees, 
from the CEO to the clerk in the mailroom, on key aspects of the 
antimoney laundering laws. The satisfactory completion of this training 
and testing is a condition of employment. In addition, MoneyGram takes 
steps to ensure all agents who sell its services are trained on 
antimoney laundering laws so that they understand their duties under 
the law. In order to facilitate the training process, MoneyGram employs 
bilingual staff to ensure accurate communication of the requirements, 
and to respond to any questions raised by the agents.
    Before authorizing any agent to conduct transactions on its behalf, 
MoneyGram first conducts its own investigation of the entity to be 
certain that its owners and management are of a reputable character. 
This process, which MoneyGram calls its ``Know Your Agent'' program, 
involves credit checks, criminal background reviews, data mining, and 
OFAC screening. MoneyGram will not conduct business with any individual 
or entity that fails to meet its background investigation standards. 
This means that MoneyGram walks away from potential business 
opportunities, but MoneyGram would rather forego some business than put 
its own reputation in jeopardy by affiliating itself with disreputable 
parties.
    Once an agent is trained and begins to sell MoneyGram's services, 
the MoneyGram compliance team closely monitors the agents' activities 
and will terminate the relationship with any agent who fails to fully 
comply with their antimoney laundering obligations. The ``monitoring'' 
component of MoneyGram's antimoney laundering compliance program is 
built around sophisticated computer programs that search for unusual 
patterns that may indicate structuring or other forms of suspicious 
activity. In addition to using computer programs, MoneyGram's 
compliance team physically reviews millions of transactions every year 
in an effort to 
detect possible money laundering or terrorist financing. The compliance 
team also reviews the names of every MoneyGram money transfer 
``sender'' and ``receiver'' against the OFAC database to guard against 
doing business with sanctioned individuals. These monitoring efforts 
lead to the third component of MoneyGram's compliance program, which is 
``reporting.''
    MoneyGram files thousands of Suspicious Activity Reports, but they 
only represent a small fraction of the millions of transactions the 
company conducts. These reports range in size from transactions 
involving several hundred dollars to transactions involving tens of 
thousands of dollars. In most situations the suspicious activity 
involves structured transactions in which the money launderer moved 
from one agent to another conducting relatively small transactions at 
each agent so that no individual agent would notice anything 
suspicious. However, MoneyGram's systems are designed to detect such 
activity and it is then reported to the IRS. Over the years, MoneyGram 
has continued to invest heavily in its antimoney laundering compliance 
efforts through additional compliance staff located around the world; 
with enhanced computer systems to analyze transaction activity and to 
comply with OFAC; and, by enhancing training programs for its agents 
and employees. These efforts are expensive, and in many cases they go 
beyond what is required by law. Thus, there should be no doubt that 
MoneyGram takes its antimoney laundering obligations very seriously--
not just because it is the law, but also because MoneyGram values its 
reputation as a good corporate citizen.
    MoneyGram is also well aware of the discussion that is currently 
taking place in legislative and regulatory circles regarding the filing 
of Suspicious Activity Reports, and agrees with many of the sentiments 
expressed by FinCEN and other organizations that the defensive filing 
of Suspicious Activity Reports poses a potential serious problem for 
the law enforcement community. That is one reason why MoneyGram was 
pleased to see the announcement from FinCEN on April 18, 2005, that it 
intends to streamline the SAR form used by money services businesses. 
MoneyGram welcomes the opportunity to provide FinCEN with comments on 
the proposed changes, and believes that a streamlined form will be a 
great benefit to MoneyGram and the thousands of agents who use the 
form.

Bank Account Concerns
    Now I would like to address the problems that many money services 
businesses and their agents are experiencing in opening and maintaining 
bank accounts. In the past year this has become a serious problem for 
many MoneyGram agents, as well as many other Money Services Businesses. 
In most instances for MoneyGram, it appears that the small ``mom-and-
pop'' shops and check cashers are the ones who are being targeted for 
account closings. These businesses are often being told by banks with 
which they have had relationships for years that they now must choose 
to either close their account, or cease conducting any kind of money 
services business. When they ask their bankers ``why?'' they are 
frequently told that the bank's regulator has informed them that money 
services businesses are high-risk entities and the bank is advised to 
avoid doing business with such entities.
    At MoneyGram we have heard from dozens of agents in New York, 
Illinois, Virginia, Florida, California, and other States that this 
situation is forcing them to consider no longer serving as an agent. In 
some cases, our agents have sought accounts at other banks only to be 
told the same story. These agents are frightened and unwilling to 
provoke their banks upon whom they depend for their financial needs. 
After all, for most of our agents the sale of money orders or money 
transfers is only a small portion of their business; it is just another 
product they offer to their customers, like milk or bread.
    In order to help our agents, MoneyGram has begun negotiating with 
banks around the country to offer special accounts. In some situations, 
we have negotiated a master MoneyGram account with sub-accounts for our 
agents. While this may sound like the ideal solution, it is not. It is 
far more costly for MoneyGram and it is far less convenient for our 
agents. In some cases, agents have refused this arrangement because 
they cannot afford to be away from their store to travel to new banks 
across town when they were used to their old bank that might have been 
across the street. Thus, in order to retain some agents, MoneyGram is 
now paying for armored car service to collect the funds from these 
agents, which adds even more costs to conducting the business. These 
added costs present a difficult challenge to MoneyGram as we strive to 
maintain our value proposition to our customers in a rising cost 
environment. I fear too often that is the point that gets lost in all 
of the discussion regarding banking relationships and compliance 
requirements. We simply forget that all of these issues cost money and, 
in turn, lead to higher costs for consumers.
    MoneyGram itself has not had banks threaten to close its accounts, 
but in the course of the past year, every major bank that MoneyGram 
does business with has requested in-person meetings with MoneyGram's 
compliance team to verify the quality of MoneyGram's antimoney 
laundering compliance program. While this is not a terrible hardship, 
it demonstrates the pressure that banks are under from their 
regulators. For instead of focusing their compliance resources on true 
risks, the banks are merely duplicating the efforts of the State 
banking departments and other regulators who are already reviewing 
MoneyGram's compliance program.
    MoneyGram was very gratified that FinCEN took the lead in holding 
an informational meeting on this subject on March 8, 2005. This meeting 
was a critical first step in getting the problem out in the open, but 
the real challenge will be getting the regulatory examiners in the 
field to change their practice of recommending to banks that they stop 
conducting business with money services businesses. Likewise, MoneyGram 
was also pleased with the Joint Statement on Providing Banking Services 
to money services businesses that was issued on March 30, 2005, by the 
Federal Banking Agencies. That Statement correctly identified a major 
source of the problem to be the misperception regarding the compliance 
and regulatory requirements that apply to money services businesses. 
That misperception is one of the driving factors that has caused banks 
to believe they must take on the duty of ``regulating'' money services 
businesses, and since most do not want such an additional duty, they 
find it far easier to simply terminate those accounts.
    So what can be done about this problem? The March 30 Statement said 
that FinCEN and the Federal banking agencies would soon issue guidance 
for banks on their account relationships with money services 
businesses, and that FinCEN would issue concurrent guidance for Money 
Service Businesses on their compliance obligations. MoneyGram is 
solidly behind the issuance of such guidance, with one minor caveat. 
That is that the guidance does not impose new compliance obligations on 
money services businesses. As the March 30th Statement noted, money 
services businesses are already subject to the Bank Secrecy Act and 
related antimoney laundering laws. It would be a great injustice to 
money services businesses if the final outcome were to impose even more 
regulatory requirements on them, at the same time that many in 
Government are calling for a reduction in the regulatory burdens 
imposed on banks. Instead, there needs to be a balancing of the 
requirements imposed on both banks and money services businesses so 
that neither industry is handicapped or forced to spend even more 
resources on the spiraling costs associated with compliance.
    We hope that the Guidance for banks and money services businesses 
will focus on key elements of an effective compliance program, 
including:

 that the money services business is licensed in all 
    jurisdictions where it conducts business (some Internet and card 
    based money transmitters claim the licensing laws do not apply to 
    them, or they establish themselves in one of the few States that 
    does not license money transmission);
 if the entity is an agent, that it only serve as an agent for 
    licensed money services businesses;
 that the entity have a written compliance program;
 that the entity train its employees on antimoney laundering 
    compliance; and,
 that the entity have an effective OFAC screening program (once 
    again, many Internet and card based money transmitters are not 
    conducting OFAC screening on the recipients of funds, but only on 
    U.S. ``senders.'')

Recommendations
    MoneyGram appreciates the opportunity to offer the Committee a few 
suggestions on how the bank account issue might be addressed, and how 
compliance with the USA PATRIOT Act might be improved. The two are 
somewhat tied together, since improving USA PATRIOT Act compliance will 
help banks and their regulators gain confidence in the money services 
business industry. With regard to the bank account issue, MoneyGram 
believes part of the problem stems from the fact that banks and their 
regulators do not understand the existing State licensing regime that 
applies to money services businesses. That is why MoneyGram recommends 
that the Committee consider legislation that would establish a dual 
chartering system for money services businesses analogous to what banks 
and credit unions enjoy. Under such a system, a money services business 
that only operates in one or a few States could opt to be State 
chartered, while others could choose a Federal charter. The 
establishment of a primary Federal regulator may significantly reduce 
the concerns and misperceptions about the oversight of the industry. 
Too often MoneyGram has heard from banks, lawmakers, and law 
enforcement officials, as well as in the press, that money services 
businesses are largely unregulated. As we have already noted, that is 
not true, but it is a perception that simply will not go away. A 
primary Federal regulator would instill greater confidence by banks, 
their regulators, and the public in money services businesses.
    A Federal regulator could also help to close the loophole that some 
unscrupulous operators try to use to avoid any licensing requirements. 
Today, 35 States license money transmission. However, these tend to be 
the biggest States and the ones where most money transmission occurs, 
so responsible money transmitters are licensed and regulated. 
Nonetheless, some operators have been known to establish themselves in 
one of the States that does not require licensing, and then only 
conduct business in licensed States via the Internet or by phone in 
order to avoid a physical presence in those States. Similarly, some 
operators claim that since they only move their money through banks 
they do not have to be licensed. This is one of the more convoluted 
arguments since all money transmitters must use banks in order to move 
money from one location to another; it is only couriers who actually 
transport currency.
    Of course, any new Federal regulator would need to be separate from 
the State regulators. MoneyGram would not support merely adding an 
additional regulator to the process if it meant that it was now subject 
to all of the State regulators and a new Federal regulator. After all, 
one of the biggest challenges for MoneyGram and other nationwide money 
transmitters is the lack of uniformity among the State licensing laws. 
The requirements imposed on MoneyGram and its agents in one State will 
often differ significantly from those imposed in a bordering State. 
These conflicting regulatory requirements impose a heavy burden for 
companies like MoneyGram that offer their services throughout the 
country, as opposed to small transmitters that may only operate in one 
or two States. Thus, the option of a dual chartering system for money 
services businesses could prove to have a beneficial impact on the 
money services industry's overall image, as well as easing the 
regulatory burdens for the members of the industry.
    MoneyGram would also like to offer a recommendation that would add 
clarity to the USA PATRIOT Act requirements. One of those requirements 
is that money services businesses (as well as all other entities 
subject to the Act) conduct a periodic review of their compliance 
program. For banks and licensed money services businesses, such a 
requirement is appropriate, but for the thousands of ``mom-and-pop'' 
convenience stores that sell money orders or money transfers as an 
agent for a licensed money services business, this requirement is 
nearly unintelligible. These businesses need greater direction from 
FinCEN as to what constitutes an adequate ``review'' and who can 
conduct the review. For example, a simple one page form could be 
developed that the owner of the business would be required to complete 
on an annual basis confirming the adoption of a compliance program, 
that the business trains employees, and that it has designated a 
responsible individual as its compliance officer. The form could also 
require verification that the business is aware of its duty to file 
Suspicious Activity Reports and Currency Transaction Reports. It could 
also pose several questions to confirm that the business fully 
understands the concepts of structuring and suspicious activity, and 
what to do when such situations are encountered. This type of direction 
from FinCEN is badly needed by the money services business industry and 
its agents. It will also help those businesses better demonstrate to 
their bankers that they are fully compliant with the Bank Secrecy Act 
and the USA PATRIOT Act. MoneyGram has the greatest respect for FinCEN, 
and has a long history of working in a positive relationship with that 
organization. Going forward, MoneyGram would welcome the opportunity to 
continue to work with FinCEN on any changes to the regulations 
implementing the USA PATRIOT Act, as well as the regulatory guidance 
for the money services business industry.

Conclusion
    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 International. We at MoneyGram are proud of our 
company's strong efforts at antimoney laundering and the prevention of 
terrorist financing, and we remain dedicated to working with regulators 
and law enforcement officials to defeat the attempts by criminals to 
use any of our services for illegal purposes. We think there are 
proactive measures that the banking regulators can take to resolve the 
problems that many money services businesses are experiencing with 
establishing and maintaining bank accounts, and we believe Congress can 
also provide a solution with the establishment of a Federal regulator 
for money services businesses. Finally, we believe the majority of the 
USA PATRIOT Act as it applies to money services businesses is workable, 
but some minor refinements of the requirements by FinCEN will greatly 
assist money services businesses in complying with the periodic review 
requirement. Thank you again.
                               ----------

                  PREPARED STATEMENT OF DAVID LANDSMAN

 Executive Director, the National Money Transmitters Association, Inc.
                             April 26, 2005

    We appreciate the opportunity the Committee has given us today to 
have our grievances on this subject heard. We are also grateful to New 
York Superintendent of Banking Diana Taylor, for meeting with us last 
month on this issue.
    FinCEN is now working hard with Federal bank regulators to publish 
guidelines as soon as possible. For this we are also grateful, and we 
applaud the stance they have taken. They are doing what they can to fix 
the problem and correct this injustice, an injustice that has ominous 
implications for other industries untouched by this problem as yet.
    Yet relief will not come soon enough for many of us. If nothing is 
done, and done quickly, many licensed remittance companies will lose 
their last bank account in 3 days, and probably breathe their last.
    In the March 30 Joint Statement, FinCEN publicly acknowledged for 
the first time that there may have been ``. . . a misperception of the 
requirements of the Bank Secrecy Act, and the erroneous view that money 
service businesses present a uniform and highly unacceptable risk of 
money laundering or other illicit activity.'' This is an 
understatement.
    Further clarification of minimal best practices will help, as a 
first step, but most of these guidelines have been in the public domain 
for years, available to us and the banks. For our part, many of us have 
been early adopters of these best practices, even before the 
regulations were finalized for MSB's, out of concern for self-
preservation. But many bankers are still not aware of their own State's 
license requirements.
    Now, regulators are properly alarmed at the idea that two entire 
licensed industries--money transmitters and check cashers--can be so 
red-flagged as to make it impossible for even the best of them to get 
an account anywhere.
    The main reason for these closings is a fundamental 
misunderstanding of licensed remittance companies, compliance, money 
laundering and the law, by both the banks and the Federal regulators. 
(State regulators have traditionally left antimoney laundering 
initiatives to the Federal Government.)

Who We Are
    We are licensed to engage in the money transfer business by the 
State banking departments in the States where we operate. The money 
transfer services we provide are vital to our customers and their 
beneficiaries and the economies of the many countries that receive 
these remittance flows. We provide outstanding service at affordable 
prices for the large number of immigrants who send money home to these 
countries. We provide employment and income for our agents and the 
neighborhoods they serve.
    We comply with all State and Federal regulations, and are committed 
to using best industry practices to detect and prevent money laundering 
through our facilities. We are committed to knowing our agents, our 
employees, our correspondents, and our customers. We are committed to 
using adequate computer systems and internal controls, appropriate to 
the nature and volume of business we are doing and the type of 
customers being served.
    We are committed to fulfilling our recordkeeping and reporting 
requirements under the Bank Secrecy Act, and our obligations under 
state and Federal antimoney laundering statutes. We comply with the 
applicable provisions of Title III of the USA PATRIOT Act. We are 
committed to OFAC SDN-screening and we cooperate with law enforcement 
whenever called upon. Our training and supervision of employees and 
agents are both constant and close.
    We are audited not only by the states and the IRS Title 31 
examiners, but by our independent (usually external) compliance 
reviewers which are required by Section 352 of the USA PATRIOT Act. 
Licensed money transmitters take identification at lower transaction 
thresholds than banks, and we do it every time a customer comes to our 
window. Proportionately, we file more SAR's than do banks themselves.
    Our databases of remittances are available upon request, as are the 
due diligence folders we maintain on our agents. This would easily 
satisfy any bank's CIP obligations under Section 326 of the USA PATRIOT 
Act, and 31 CFR 103.121.

What is Happening?
    What we are seeing now is the culmination of 20-odd years of 
various arms of the Federal Government demonizing all nonbank financial 
institutions as hotbeds of money laundering, not making any distinction 
between licensed and nonlicensed entities. This has led to the irony 
that those most compliant, sometimes have the roughest time. This is a 
trend that will not be easy to reverse.
    Since we domestic licensed transmitters have to do much more than 
register with FinCEN as MSB's, we understandably resent being routinely 
classified with unlicensed transmitters who range from the ignorant but 
innocent, to the willfully sinister, and everything in between.
    Instead of speaking of Informal Value Transfer Systems, let us be 
more specific: In the money transmission industry there are licensed 
and unlicensed money transmitters. That is all. Licensed money 
transmission is not only permissible and beneficial, but it is also 
altogether necessary and irreplaceable. It is to be regulated and 
monitored, yes, but it is also to be encouraged and protected. The 
alternative will drive the underground economy further underground.
    The closing of our accounts goes back at least 10 years, although 
in those early days, no reason was given; the letters simply cited the 
bank's right to terminate any relationship at will. Now, the letters 
are more explicit. Now, there can be no doubt what the reason is. Back 
then, it was just an account here and there; no alarm was raised. No 
one would have listened. We kept a low profile. But an account could 
usually be had somewhere.
    Over the years, with the continued closings and continued bank 
mergers, our accounts became concentrated in fewer and fewer banks. So 
when the last few banks went in rapid succession, things got very dire, 
very quickly. Even banks that were committed to our markets realized 
they had not only regulators, but also prosecutors threatening criminal 
charges to worry about. That tipped the scale for even the most 
courageous bank.
    For a time it seemed every week we heard of another major bank 
closing licensed MSB accounts, and those that did not deny those 
accounts before, merged with those that do. This situation has 
undermined public confidence in licensed financial institutions.
    That this acceleration has coincided with the accelerating rate of 
bank prosecutions, fines, enforcement actions and scandals, is no 
accident. The more heat that is brought on the regulators by Congress, 
the more they will ``crack down'' on the banking industry. The more 
heat that is brought on the banking industry, the less it can afford to 
appear to be associated with those who look even slightly suspicious to 
some eyes.
    No one has done a scientific survey, but I have collected closing 
letters and can relay some anecdotal evidence. New York is the 
epicenter of the problem: The problem started earliest in New York and 
New York is the hardest hit today. The problem spread along the Eastern 
seaboard, then migrated to the West Coast. The 
middle section of the country is now catching up. This pattern roughly 
tracks examination trends, which recently have had significantly 
enhanced AML components added. Our agents, if they handle too much 
cash, are also having trouble finding and maintaining bank accounts.
    The movement of money which is the lifeblood of our business, 
relies on banks that enjoy a public charter. We need bank accounts to 
collect money from our agents, and to wire that money to our 
correspondents abroad. Yet we are the only sector in the country that 
is routinely denied bank accounts, most times without even being given 
a chance to demonstrate compliance.
    Regulators do a difficult job and enforce the law in good faith. 
They are beginning to appreciate the critical role we play in meeting 
the financial needs of the Nation and the world. But the perception of 
risk they have fostered on the part of the banks has reached such a 
level that banks feel they have no choice but to close our accounts.
    Regulators will tell you that they never told banks to close all 
MSB accounts. They will tell you that no regulator ever tried to 
persuade or dissuade a bank from taking on a particular customer or 
type of customer. Yet banks continue to feel pressure to close our 
accounts due to lack of guidance and reassurance.
    From the moment it became acceptable, even advisable, to cure a 
bank's own compliance deficiencies by closing our accounts, the pattern 
was set that we be treated as pariahs, even scapegoats, with no 
recourse, and no chance of appeal.
    Bankers, influenced by regulators, deemed it logical and a good 
solution to sidestep the problem in this manner. It was as if a doctor, 
finding a certain disease distasteful or intractable, decided to ignore 
it, and just stop treating those patients that had it. The more 
challenged a bank is found to be in their own compliance programs, the 
more likely it is that they will be pressured to close our accounts. 
This is beyond dispute, and is totally unjust.

Are We Risky Customers?
    Much to the contrary, no adverse regulatory action has ever 
befallen a bank because of a licensed MSB account, unless it was 
because the bank forgot to ask to see a license.
    Government controls tightening slowly over the last few decades, 
always starting with the banks and only coming to nonbanks years later, 
have predictably driven some bad customers to nonbanks, and attracted 
some bad elements into the money transfer business itself, causing 
legitimate licensees to be unfairly marked with a stigma we do not 
deserve, a presumption of guilt.
    In most cases, closings have occurred, not because of any actual 
problem in our history or deficiency in our compliance programs, but 
simply because we are in a business designated ``high-risk'' by Federal 
banking regulators. Banks no longer feel they can do enough due 
diligence on us no matter how much time and money is spent. They do not 
feel secure, nor do they feel they can satisfy the probing questions of 
their examiners in this regard.
    If some members of our industry have had compliance problems, they 
are lessons dearly learned and frankly, are dwarfed by comparison to 
the compliance problems the banks themselves have had.

Image vs. Reality
    We do not consider our money laundering risk to be as great as has 
been portrayed: We take in money an average of $300 at a time from 
consumers; most of us do employment verification for any sum over 
$5,000; we are licensed, we are domestic, and we are held fully 
responsible for any misdeeds by our agents. Despite all this, we are 
routinely classified together with any type of informal transmitter you 
can name: Wholesale, foreign, or unlicensed, it does not matter--we are 
tarred with the same brush.
    If the respect afforded the State money transfer license needs to 
be upgraded and standardized, then let us look at that. But all that 
should be necessary is proof of licensure, some initial due diligence 
and some affordable monitoring.
    The banks are not wrong to be fearful of our accounts. The greatest 
risk they face with our accounts, is getting into serious trouble with 
their regulators for having ``too many'' MSB accounts.
    No financial institution should refuse to consider, nor 
unreasonably deny, account facilities to another class of lawful 
business, as is happening right now to the licensed remittance 
industry. Since we have been categorized as ``high risk,'' the 
presumption of guilt is so strong, that we are not even given a chance 
to demonstrate our compliance programs.
    We and banks need a roadmap to an affordable due diligence process 
and the message needs to go forth that it is okay to have licensed 
remittance companies as customers, and that no discrimination shall be 
tolerated. The only message that has reached the banking community so 
far, is that MSB accounts, licensed or not, are to be feared as risky 
and expensive to maintain.
    This problem can no longer be seen as the occasional result of 
prudent business practices on the part of banks. The problem is 
pervasive. Whether it is the direct consequence of compliance guidance 
the banks have been given, or the lack thereof, or because the guidance 
and our industry have been misunderstood and taken to irrational 
extremes, no longer matters. Something must be done to correct the 
current trend.
    Considering that no bank has ever gotten into trouble for having a 
licensed remittance company as a client, as long as they remembered to 
do a few simple things, one wonders where our ``risky'' reputation came 
from? It is clear as day that this is a regulator-caused problem, and 
therefore needs a regulatory about-face to solve it.

What Can Be Done About It?
    We seek a National Money Transmitters Act that will require a 
national money transmitter's license not to deal with safety and 
soundness, but with antimoney laundering requirements. The purpose of 
this new license would not be to add more regulatory burdens, but to 
ensure uniform and universal application of our antimoney laundering 
laws, eliminate duplicative exams, and provide a certification that 
banks may rely on.
    We seek a broad, clear, national definition of money transfer and 
when a money transfer license is required, even application of the 
licensing requirement, respect for the license itself, and meaningful 
punishment for those who willfully refuse to get a license.
    With this license, any bank should be required to give the account 
applicant a fair evaluation and, if there is a rejection on AML 
grounds, the bank should be compelled to give a specific reason. The 
applicant should then be given the chance to cure and reapply, or a 
chance to appeal the decision to FinCEN.
    It is time for FinCEN, the functional regulators, and Congress, to 
insist that licensed MSB's not be unreasonably denied access to banking 
facilities. Not just for our sake, but for everyone's, it is time to 
change the course we are on.
    Treasury has long spoken about how important the remittance 
business is to world economic stability and why remittances are an 
important public policy issue, but has seldom made mention of licensed-
remittance companies in this connection. The movement to bank the 
unbanked, which includes poor people in general, as well as immigrants, 
is a laudable goal, which we support.
    But there seems to be a myth that banks are really the preferred 
way to send money, both from a customer perspective and a public policy 
perspective. In fact we, the licensed MSB's, are the Government's best 
ally in the fight against money laundering, and the best guarantee of 
competitive conditions, favorable to the consumer. We are the last 
channel with any hope of vetting those other ``unrecorded'' customers, 
or preventing their number from growing. The worthy goal of thwarting 
money laundering must not be allowed to hurt the innocent, and that is 
what is happening today.
    No financial institution can be required to guarantee that no 
tainted funds ever pass through its facilities. Such a guarantee would 
be impossible. What is required is that we and the banks, build systems 
that are adequate to the nature and volume of customer activity and 
take reasonable steps to detect and prevent money laundering.
    This is no longer just a company problem, nor even just an industry 
problem, but a pervasive societal problem and one that involves 
national security, consumer protection, humanitarian needs, and global 
economic stability.
    It is distressing to me that, in some circumstances, smaller 
licensees are likely to be ``priced'' out of the market, in various 
ways, by both banks and government. We do not believe anyone would 
consciously intend this result either. Small licensees who can 
demonstrate good compliance should not be overburdened with fee upon 
fee for multiple, expensive audits.
    All of these effects are predictable consequences of the present 
trend, and we have been well alerted to the problem so, if we do 
nothing at this critical time, history will not judge our motivations 
so kindly.
Clarification and Guidelines are Not Enough
    Banks themselves are clamoring for clarification, and FinCEN has 
pledged to give it. But in this topsy-turvy atmosphere, sometimes 
``clarification'' can have negative consequences. In June 2004, the OCC 
came out with its Advisory Letter 2004-7 which contained a few simple 
steps for opening an MSB account.\1\
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    \1\ ``National banks should perform careful due diligence of the 
accounts of MSB's to control money laundering and reputation risks. For 
example, banks should verify registration and licensing status, and 
consider visiting customers at their place of business and implementing 
monitoring procedures to identify and report suspicious activity. As 
part of their due diligence programs, banks should also consider 
obtaining and reviewing the following on the MSB:

     Financial information, including primary lines of business 
and major customers, and local reputation;
     The MSB's antimoney laundering policies, procedures and 
controls;
     Third-party references and information from verification 
services;
     Information on owners of the MSB;
     The MSB's license, including any restrictions;
     Consideration of the purpose, source of funds to open the 
account, and expected activity.

    MSB's who have registered with FinCEN receive letters of 
acknowledgement from the Internal Revenue Service, Detroit Computing 
Center (DCC). A bank may rely on the DCC correspondence as verification 
that the MSB has properly registered with FinCEN and may ask its MSB 
customers to provide a copy of this form.''--From OCC AL 2004-7.
---------------------------------------------------------------------------
    Those guidelines looked simple enough to me, in fact, they looked 
like what a bank should do on all business customers of a certain size. 
Yet, it was enough to prompt most banks to close some more accounts. In 
fact, some closing letters quote AL 2004-7 verbatim and cite it as the 
reason the account is being closed.
    The letter simply advised caution with MSB's, especially when doing 
business with unlicensed or foreign MSB's. Although we fall into 
neither of these sub-categories, no such distinction was made in the 
minds of bankers or examiners. It was all one more big red flag on 
MSB's in general, to them.
    No wonder regulators will not admit a causal connection: Who would 
take responsibility for such a non-sequitur?
    The country of highest money laundering volume is the United 
States, and the preferred and predominant financial institution home 
for such monies is the U.S. bank itself. The whole premise of ``high-
risk'' is relative. A proportional comparison of the laundering done 
through licensed MSB's with that done through banks, makes the negative 
reputation we have all the more unjust.
    We are not looking for leniency. To the contrary, we licensed MSB's 
welcome stringent regulation and we demand vigorous enforcement. At no 
time have we thought that the problem was due to regulations that were 
too stringent. To the contrary, closing accounts is a total abdication 
of and a running away from, responsibility. All we are asking for is a 
level playing field and a fair chance.
    Section 311 of the USA PATRIOT Act anticipated this problem and 
tried to prevent it by ordering Treasury to consider ``. . . whether 
the imposition of any particular . . . measure would create a 
significant competitive disadvantage . . . cost or burden associated 
with compliance, for financial institutions . . . licensed in the 
United States . . . any significant adverse systemic impact on the 
international payment . . . system, or on legitimate business 
activities involving a particular jurisdiction, institution, or class 
of transactions; and . . . the effect of the action on United States 
national security and foreign policy.''
    If ``clarification'' works to some degree, it will be nice. It will 
help to see the number of account closings go down and the number of 
account openings go up, but this is not the whole story. We will never 
achieve true transparency until we have the right to know exactly why 
we have been rejected by any particular bank, and given a chance to 
cure the problem and reapply, or given a chance to appeal to a higher 
authority . . . . until then, there will be no due process for us, even 
when everything gets ``clarified;'' to the nth degree.
    The primary way we separate the good guys from the bad guys, ever 
since the BSA was passed in 1970, is to ask the customer for 
identification. That, and explaining any deviations from expected 
activity, are the essence of compliance for any financial institution. 
Without us around, the majority of senders will never get asked for 
identification. We will have our own Government-induced parallel market 
where no identification will ever be requested and no records are kept.
    From the moment no distinction was made between licensed and 
unlicensed MSB's, and nothing was known about what tests we go through 
and how good we are, we were in for trouble as an industry. From the 
moment it became okay, even recommended, to deal with a bank's own 
compliance deficiencies by closing all its MSB accounts, we were in for 
trouble as a nation.
    We look forward to working with all parties toward a day when good 
compliance comes with viable procedures, by definition, without 
presumption of guilt and, if those procedures are not followed, that 
the right party gets educated and then leaned on, if necessary--when 
our legitimate reactions to crime, or terror threats or bank scandals, 
no longer cast undue suspicion on innocent parties, or encumber 
legitimate commerce.
    Our shared obligation as financial institutions is not to guarantee 
that tainted money will never pass through our facilities. What is 
required is that we design and maintain systems and procedures that are 
reasonably designed to prevent, impede, and/or report money laundering, 
in proportion to the size of our operation and type of risks posed by 
the customer.
Are Civil Rights and Anti-Trust Laws Being Violated?
    If decisions continue to be made behind closed doors and banks 
continue to reject certain licensed customers without giving specific, 
rational reasons, and that rejected customer has no right to even try 
to improve or to appeal the bank's decision, we will be right back 
where we started. Remember, we are going for transparency here, not 
just a one-way mirror.
    If even one person is terminated for subjective reasons, it is one 
person too many. If two entire licensed industries--check cashers and 
money transmitters--can be treated this way, imagine how much worse is 
the plight of the everyman with no such credentials.
    For example, the last big bank I know of in the business is 
starting to close accounts selectively. So far, the only closings I 
have heard of is a small Muslim licensee in New Jersey, and a one-shop 
Florida licensee, who is mono-lingual Spanish. Selectively, indeed. How 
often will compliance concerns coincide with other sorts of profiling?
    It is true: Banks can take or refuse any customer they wish. Hotels 
and restaurants in the South used to have that right, too.
    There is no such thing right now as a civil right to a bank 
account, even though bank accounts are as necessary as air to us, and 
we are being denied it in most cases not because of any transgression, 
but because of who we are. While overt racism may not be visible on the 
surface, the societal consequences are to the detriment of immigrants 
and minorities.
    What may have started out as legitimate money laundering concern on 
the part of government and banks, has turned into nothing less than a 
denial of civil rights, not only to the community-based businesses we 
represent, but to the broader public they serve.
    We have been told that this situation does not meet the legal 
definition of discrimination, nor does it rise to the level of an 
antitrust violation. But one need only look around to see that the 
transmitters losing their accounts are the smaller, independently owned 
money transfer businesses. These businesses also just happen to be 
ethnically owned and serve ethnic communities.
    Discrimination can never be adequately judged on a case-by-case, 
alone, and in a vacuum. Only after time, in the aggregate, and by 
comparison to the way others are treated, can one say whether 
discrimination is taking place. We believe it clearly has and is.
    Money is the lifeblood of our business. Banks control the pipeline. 
Access to a bank account is access to life. It is a public 
accommodation, working under public charter, and should not be 
unreasonably denied to any class of people.
    Treasury wants to see the cost of remittances reduced, yet fails to 
emphasize that we licensees are the reason costs have come down in the 
first place. This thriving competition must be maintained.
    The bulk of remittance flows is not going through banks nor through 
large transmitters, but through small and mid-size companies. Just as 
small business collectively accounts for most of our economy and for 
most economic growth, so do we ``smaller'' transmitters, collectively, 
account for the bulk of recorded international migrant worker family 
remittances.
    The banks, and even the larger transmitters, have only relatively 
recently ``discovered'' our markets. Previously, service through those 
channels was poor and expensive, or nonexistent. The competition that 
has improved these conditions was provided by us. Now, picking up the 
scent of profit, and with prodding from Government itself, those same 
banks slowly but surely are shutting us off from the facilities they 
control with an iron grip, even as they position themselves to take on 
our customers, if they can.
    Government has discouraged banks from banking us because of alleged 
compliance concerns, and simultaneously cajoled the banks into offering 
our services, on consumerist grounds. Yet anyone who is truly 
interested in keeping costs down for the remitting consumer, and anyone 
who cares about containing money laundering, should be a big booster of 
our industry. Surely our Government did not mean to foster and further 
reinforce what may well become a de facto monopoly of these services by 
the banking sector.
    While overt monopolistic behavior may not be visible, the result is 
anticompetitive and unjust in the extreme. Racism and monopolistic 
behavior are seldom overt, but they are nonetheless real, very painful, 
and unbecoming of a free society.

Why Are These Closings Wrong?
    Most banks stopped doing business with nonaccountholders a long 
time ago. This was a convenient way to encourage people to open 
accounts, assure some kind of paper trail for AML purposes, focus on 
their core business, and avoid having the teller lines clogged up with 
nonaccountholders. But some people could not afford the accounts.
    The unbanked, the undocumented, the poor, those who did not speak 
English, would have to find somewhere else to go. It was okay to lose 
those ``other'' customers, because the banks regarded them as 
unprofitable, anyway. And there were no laws saying that banks had to 
offer any particular service to any particular person. There still are 
not any such laws. Thank God for check cashers and licensed remittance 
companies.
    Treasury itself has repeatedly asserted the national and world 
importance of cheap, efficient remittance flows. We independent 
licensed remittance companies are responsible for the lion's share of 
those flows, and will be for the foreseeable future. We are the best 
way to document, vet and control those flows for AML, safety and 
soundness, and consumer protection reasons. Were we to disappear 
tomorrow, most of our senders would not flock to banks but rather, 
would simply go underground.
    We hope the Senate looks carefully into our plea, and gives it the 
same intelligent, proactive attention that we are required to give our 
compliance obligations. We do our best to comply. Now, we need your 
help to survive. Please fight for us.
    Our strongest argument is on compliance grounds. The challenge of a 
free society in the age of terror, is to separate the good money from 
the bad, without impeding the flow of commerce or stepping on civil 
rights. In this particular case, I believe the pendulum has swung too 
far in one direction.
    The challenge of a free society in the war on drugs and money 
laundering and the war on terror, is to separate and stop the tainted 
money, while letting the good money through and, especially, to 
separate the flows of migrant worker remittances, from the flows of 
nefarious schemes. The only way to do that is to encourage a vital, 
transparent nonbank sector. To do this, we need practical and rational 
measures, as opposed to impractical and irrational, knee-jerk 
responses.
    The guidelines will be a great start, but banks will not restore 
our accounts until the field examiners have shown they really get the 
message that it is not appropriate nor required nor even a good idea 
for a bank to shun an entire industry because the compliance challenge 
is perceived to be difficult.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY 
                        FROM KEVIN BROWN

Q.1. The New York Times, on April 26, 2005, described ``a surge 
in schemes involving sophisticated counterfeiting of . . . 
United States postal money orders.'' According to the article, 
``[s]ales of postal money orders [although] declining, from 233 
million money orders in 2000 to 188 million last year. . . 
brought in about $230 million in fees. . .''
    As you have noted in prior testimony before the Committee, 
the Postal Service is an MSB subject to the BSA. The volume of 
money order sales reported by the Treasury may make the Postal 
Service one of the Nation's largest MSB's. Does the IRS have 
authority to audit compliance by the Postal Service with the 
BSA? Has the Postal Service been subject to an examination of 
BSA compliance, either by the IRS or any other agency? What 
were the results of each such examination? Does the Postal 
Service file suspicious activity reports with FinCEN? Has the 
quasi-government status of the Postal Service caused any BSA 
examination or enforcement issues or problems? What has been 
the compliance history of the Postal Service, under the BSA, as 
an MSB?

A.1. In accordance with Treasury Directive 15-41, dated 
December 1, 1992, the IRS has not conducted a BSA examination/
audit of the Postal Service. See http://www.treas.gov/reqs/
td15-41.htm. As a result of the Directive, the IRS is not aware 
of any BSA examinations, or other BSA related compliance and 
enforcement issues relevant to the Postal Service.
    The Postal Service does file suspicious activity reports. 
They have filed over 99,000 SAR's since January 1, 2002 when 
sellers, issuers and redeemers of money orders were required to 
file SAR's.




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