[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
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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.
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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.
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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.
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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.
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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.
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\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.
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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\
---------------------------------------------------------------------------
\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.