[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SUSPICIOUS ACTIVITY AND
CURRENCY TRANSACTION REPORTS:
BALANCING LAW ENFORCEMENT UTILITY
AND REGULATORY REQUIREMENTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 10, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-30
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
MELVIN L. WATT, North Carolina, Chairman
LUIS V. GUTIERREZ, Illinois GARY G. MILLER, California
MAXINE WATERS, California PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York RON PAUL, Texas
MICHAEL E. CAPUANO, Massachusetts STEVEN C. LaTOURETTE, Ohio
CAROLYN McCARTHY, New York J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida PETER J. ROSKAM, Illinois
C O N T E N T S
----------
Page
Hearing held on:
May 10, 2007................................................. 1
Appendix:
May 10, 2007................................................. 37
WITNESSES
Thursday, May 10, 2007
Baity, William F., Deputy Director, Financial Crimes Enforcement
Network (FinCEN)............................................... 5
Bartlett, Hon. Steve, President & CEO, The Financial Services
Roundtable..................................................... 22
Hernandez, Salvador, Deputy Assistant Director, Criminal
Investigative Division, National Crimes Branch, Federal Bureau
of Investigation, U.S. Department of Justice................... 6
Hodge, Megan Davis, Director, Anti-Money Laundering, RBC Centura
Bank, on behalf of the American Bankers Association............ 23
McClain, Scott K., Deputy General Counsel, Financial Service
Centers of America............................................. 26
Menzies, R. Michael Stewart, Sr., President & CEO, Easton Bank
and Trust Company, on behalf of the Independent Community
Bankers of America............................................. 28
Mroz, Carolyn M., President & CEO, Bay-Vanguard Federal Savings
Bank, on behalf of America's Community Bankers................. 25
APPENDIX
Prepared statements:
Watt, Hon. Melvin L.......................................... 38
Miller, Hon. Gary G.......................................... 40
Baity, William F............................................. 42
Bartlett, Hon. Steve......................................... 51
Hernandez, Salvador.......................................... 68
Hodge, Megan Davis........................................... 76
McClain, Scott K............................................. 87
Menzies, R. Michael Stewart, Sr.............................. 97
Mroz, Carolyn M.............................................. 110
Additional Material Submitted for the Record
Watt, Hon. Melvin L.:
Written responses to questions submitted to William F. Baity. 121
Written responses to questions submitted to Hon. Steve
Bartlett................................................... 127
Written responses to questions submitted to Salvador
Hernandez.................................................. 129
Written responses to questions submitted to Megan Davis Hodge 135
Statement of the California Credit Union League.............. 140
SUSPICIOUS ACTIVITY AND
CURRENCY TRANSACTION REPORTS:
BALANCING LAW ENFORCEMENT UTILITY
AND REGULATORY REQUIREMENTS
----------
Thursday, May 10, 2007
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt
[chairman of the subcommittee] presiding.
Present: Representatives Watt, Lynch; Miller.
Chairman Watt. Let me call the Subcommittee on Oversight
and Investigations to order, and thank everybody for being
here. Good morning. I understand it is a little early for us to
be convening a hearing, but we got thrown a curve ball by the
other committee on which I sit, the Judiciary Committee.
I am on that committee also, and we are expected to
question Attorney General Gonzales today. We were originally
told that hearing would start at 10:00, so we moved ours up to
9:00, thinking that there would be some overlap but not a lot,
and then they moved their hearing up to 9:30.
So we may not still achieve the desired objective, but we
are not going to rush through this. We want to give this the
attention that it deserves. And for that purpose, my ranking
member has kindly agreed to limit the opening statements to
just a brief opening statement by myself, and to 5 minutes by
Mr. Miller, so we will get started, and I will put myself on
the clock.
We meet this morning to explore suspicious activity and
currency transaction reports which are required under the Bank
Secrecy Act of 1970. This is the first in what is probably
going to be a series of hearings to explore suspicious activity
reports and currency transaction reports, the real-life
experiences of financial institutions in complying with these
reporting requirements, and the utility to law enforcement that
these reports have.
First, I want to welcome all of the witnesses and thank
them for taking the time today to appear before this
subcommittee on this very important issue. And I want to say a
special thanks to Megan Hodge, who is the director of anti-
money laundering for RBC Centura Bank from my home State,
recognizing that all politics is local, of course.
Since 9/11, there has been increased focus on rooting out
financial crimes, including terrorist financing and money
laundering, and rightly so. As a result of this increased
emphasis on detecting financial crimes, financial institutions
have had to assume a much larger role, becoming full partners
with law enforcement.
Suspicious activity reports and currency transaction
reports are just two of the very important ways that the
financial industry has partnered with law enforcement. Today
there are millions of these reports filed annually with the
Financial Crimes Enforcement Network (FinCEN). Deputy Director
Baity of FinCEN is here this morning and we look forward to his
testimony.
In this hearing, we hope to fully explore suspicious
activity and currency transaction reporting under the Bank
Secrecy Act, and figure out what works well and what doesn't,
what reports are useful and which ones not so useful, if any of
them are not.
We know that under the Bank Secrecy Act, financial
institutions must report all transactions of $10,000 or more on
a currency transaction report and report all suspicious
activity on a suspicious activity report. What we do not yet
fully understand is how financial institutions, including
depository institutions, money services businesses, and others,
actually comply with these reporting requirements, and if the
guidance given to them by the regulators is appropriate and
effective.
We also want to explore the practical effects of Bank
Secrecy Act reporting. How do financial institutions detect
suspicious activity--through the use of automated computer
systems, human intelligence, or some combination? Are there
increased costs to financial institutions of Bank Secrecy Act
compliance, and are those costs passed on to consumers? How do
financial institutions train their staff to recognize and
report suspicious activity? Is better guidance needed?
We also want to explore the utility of increased suspicious
activity reports and currency transaction filings to law
enforcement. Is law enforcement receiving robust, useful data
from FinCEN and financial institutions? Are there changes that
law enforcement would like to see in the FinCEN guidance to
financial institutions or in the suspicious activity report
form itself?
The point of this hearing is to elicit information.
Understanding the full scope of the Bank Secrecy Act reporting,
particularly suspicious activity reports and currency
transaction reports, is a bipartisan objective. We do not have
any preconceived ideas as to the utility of these reports, or
have in mind any particular legislative action. Rather, we are
here to learn and benefit from the witnesses' collective
knowledge and experiences with Bank Secrecy Act reporting.
We all must recognize that increased Bank Secrecy Act
reporting does have some cost. Financial institutions spend
millions of dollars a year in compliance, some of which
undoubtedly gets passed on to consumers. Americans' privacy and
civil liberties must be balanced with assisting law
enforcement.
We all seek to equip law enforcement with the tools they
need to keep America safe, especially after 9/11. We want the
information they receive, however, to be robust and effective.
With that, I will conclude and recognize the gentleman from
California for 5 minutes, Mr. Miller, my ranking member.
Mr. Miller. Thank you, Chairman Watt.
We started talking about this probably a month ago--the
issues associated with the Bank Secrecy Act and how it was
applied--and my staff and I have been involved in quite a few
meetings and reading information. We have met with FinCEN, the
bankers, and others who are involved in check cashing, as well
as the FBI.
What has come out of this is obviously there is a lack of
communication that is really part of the system. I mean, nobody
knows what anybody else is doing, which is probably the best
way to have something like this happen when you are dealing
with financial institutions that are somewhat being used to
hide money or transfer money that is being used for some
illegal purpose.
But you try to look and you say, are the banks being overly
burdened in what they are doing? Is there a need for what they
are doing? Are there rules that properly define what they are
supposed to do? And I think this hearing is good for one
reason. I think we are going to ferret a lot of that out and
determine what is working and what is not working.
I had asked some questions on the $10,000 limit, which goes
back to the 1970's, and what would happen if you changed that?
And it was very interesting coming out of the conversations
that for every $2,000 you increase that by, you lose a lot of
information out there that otherwise is needed by law
enforcement. And the numbers were rather surprising when you
looked at how many cases were generated by this information
that is being provided.
It is rather secretive, in a way, because it is law
enforcement and they are trying to determine who is doing what
in this country illegally, if terrorism is occurring, if money
laundering is occurring, or other crimes are being committed
through the passage of currency in the form of cash.
And yet we want to look at our financial institutions and
say, are we providing too much of a burden on them? Is there
such a burden on a teller that when a teller does a normal
transaction that teller might consider to be a normal process
of his or her job, that they are filing information just out of
fear rather than basically complying with what the rules might
be?
I think we are going to make a lot of information public
today, and it is going to be able to maybe generate some effort
on our part to put these organizations and groups together to
talk and see if there is a better way the system could operate,
if there are things that could be changed or modified that
don't impact the result of what we are trying to accomplish
here.
Having met with all the parties involved, I have come to
the conclusion that there is substantial information being
generated that is really benefitting the safety of this
country, and in many ways stopping crime that is occurring that
might not otherwise be caught in other fashions.
And yet when I have talked to the individuals who are being
required to do all the correspondence and apply with the system
as it is structured, they feel in many cases it is a burden
being placed on them. Many of the requirements are vague and
ambiguous. They are not sure what they have to do, what they
don't have to do; that many of the transactions are being dealt
with out of more of a cause created by fear rather than a
process that they truly understand.
On the FinCEN Web site, it states, ``Working together is
critical in succeeding against today's criminals. No
organization, no agency, no financial institution can do it
alone.'' I agree with that, and I am pleased that FinCEN is
here today, as well as the bankers and check cashers and other
groups that are here, and the FBI and other law enforcement,
that everybody can talk.
We can come away, I believe, with a better understanding of
what we are trying to do here, what we are doing, and the
benefit of that. And yet we might look at the structure and
say, there are certain things we can do to streamline it, to
make it more user-friendly for the banks and other agencies
that have to comply with this regulation, yet do that in a
fashion that does not negatively impact the positive
information we are getting from the system that our law
enforcement agencies will be able to work on today.
So I commend you for holding this hearing. When you first
talked to me about it, I kind of scratched my head and said,
yes, I have heard a little bit about this in the past from
some, and it might be interesting to get the information. The
more we have researched it, and the more we have talked, I
think this hearing is going to be very appropriate, and I
believe we will come away, hopefully, with a resolution that
makes it better.
Thank you. I yield back.
Chairman Watt. Thank you, Mr. Ranking Member. And without
objection, all members' opening statements will be made a part
of the record. There are other members who will be joining us
in progress. We are up a little early this morning for the
members, I think. But that is not an indication that they are
not interested. They will be here.
We have two panels of witnesses this morning, the
government witnesses and then the private sector witnesses on
panel two. And with their permission, I will abbreviate their
introductions and assure them that I will put their full
curriculum vitae into the record, but in the interest of time,
just do a very brief introduction now.
On our first panel, we have William F. Baity, Deputy
Director of the Financial Crimes Enforcement Network, commonly
known as FinCEN. Did I pronounce Baity right? That is the way
we pronounce it in North Carolina. Got it.
We also have Salvador Hernandez, Deputy Assistant Director,
Criminal Investigative Division, National Crimes Branch of the
FBI.
In the interests of time, and without objection, your full
written statements will be made a part of the record, and each
of you will be recognized for 5 minutes for a summary of your
written testimony. We won't be too vigorous with that, but try
to stay as close to the 5 minutes as you can and we will tap
when you are in that range and getting out of bounds too far.
Mr. Baity, if you will proceed. You are recognized for 5
minutes, or somewhere in that neighborhood.
STATEMENT OF WILLIAM F. BAITY, DEPUTY DIRECTOR, FINANCIAL
CRIMES ENFORCEMENT NETWORK (FinCEN)
Mr. Baity. Thank you. Good morning, Chairman Watt, Ranking
Member Miller, and distinguished members of the subcommittee.
On behalf of our director and the men and women of the
Financial Crimes Enforcement Network, FinCEN, we appreciate
this opportunity to appear today to discuss the utility of the
information provided by the financial institutions in
accordance with the provisions of the Bank Secrecy Act, or BSA.
As the administrator of the BSA, FinCEN continually strives
to maintain the proper balance between the requirements that
are imposed upon the financial services industry and the need
to insure an unimpeded flow of important information to law
enforcement and other officials who need this information.
This balancing effort must be ongoing, and it must be
continuously reexamined. We take this responsibility very
seriously, and we look forward to working with this
subcommittee in our united fight to safeguard the U.S.
financial system against all types of illicit financial
activities. In this regard, our director has tasked everyone in
the agency to take a fresh look to help reexamine the
efficiencies and the effectiveness of our regulatory regimes.
I am also honored to appear today with Mr. Salvador
Hernandez, Deputy Assistant Director for the Criminal
Investigative Division of the FBI. Our partnership with the
FBI, as well as other law enforcement agencies, allows for a
seamless flow and utilization of the BSA information in our
united fight against terrorist financing and money laundering.
As I discussed in greater detail in our written testimony,
FinCEN works to help safeguard the financial industry from
illicit financial activity. This is achieved through a broad
range of interrelated activities, including: administering the
Bank Secrecy Act; supporting law enforcement, intelligence, and
regulatory agencies through the sharing and analysis of the
information received; and building global cooperation and
technical expertise among financial intelligence units
throughout the world.
All of the information received pursuant to the BSA is
critical to FinCEN's ultimate goal of improving the
transparency within the U.S. financial system. The BSA data
received through currency transaction reports, suspicious
activity reports, and other forms has proven to be highly
valuable to our law enforcement customers who use this
information on a daily basis as they work to investigate,
uncover, and disrupt the vast networks of money launderers,
terrorist financiers, and other criminals.
However, FinCEN is a user in its own right. FinCEN's
analysis and liaison division, which is responsible for
analyzing BSA data and other information, produces analytical
products supporting domestic law enforcement, intelligence, and
foreign financial intelligence units.
Our analytical products range in complexity from
traditional suspect-related reports to policy-level assessments
of financial criminal threats in particular areas. Last year,
by way of example, FinCEN produced numerous analytical products
which consist of geographical threat assessments, analysis of
money laundering, illicit financing methodologies, analytical
support for major law enforcement investigations, specific
financial transactions tutorials, and analysis of the Bank
Secrecy Act compliance systems.
Specific examples included our study on mortgage loan
fraud, a report on domestic shell company abuse, and domestic
geographic threat assessments based on requests from the Texas
Department of Public Safety and the Arizona Attorney General's
Office. We believe these types of analytical products, coupled
with other sources, provided added value and understanding on a
broader level regarding the individual reports of information
that are provided under the BSA.
Our efforts also reflect the understanding that we must
address these issues from an international perspective. FinCEN,
a founding member of the Egmont Group of financial intelligence
units, works to strengthen the international sharing of
relevant financial investigation.
We, along with our FIUs, as they are called, work in a
combined operational manner to better understand international
threats to our responsive financial sectors. The Egmont Group
has grown in 10 years from approximately 14 jurisdictions to
now over 100 countries and jurisdictions having financial
intelligence units like FinCEN.
In conclusion, Mr. Chairman, we are grateful for your
leadership and that of other members of the subcommittee on
these issues, and we stand ready to assist you in your
continuing efforts to ensure the safety and soundness of our
financial system. Thank you for the opportunity again to be
here today, and I look forward to discussing these very
important issues with the committee this morning. Thank you.
[The prepared statement of Mr. Baity can be found on page
42 of the appendix.]
Chairman Watt. You have set a tremendous precedent, ending
right on 5 minutes. That is going to be a hard act to follow,
Mr. Hernandez. But you are recognized for 5 minutes, or
somewhere in that neighborhood, also.
STATEMENT OF SALVADOR HERNANDEZ, DEPUTY ASSISTANT DIRECTOR,
CRIMINAL INVESTIGATIVE DIVISION, NATIONAL CRIMES BRANCH,
FEDERAL BUREAU OF INVESTIGATION, U.S. DEPARTMENT OF JUSTICE
Mr. Hernandez. Good morning, Mr. Chairman, Ranking Member
Miller, and members of the subcommittee. On behalf of the
Federal Bureau of Investigation, I am honored to appear before
you today to discuss how the FBI utilizes information obtained
from the private financial sector.
Chief among the investigative responsibilities of the FBI
is the mission to proactively neutralize threats to the
economic and national security of the United States of America.
Whether motivated by criminal greed or radical ideology, the
activity underlying both criminal and counterterrorism
investigations is best prevented by access to financial
information by law enforcement and the intelligence community.
The FBI considers this information to be of great value in
carrying out its mission to protect citizens of this country,
and over the past 5 years, we have made significant advances in
utilizing this information to carry out that mission.
In the ``criminal greed'' model, the FBI utilizes a two-
step approach to deprive the criminal of the proceeds of his
crime. The first step involves aggressively investigating the
underlying criminal activity, which establishes the specified
unlawful activity requirement of the Federal money laundering
statute, and the second step involves following the money to
identify the financial institutions used to launder proceeds of
criminal activities.
In the counterterrorism model, the keystone of the FBI's
strategy against terrorism is countering the manner in which
terror networks recruit, train, plan, and effect operations,
each of which requires a measure of support. The FBI
established the Terrorist Financing Operations Section, or
TFOS, of the Counterterrorism Division on the premise that the
required financial support of terrorism inherently includes the
generation, movement, and expenditure of resources, which are
oftentimes identifiable and traceable through records created
and maintained by financial institutions.
The analysis of financial records generated by the private
financial services sector provides law enforcement and the
intelligence community with real opportunities to proactively
identify criminal enterprises and terrorist networks and
disrupt their nefarious designs.
Money laundering has a significant effect on the global
economy and can contribute to political and social instability,
especially in developing countries or those historically
associated with the drug trade. The International Monetary Fund
estimates that money laundering could account for 2 to 5
percent of the world's gross domestic product.
In some countries, people eschew formal banking systems in
favor of informal banking transfer policies. Systems such as
hawalas or trade-based money laundering schemes, and the
Colombian black market peso exchange, which the Drug
Enforcement Administration estimates is responsible for
transferring $5 billion in drug proceeds per year from the
United States to Colombia, are chief among them.
Hawalas are centuries-old remittance systems located
primarily in ethnic communities and based on trust. In
countries where modern financial services are unavailable or
unreliable, hawalas fill the void for immigrants wanting to
remit money home to family members, and unfortunately, for the
criminal element to launder the proceeds of illegal activity.
There are several more familiarized venues that criminals
use to launder the proceeds of their crimes, the most common of
which is the U.S. banking system, following by cash-intensive
businesses like gas stations, convenience stores, offshore
banking, shell companies, bulk cash smuggling operations, and
casinos.
Money services businesses such as money transmitters and
issuers of money orders or stored value cards serve an
important and useful role in our society, but are also
particularly vulnerable to money laundering activities. A
recent review of suspicious activity reports filed with the
Financial Crimes Enforcement Network indicated that a number of
significant money services businesses' filings involved money
laundering or structuring.
The FBI's pending money laundering cases include examples
of proceeds generated from criminal activities such as
organized crime, drug trafficking, fraud against the
government, securities fraud, health care fraud, mortgage
fraud, and domestic and international terrorism.
By taking a two-step approach to these investigations, step
one being the investigation of the underlying criminal
activity, and step two being following the money, the FBI has
made significant inroads into identifying the financial
infrastructure of the domestic and international criminal or
terrorist organizations. Once the underlying criminal activity
is identified and the financial infrastructure has been
discovered, the FBI has aggressively applied the asset
forfeiture laws in order to seize and forfeit the proceeds of
the illegal activity.
In terrorism investigations in particular, access to
financial information significantly enhances the ability of law
enforcement and members of the intelligence community to
effectively counter threats. The lack of complete transparency
in the financial regulatory system is a weakness on which money
launderers and financiers of terrorism rely to reap the
proceeds of their crimes and to finance terrorist attacks.
Limited access to financial records inhibits law
enforcement's ability to identify financial networks and
financial activities. Efforts to detect terrorist activity
through financial analysis are further complicated by the fact
that the funding of terrorism may differ from traditional money
laundering because funds used to support terrorism are
sometimes legitimately acquired, for example, charitable
contributions and the proceeds of legitimate businesses.
Overcoming these challenges so that we can prevent acts of
terror has increased the importance of cooperation with our
partner law enforcement agencies, the intelligence community,
and the private financial and charitable sectors.
If there is any doubt that law enforcement vigorously and
proactively utilizes BSA data, and especially SARs, I would
like to dispel that doubt right now. Federal law enforcement
agencies review and utilize SARs in a proactive manner to
identify both potential money laundering cases as well as money
laundering trends.
Moreover, as indicated in the 2007 National Money
Laundering Strategy report that was issued last week, law
enforcement agencies do not review the SARs in isolation. The
Departments of Justice, Treasury, and Homeland Security
encourage the formation of interagency SAR review teams to
review and discuss the SARs in a coordinated manner in order to
exchange information and avoid duplication of effort.
There are 80 SAR review teams operating across the country
analyzing BSA data to identify evidence of financial crimes and
money laundering. In many cases, these groups include
representatives from State and local law enforcement. The
investigations resulting from these task forces frequently
result in successful investigations of money laundering, fraud,
drug trafficking, and other offenses. While we are limited in
our ability to discuss such cases openly because of the
confidentiality requirements surrounding SARs, we would welcome
the opportunity to provide you with examples of such successful
investigations.
In conclusion, BSA data is invaluable to the FBI's
counterterrorism efforts as well as our more traditional
criminal investigations. Our experience shows that terrorism
activities are relatively inexpensive to carry out and that the
utilization of data obtained pursuant to the BSA provides
significant operational uplift.
The FBI is committed to collaborating with the committee
and Congress to ascertain whether certain categories of the BSA
can be reworked without harm to our investigative capabilities.
The GAO is currently studying this issue, with a report due in
early 2008, and the FBI has been an active participant in this
study.
However, to alter the current BSA reporting requirements
without careful study to determine the range of implications
could be a significant setback to investigative and
intelligence efforts relative to both the global war on
terrorism and traditional criminal activities. Thank you.
[The prepared statement of Mr. Hernandez can be found on
page 68 of the appendix.]
Chairman Watt. Thank you to both of the witnesses for your
testimony.
The members of the subcommittee will now be recognized for
5 minutes each for questioning, and if we need to, we will go
back for a second round. I will recognize myself for 5 minutes
of questioning.
I have heard some pretty general testimony this morning,
and I still am not sure I understand much about the underlying
objectives that we are here for. First of all, I need to
understand better the interface between the two agencies that
you are here representing, FinCEN and the FBI, or FinCEN and
other parts.
Mr. Baity, FinCEN is under which Department?
Mr. Baity. We are a bureau of the Department of the
Treasury.
Chairman Watt. And do these SARs and CTRS come to your
agency, or do they go to the Department of Justice? How does
that work?
Mr. Baity. If I can, let me take you through the process.
If a financial institution, which is covered pursuant to our
regulatory authority, either files a currency transaction
report or a suspicious activity report or another BSA report,
that information is placed on forms that have been designed.
Those forms are then put into a data system, which is
maintained at the IRS ECC complex in Detroit on our behalf.
We then ensure that the information is made available to
appropriate law enforcement, which is done in several ways. In
the case of the FBI and other Federal law enforcement agencies,
it is done through a bulk download, where that information is
provided to them in bulk.
We also have arrangements with other agencies and State law
enforcement where they have the ability to go into that data
set, based on guidelines and procedures which we have
established, to get information that they may be interested in
that regard.
And so through a myriad of ways, we provide it to a range
of law enforcement pursuant to our rules of dissemination of
the information.
Chairman Watt. So FinCEN is kind of a clearing house for
information. You get the suspicious activity reports and
currency transaction reports, you put them into a database, and
then you make that information available to law enforcement
agencies. Do you do any law enforcement yourself?
Mr. Baity. Well, as I stated, we do a couple of things.
First of all, let me go back to your question. Yes, I think
your characterization is correct. We do ensure that the
information is provided to the appropriate law enforcement
agencies.
But the information from FinCEN's standpoint is also
valuable for our use because, as I indicated, we are looking at
the information on a broader base, a macro level, to see what
information we can glean. Some of our analytical products--for
instance, the product that we recently gave to the Texas
Department of Public Safety was a study based on all of the
information as it related to movement of currency, and
suspicious reporting along the Texas border, and it allowed
them to basically make policy decisions about allocating
resources in the right places.
We also use the information to provide actual threat
assessments. We are in the process of completing one for Ohio,
where they can look to see money laundering trends and
patterns. And we also use the information to provide guidance
back to the financial sector that are filing these reports to
illustrate patterns of information and various statistics, so
we use the information ourselves.
Chairman Watt. All right. Now, you had in 2006 17,600,000
SARs or CTRs go into some system. I am still trying to figure
out, where is that information going? Is it coming to FinCEN
and going into a database? Does FinCEN itself use any of that
information for investigative or prosecutorial purposes, or is
that further downstream with the people that you provide the
information to? Do you do any law enforcement? Do you prosecute
anybody?
Mr. Baity. No. We are not a law enforcement agency. We are
a law enforcement support agency. For instance, there are
several ongoing matters with, for instance, the FBI and other
law enforcement where they will come to FinCEN and our analysts
will help them understand the data.
Chairman Watt. But you don't prosecute anything?
Mr. Baity. No, sir.
Chairman Watt. Okay. And so the information that you get is
gross information for your purposes, for the purposes of doing
the 1,284 basic reports that you described in your testimony
and the 176 complex reports that you described in your
testimony. Is that information--that is gross information you
are using. It is the cumulative information, the statistical
information, rather than specific case information, specific
SARs or CTRs. Is that right?
Mr. Baity. That is correct for the majority, even though in
some of the requests, we are actually looking at the specific
SARs to give that information back to the requester.
Chairman Watt. All right. My time is expired. I will chase
this on down the chain in the next round of questions, and I
will now recognize the ranking member for 5 minutes for
questions.
Mr. Miller. Thank you. To follow up on this, when the forms
are completed--how long does that take, to complete the forms
before they are put in a databank?
Mr. Baity. From the time that the forms are actually
received, there are approximately 10 days before they are
actually put into the database. That is the outside.
Mr. Miller. You said one bank was concerned that this was
not really being utilized because they had received one of the
forms back 8 months after they made application that it wasn't
filled out completely. And their confusion was if it was
important, why would it take 8 months?
Mr. Baity. I am not--
Mr. Miller. Was this an unusual situation?
Mr. Baity. I think that is unusual. It could have occurred
as part of a regulatory oversight, when the examiner looked at
it and asked a question. But normally, when the information
comes in to FinCEN, in essence, basically it is in the database
within 10 working--
Mr. Miller. So if it is not complete, it is caught at that
point and the bank is notified?
Mr. Baity. Normally, there is a process to go back to the
institution, yes.
Mr. Miller. Now, when everything is in the databank, is
there any portion of that that is automatically forwarded to
any law enforcement agencies, like the FBI would immediately
get it, or do they just have access to that databank?
Mr. Baity. Well, different agencies--as I mentioned, we
have different ways in which we deliver the information. But
normally, when I say download, every day a different completed
data set of new information is put out, and those agencies that
are allowed to go in and extract it in bulk can pick it up
immediately, just like FinCEN does.
Mr. Miller. A question for Mr. Hernandez with the FBI. As
you see the process that occurs and this information goes to
the databank, is that the best process that you can see
available as far as your availability of this information?
Mr. Hernandez. We receive most of that information by bulk
download, as Mr. Baity has indicated. It is electronically sent
to us, forwarded to us. We immediately match it with our
investigative data warehouse and our FBI database.
Mr. Miller. Is that these 80 different partnership groups
out there that are working on this?
Mr. Hernandez. No. Those would actually be human beings
getting together to talk about what they have in the way of
SARs. But our investigative data warehouse and our other
database systems are matched against the information that comes
in from FinCEN on the SAR reports, CTRs, and immediately put to
use. So in my view, the electronic transfer of that information
is the most efficient way to do business.
Mr. Miller. Now, you have 17,600,000 reports a year. Are
these matches oftentimes done by a computer matching with a
name, or do you have to try to have individuals go through this
information and try to specifically review it to see if there
is any applicability?
Mr. Hernandez. Currently, most of those matches are made by
computer, by links between what we have in our databases and
what comes in. And that is an important point because not so
many years ago, before our databases were as robust as they are
now, most of that matching had to be done by hand. And it was a
difficult process. You can imagine the kinds of numbers that
come into the typical field office. They are coming in by field
office based on where the activity occurred.
Now the process is much more efficient, and much more
streamlined, so we are able to make use of far greater numbers
of SARs now than we were even several years ago. In fact, it is
interesting that the issue continues to percolate the way it
has over the years. In reality, we make much better use of the
SARs in spite of the fact that there are many of them, much
more of them, now than we did, as I said, just years ago
because of the systems that we have in place.
Mr. Miller. The workload for individuals actually increased
dramatically because of the availability of the technology you
have to focus on the compliance that you receive that are most
beneficial to you as far as they are applying to case work?
Mr. Hernandez. Right. We actually have done some things at
the headquarters level to increase, even more than we currently
have, our ability to analyze SARs through a SAR exploitation
product that we are working with our directorate of
intelligence on that is in the process of being sent out to the
field so that roles are clearly defined, who will do what with
SARs when they come in.
But again, to reiterate, the use we make of them now is far
more comprehensive, far greater than it was even years ago.
Mr. Miller. There have been some comments from individuals
I talked to who suggested that perhaps a working group should
be organized amongst different agencies to see if we could make
this process work better. But you currently have the Bank
Secrecy Act Advisory Group that is in place. How successful has
that been, and could it be improved upon?
Mr. Baity. Well, we think the Bank Secrecy Act Advisory
Group has been extremely successful. It is a place where we can
bring together--in fact, we will be meeting next week with that
group--where we bring together all of the industries that are
affected by our regulatory regime, law enforcement and the
regulators, to discuss the issues that are before them.
Mr. Miller. How often do you meet?
Mr. Baity. We meet twice a year. And that has been in
existence now since before 1995, and with membership changing.
But it has been a place where we have been able to address many
of the issues collectively, and I think it has been successful
because it allows us to get a full understanding of the
concerns of the financial sector.
Mr. Miller. Well, I see my time has expired. I don't know
when it expired. But thank you very much.
Chairman Watt. I am not being all that rigorous about it.
We will keep going back and forth, so if you have a question
you want to get in. Let me recognize myself for 5 more minutes,
and we will keep this going as long as we think it is
productive.
Mr. Hernandez, I am going to approach this from the other
end of the spectrum. You are the recipient of this information
in some form downstream from FinCEN. Does the FBI get 17.6
million CTRs or SARs, or do you get just the bulk information?
What form does this information come to you in?
Mr. Hernandez. I am not certain that we get 17 million,
that we get everything that FinCEN gets, because FinCEN may be
parceling that out to individual agencies. I would suspect that
we get most of that since our jurisdiction is so broad.
Chairman Watt. Maybe I should ask Mr. Baity that, then. Do
they get 17.6 million reports, too?
Mr. Baity. To all of the agencies who have access, they
have the same access to all of the records.
Chairman Watt. So basically FinCEN is dumping this into an
FBI computer. FinCEN has a computer that has the information,
and it dumps it into the FBI's computer daily?
Mr. Baity. We post it daily, and then there is a process by
which the FBI and others electronically come and pull it out
into their system.
Chairman Watt. Pull it out selectively or just dump it?
Mr. Baity. It is made available to them to pull the whole
data information.
Chairman Watt. And does the FBI pull the whole data
information, Mr. Hernandez, that you are aware of, or is it
selective in what it pulls?
Mr. Hernandez. Well, the information would be pulled based
on the field office where the activity occurred. For example,
if the entire bulk is sent to everyone, Cincinnati at least
initially would be, if it is in Cincinnati, the only field
office that would be interested in those. And so it would pull
those down that are of interest to it because the incident
occurred there.
Chairman Watt. But the FBI gets the whole pool in one
location somewhere, or is it various offices of the FBI pulling
from FinCEN's database? Do we know that?
Mr. Hernandez. I don't know that.
Chairman Watt. Does anybody who is accompanying you know
that?
Mr. Hernandez. I am told that we get monthly downloads of
everything from FinCEN. It goes right into our investigative
data warehouse.
Chairman Watt. Monthly downloads? So this information might
be 30 days old when you get it? Is that what you are saying?
Mr. Hernandez. Yes. It could be.
Chairman Watt. Okay. Mr. Baity, State agencies that wanted
access, are they pulling down the whole download? Is anybody
pulling down the whole database that FinCEN has, or are they
just going into it selectively?
Mr. Baity. There are two kinds. The bulk download provides
the capability to get the entire download.
Chairman Watt. We have established that once a month, the
FBI gets a bulk download. Is there anybody else who is getting
a bulk download?
Mr. Baity. There are other agreements with other law
enforcement.
Chairman Watt. Who?
Mr. Baity. Well, we have an agreement with DEA. We have an
agreement with the Secret Service. The IRS has the ability
because the data is at--
Chairman Watt. I want to know whether they are getting it--
Mr. Baity. Yes, sir. They are getting it.
Chairman Watt.--not whether they have the ability because
it sounds to me like we have duplicate technology systems out
here that end up getting exactly the same information. The
whole bulk information DEA gets, the FBI gets once a month. You
have it in your computer. Every time we build a computer system
that can take 17 million pieces of information into it, it
costs the taxpayer some money, and I am just trying to find out
what is being done with this stuff.
Mr. Baity. Well, if I can, let me--in terms of the bulk
download, that information is made available to the Federal law
enforcement agencies so that they can directly pull it down.
The reason why it is available in that regard is because they
have different uses of it because of their investigatory
authorities. We do not determine that, so we make that
available.
The other thing we do, though, is that we make it
available--you asked the question--
Chairman Watt. But might it be more efficient, if they were
getting the information directly as opposed to your--
Mr. Baity. Well, they are getting it directly. They are
getting it as FinCEN's data, and they are getting it directly
by us putting it out. Because they have different systems in
how they bridge the information, we have built a system so they
can interface to get the data.
Chairman Watt. Mr. Hernandez, are there situations where
this 30-day delay in getting a bulk download has any law
enforcement implications?
Mr. Hernandez. That point has actually been clarified for
me. We have access to the information posted by FinCEN as it is
entered. So we can go in and look essentially on a daily basis
for information. We get a biweekly or monthly download, a dump,
essentially, of all of the information. So depending on what it
is we are doing, if we are looking for something in particular,
we can look for it on the same day it is entered.
And Mr. Chairman, I understand from your questions and from
some of the statements early on, that some of the concern has
to do with what is happening with 17 million records.
Chairman Watt. That is where I am going to get to next.
That is the third round of questions. But my 5 minutes has run
out again, so I will go to Mr. Miller for 5 additional minutes.
Mr. Miller. Thank you. Taking up where we left off, you
said this bank advisory group meets about twice a year. And
based on meetings I had with the Financial Services Roundtable,
the American Bankers Association, the American Community
Bankers Association, the Financial Services Centers of America,
and the Independent Community Bankers Association, there is a
lot of confusion amongst the groups who have to comply with the
regulations.
And there are some who think that some examiners basically
have told them that they have to file a certain amount or
number of CTRs or SARs, or else they will be written up for
lack of compliance. I guess it might be like that every
community has their own local police officer who writes more
tickets than everybody else, and everybody knows that one
person by name.
I don't know if that is happening out there. But is there
some way that you can see we can improve upon this process,
maybe meeting more than twice a year or outreach or something
to more involve the groups that have to comply with the
regulations?
Mr. Baity. Let me, if I can, try to answer the specific
example you raised first.
The steps we have taken in conjunction with the other bank
regulators is to come together and basically put together
uniform guidelines on examinations to basically help alleviate
the issue raised that one examiner is far out front or
different than the normal. So we put that together as a manual
which is being taught to all examiners to try to bring
consistency to the examination process.
We think that right now, even though we are looking at
everything anew, that the current frequency of the meetings
makes sense. And one of the advantages, as we rotate new
industries under our regulatory authority, they are brought
into the Bank Secrecy Act advisory group for discussions as we
go forward.
Mr. Miller. One repeated statement from all of the
organizations was that the guidelines are vague and ambiguous
to such a degree that a teller is put in a position where they
are almost afraid not to file a certain type of forms even
though they might not necessarily be applicable because they
are afraid that it can come back on them if they don't.
Is there something we can do to clarify some of this?
Mr. Baity. Well, again, what FinCEN has done is to try to
participate in the examination training to make sure that they
understand, from an examiner's point, what is expected under
the regulation. We meet with them regularly. We have put out
guidance on that regard. So we not only meet with the
regulators, but are trying to increase the guidance that we are
putting out to the financial sector as well as to what are the
expectations so that everyone is at least hearing the same
message in terms of what we are trying to provide.
Mr. Miller. Mr. Hernandez, is there any alternative to the
current system of CTRs and SARs that you see out there that
would be as beneficial as the current system we have?
Mr. Hernandez. For the purposes of law enforcement and the
FBI especially, 30-plus years of the Bank Secrecy Act CTR/SAR
requirement has yielded tremendous results in terms of the
initiation of investigations, enhancing of investigations.
I don't see an alternative system. The FBI has always been
willing to discuss, and I think has, in individual contexts
with banking institutions and certainly as members of groups of
this sort, ways that we might streamline the process or ways we
might identify things that aren't particularly helpful to law
enforcement.
But I don't see an alternative. The value coming from CTRs
and from SARs is simply too great. We understand that not every
single CTR and every single SAR is going to yield an
investigation and a conviction. But that is not different than
anything else we do. We don't not look at what may not be a
smoking gun lead on a terrorism case because we think it is not
going to lead us to something important. We look at those
things.
And so we look at everything that comes in. We make
connections where we can. And time has proved that we do make
connections through joining SARs from different places, from
different subjects, to make better cases, more significant
white collar crime cases, that yield us to results of terrorism
investigations. There simply isn't any substitute for what we
get in the way SAR and CTR data that I see.
Mr. Miller. There has been a suggestion that $10,000 today
is not what $10,000 used to be in the 1970's, and perhaps that
number needs to be moved up. But I understand technology is
different than it used to be that benefits you.
How do you think that would impact you positively or
negatively if it was raised?
Mr. Hernandez. Well, I would submit that $10,000 in cash or
above is perhaps even more significant now than it was 10 years
ago. In a largely credit and debit-based society, the fact that
individuals show up at institutions with $10,000 or $12,000 or
$14,000 in cash is, I think, suspicious.
Mr. Miller. More so than it was in the 1970's?
Mr. Hernandez. Possibly so, depending on who it is that
shows up and where it came from, what the business is that is
involved. An argument could be made, I think, if we were to
look at this closely that in certain instances, the threshold
could be lowered to get at what we are really interested in,
and in certain instances, perhaps raised depending on what we
are interested in. But I don't think it is prudent to talk
about raising the threshold simply because we are 30 years down
the road.
Mr. Miller. I guess I will follow up on my next round. My
time is up.
Chairman Watt. Mr. Hernandez, you talk about over 30 years
of experience. Currency transaction reports have been in
existence since 1970. Right? How long have suspicious activity
reports been required?
Mr. Baity. If I can answer that, the first reporting
requirements were in 1996 for depository institutions.
Subsequently, other industries have been brought on. So the
first suspicious reporting program was started in 1996.
Chairman Watt. And that was pursuant to the statute that
was passed in 1996?
Mr. Baity. In 1994, the Money Laundering Suppression Act
basically authorized it, over the next 2 years, we developed
the program, and reporting actually started in 1996.
Chairman Watt. Mr. Hernandez, you were about to tell me
what happens with an individual. We have been approaching this
from the 17 million pieces of paper. What happens from the
individual piece of paper?
Mr. Hernandez. A number of things can happen. The
individual piece of paper is brought into our IDW. A connection
may be made there. It may be reviewed by an individual. It may
be joined with some pending investigation in that field office;
it may be joined with a pending investigation in another field
office.
Chairman Watt. So the FBI would have some suspicion that
somebody is doing something illegal, and then they would use
that person's name to go and access a CTR or SAR report on that
person?
Mr. Hernandez. We might look for it by name, if we have an
ongoing investigation or a subject investigation. Often,
though, those CTRs, those SARs, cause us to initiate an
investigation. They are, after all, suspicious activity
reports. That is a clue to us that there might be something we
want to look at.
So many of those CTRs or SARs start an investigation. And I
understand that for the financial services industry, it is
difficult sometimes to understand how one individual report
might lead us to an investigation, especially if it is a
smaller dollar amount. The fact is that many of those--
Chairman Watt. Essentially if there are 17 million of them,
I think, is the concern that people have. Is there somebody
looking at each one of these 17 million CTRs and SARs?
Mr. Hernandez. I am not going to tell you, Mr. Chairman,
that an individual is looking at 17 million, but 17 million are
being hit against business of the current system we have, our
databases, to see whether there are connections.
Chairman Watt. All right. Let me just submit for the
record, just so you will have it, the examination manual, the
Bank Secrecy Act Anti-Money Laundering Examination Manual. This
manual contains the instructions that you all have put out to
the banks or financial institutions that provide the
information to go into these reports?
Mr. Baity. If I understand what you read, I believe it is
the instruction manual that is put out to the regulators in
terms of their procedures for examination financial
institutions for compliance with the statute.
Chairman Watt. So you give these to the regulators, and
then regulators take this set of directions and issue
instructions to financial institutions?
Mr. Baity. They use that to examine if the institutions are
complying with the BSA requirements. When they go in and do an
examination of the institutions for their purposes, which
include safety and soundness, they also review them to look for
compliance with the Bank Secrecy Act. That manual is a product
of our joint efforts with the regulators to bring consistency
as much as we can to that process.
Chairman Watt. This part of the examination process, how
does an individual bank get communicated to about what they are
expected to do to prepare for the examination?
Mr. Baity. Just about every institution has what they call
a compliance officer, who is responsible for understanding the
Bank Secrecy Act regulations and rules. The regulators, when
they do their examination, in conjunction with those compliance
officers they provide the information and expectations of them
to the bank itself. So every bank has in it a process for
complying or persons who are dedicated to complying with the
Bank Secrecy Act requirements, if that answers your question.
Chairman Watt. It does. What has happened since 1996? I
mean, it seems to me that currency transaction reports can be
generated electronically. Computers can do that without
substantial human involvement. What has transpired since 1996?
How are banks complying, how are financial institutions, with
the non-mechanical function?
CTR is a mechanical reporting function that a computer can
go in and pick out. It is a cash transaction of $10,000. The
computer just spits it out. The information goes. Tell me what
you understand is happening in financial institutions just
after 1996 aside from CTRs?
Mr. Baity. Well, since 1996 and specifically since 9/11,
what we have tried to do is enhance the electronic filing of
the information from all of the institutions that are covered
so that the institution is filing not in a paper format but in
electronic because it makes the data--
Chairman Watt. The CTRs, though, how do you electronically
file what is a personal observation?
Mr. Baity. Well, the suspicious activity reporting, which
allows for the institution to basically examine the transaction
and make a judgment whether, based on their understanding of
their customer, whether that transaction is suspicious. They
can fill out--
Chairman Watt. So you are saying once it has been
determined by a bank employee that there is a suspicious
activity, you streamline the system for reporting that. I think
the question I am asking is: What do you understand to be the
process before that determination is made? What are the--
Mr. Baity. The process before, which is laid out in a
regulation, is that the institution basically undertakes to
review this--not just a teller making a decision, but I am
talking in terms of suspicious activity reporting.
Chairman Watt. Right.
Mr. Baity. That there is an examination within the
institution, and in fact, it requires notification to senior
management in the institution of the intent to file a SAR. So
we ask the institution to actually make a value judgment and a
review before they file the report with us.
Chairman Watt. I ask unanimous consent to submit the 2006
BSA/AMC Examination Manual for the record. Without objection,
it will be submitted.
[The above-referenced document is available at the
following site: www.ffiec.gov/bsa--aml--infobase/default.htm]
Chairman Watt. Is there a companion set of instructions
that don't go to the examiners, but go to the financial
institutions themselves, or do we need to talk to the examiners
about what the content of that is?
Mr. Baity. There are--I wouldn't say a companion manual,
but there are guidelines that have been provided to the
industry on various questions about the compliance. And we
provide that guidance as part of what we do on our Web site
that is publicly available to the financial institutions
because that depends on sometimes the question that comes to
FinCEN when the bank asks, what do we do in this particular
case?
If it looks like a question has broad application, we issue
a guidance document to all of the financial institutions that
this is our perspective to answer that question.
Chairman Watt. What about institutions that are not
regulated? They have examiners. Do you have examiners for
institutions that are not regulated under the Federal system?
Mr. Baity. Well, no, because first of all--let me take a
step back. We are only talking about those financial industries
or sectors that come under our regulatory authority. If you
come under our regulatory authority, if you are, for instance,
a depository institution, that is done by the Federal banking
regulators--the OCC, the Federal Reserve Board, etc.
But there are a range of financial institutions that we
regulate, and we look to others, particularly the Internal
Revenue Service, to help us with the compliance. So for
instance, in the case of casinos that are under our regulatory
authority, the Internal Revenue Service has a sector that
actually goes out and reviews that industry for compliance.
Again, that is done in conjunction with consultation with
FinCEN as to what our expectations are. We do spend a lot of
time training those industries on what we expect them to do.
Chairman Watt. All right. I am going to recognize Mr.
Miller for 5 minutes, not to ask additional questions, but to
seek unanimous consent to submit written questions for the
record so that we can get further into this, because we could
be here a long time, I think, trying to understand it. We will
try to be more systematic in our approach, and maybe submit
written questions to these witnesses.
Mr. Miller? Five minutes.
Mr. Miller. Thank you.
Mr. Hernandez, you suggested that in some cases, the amount
could even be lower than $10,000 that would be beneficial.
Could you explain that a little further?
Mr. Hernandez. I can't conceive of what that would be right
now. I just believe that as we have established a $10,000
threshold, it was based on something. It may be too general, in
a sense. It may be too low, given certain kinds of activities,
and it may be too high, given changes that have occurred over
the past 6 years, certain kinds of activities.
We have strong suspicion that on the terrorism side in
particular, smaller dollar amounts are probably important and a
good indicator, potentially. I think in the end that $10,000 is
a good balance, given where we are. I will say this, it is my
firm belief that if that were raised, and frankly, if the
seasoned customer proposals that are moving forward are in fact
enacted, we will get less information. That is a positive thing
potentially for the financial sector because they will have to
report less to us. We will have less to work with. We will have
less in the way of information intelligence to put together
into our investigations.
I think there is a natural tradeoff, and the decision that
is left with this subcommittee and, I suppose, Congress is:
Where is that tradeoff? What as a society are we willing to
trade for reduced numbers of submissions by the financial
sector? I think it is all valuable. I don't think anybody here
is proposing that it be increased. But I think it needs to be
said that there is value here, and there will be something lost
by changing the rules if the rules are changed, clearly.
Mr. Miller. There are a lot of people in this country who
don't like government in their life. And I know one of the
questions that was asked of me, or a comment that was made to
me, by a banker was the small-town farmer who went out to the
auction, sold an old tractor and a pickup truck and it exceeded
the $10,000 or $11,000. He went to deposit it in his account,
later to find out that that had to be filed with a CTR to the
government, and he just went ballistic because he was a private
person.
And that really struck home. I think back to a few years
ago when I went back to bury my dad in Arkansas, a little town
called Japton, Arkansas. And Japton, Arkansas, has a little
store with one gas pump. My brother and I walked into it, and
there was a lady in the corner with a rifle leaning up against
the wall with the cash register, and three elderly gentlemen
sitting in these chairs rocking, staring at us as we walked in
the door.
We were going to pay, and they were staring at us. And they
said, well, what are you doing here? And until I told them we
came to bury my dad, and they asked who he was, then we were
accepted once they found out we weren't outsiders. But there
are some people in this country who just do not like the
government in their life. They are honest people, just trying
to live their lives and they are bothered by something like
this.
How does a bank deal with these type of situations?
Mr. Hernandez. Well, basically I think we are dealing with
a very basic problem in setting thresholds of any kind. How
specific can you ultimately make a threshold? Can we account
for $10,000-plus deposits with the exception of a farmer who
brings in $10,000 from the sale of a tractor? There are any
number of possibilities.
Mr. Miller. But the exemption that they are required to
file, they say, by and large are so time-consuming they are
unusable, that it is hard for them to justify doing it in this
case. And I am not arguing this. I am just saying that this is
a genuine question posed by a genuine individual who has a
major concern.
Mr. Hernandez. Right.
Mr. Miller. That is what some of these banks are facing out
there. And some people in this country just like their privacy.
Mr. Hernandez. Sure. That is a very natural tension. We
understand that. We accept that. And again, it gets back to
where are we as a society going to draw that line? Do we think
it is important enough to be able to capture the $10,000-plus
currency transactions in the general sense across the board
because we think that is indicative of criminal or terrorist
behavior, and in the process, draw into that some folks who
clearly aren't involved in anything of the sort? It may look
suspicious at the outset, but it ends up not being suspicious.
Nothing happens with that information. No investigation will
follow that information.
Mr. Miller. But, see, the guy who likes his privacy doesn't
understand that argument.
Mr. Hernandez. That is exactly right. We understand the
concern. And it is something that obviously in the FBI we deal
with all the time.
Mr. Miller. Is there any way of making the form, Mr. Baity,
more user-friendly, let's say, for banks to be able to file an
exemption rather than the exemption taking 15 minutes? Isn't it
easier just to hit the buttons and file it rather than having
to go the exemption process that some people would prefer to
use, but it is too complicated and time-consuming?
Mr. Baity. The short answer is, we are looking anew at
everything, including the forms themselves. But if I could just
take a minute to go back to your original question on
exemption. As you know, there are exemptions in place that have
not, from our perspective, been utilized fully by the banking
sector and the other reporting entities that could reduce the
number of CTRs, particularly.
What we are doing is we are re-looking at those exemptions
that have been in place for a while to try to get a clear
understanding to see if there is something we can do to make
them more usable by the financial sector as we go forward. So
the short answer is we are looking at that, including such
things as the forms themselves, because they have proliferated
over several years.
And if I could, Mr. Chairman, just to go back to your
question, institutions do have access to the examination
manual.
Mr. Miller. I would encourage you to do that if you are
looking at those because that was a repeated concern, and I
think that is a good direction to go. Thank you.
Chairman Watt. Let me thank the two witnesses for being
here. I ask unanimous consent to allow all members of the
subcommittee an appropriate amount of time, whatever that is,
to submit additional written questions to the witnesses.
And we will try to do that expeditiously and do it within
the parameters of our general committee rules, not outside that
timeframe. Since I am a new chairman, I don't know what that
timeframe is. Thirty days? Okay, within 30 days. Without
objection, so ordered.
All right. We thank these gentlemen, and we will call up
our second panel of witnesses. You all are going to make me
miss Attorney General Gonzales, I can see that already.
Without objection, we will submit for the record the
California Credit Union League statement. They are not part of
this second panel, but we will put their statement in the
record.
Let me thank the second panel of witnesses for being here,
and with their permission, do the same as I did with the first
panel, and abbreviate their introductions. We will put your
full bios into the record, but we will abbreviate in the
interests of time.
Our first witness is the Honorable Steve Bartlett, who is
well known to all of us on the Financial Services Committee. He
has testified many times. He is the president and CEO of the
Financial Services Roundtable.
The rest of the second panel consists of: Ms. Megan Davis
Hodge, director, anti-money laundering, at the RBC Centura
Bank, on behalf of the American Bankers Association; Ms.
Carolyn Mroz, president and CEO, Bay-Vanguard Savings Bank, on
behalf of America's Community Bankers; Mr. Scott K. McClain,
Deputy General Counsel, Financial Service Centers of America,
on behalf of the Financial Service Centers of America; and Mr.
R. Michael Stewart Menzies, Sr., president and CEO, Easton Bank
and Trust Company, on behalf of the Independent Community
Bankers of America.
We welcome each and every one of you. And as I said, your
full curriculum vitae will be put in the record, and we will
recognize each one of you for 5 minutes. I may be a little more
aggressive than I was with the first panel, but I will try not
to be unreasonable.
Mr. Bartlett, 5 minutes, please.
STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CEO,
THE FINANCIAL SERVICES ROUNDTABLE
Mr. Bartlett. Thank you, Mr. Chairman. Mr. Chairman and
Ranking Member Miller, we very much appreciate your leadership
on this, and the leadership of this subcommittee in examining
this difficult but solvable problem, a problem that has been
with us for some time.
Mr. Chairman, I would ask to submit for the record the
annual report for M&T Bank, which is one of our companies, and
has some comments in their annual report. I referred to it in
my testimony.
Chairman Watt. Without objection, so ordered.
[The above-referenced document is available at the
following site: http:/ir.mandtbank.com/fundamentals.cfm]
Mr. Bartlett. Mr. Chairman, I will summarize my testimony.
It is the goal of the Financial Services Roundtable and our
member companies to assist law enforcement in identifying
suspicious activities and making that identification usable to
law enforcement.
We believe that can be done much better than is being done
now. We think it can be done with a lot less disruption. But
more importantly, we think that better focus and better
targeting of suspicious activities in the identification and
the reporting will assist law enforcement in a much greater way
than they are assisted now.
Mr. Chairman, we have been calling this problem to the
attention of Congress for about 4 years. We have seen no
progress at all. The system continues to get worse. It is more
expensive, more clogged-up, and much more inconvenient and
difficult for our customers, the customers of financial
institutions, to use than it was just 4 years ago when we began
calling it to the Congress's attention.
Mr. Chairman, we see three basic problems. One is the very
large and increasing filing of defensive SARs. That has been
well-documented. The recent SAR activity report number is
62,000 suspicious activity reports filed in 1996, and almost a
million filed in 2005.
We don't think the number of suspicious activities have
increased by that amount since 1996, but we think those
additional filings of defensive filings has increased in
response to the current procedure. And that is why we think the
current procedure could be improved.
Second, and this is really in the last 18 months to 2
years, we are now beginning to see an additional problem of
what we call ad hoc enforcement. In response to the manual, the
guidance manual that you cited, Mr. Chairman, we are now
finding on a regular basis examiners who in the examination
process, they begin designing with our financial institutions
under the threat of--implied threat, in any event--of a
potential criminal indictment, which means we listen to them
very carefully.
The examiners begin to create new and customized procedures
for filing and identification of SARs that do not exist
anywhere in the manual, do not exist in the regulations.
Indeed, there are no regulations. These are guidance and not
regulations.
And so in the absence of a rule of law, in many of our
companies--not all, but many of our companies--tell us that
now, during the examination process every year, they just
simply make up a new process for going forward, and then
presumably they think that they will end up making up a new
process the following year, depending on who the examiner is,
which demonstrates the lack of clarity and the lack of rules in
place to follow.
And third, Mr. Chairman--this is the one that is the most
difficult for us--the filing of suspicious activity reports,
one of the results of this is that our companies are often told
that a particular account or implied that a particular account
is suspicious in some way. And oftentimes, we know that it is
not suspicious. Oftentimes, it is a seasoned customer, a
customer we have been doing business with for a long time. But
the outcome is we close the account.
And the outcome of that is you take large numbers of
legitimate customers out of the banking system, which doesn't
help law enforcement, but does inconvenience those customers,
some consumers, some small businesses, and also is harmful to
the economy because you drive more people into the unbanked
system of the cash economy.
Mr. Chairman, we think that the system can be improved. I
have met with most of the succession of directors of FinCEN,
and they all have good intentions. I have also met with several
Assistant Secretaries of the Treasury, and met with the Justice
Department, and they have been cordial meetings.
But the meetings have had one result, the same result you
got this morning, which is that--and I will paraphrase what you
just heard--we can see no changes in the process that we would
be willing to consider.
We think there are better systems. We think there are
better processes. And what we would ask for is a chance to have
a summit or a working group, as you suggested, between law
enforcement, the regulatory agencies, and the industry, with an
open mind towards looking for improvements instead of a set of,
well, this is the way we do it and we want to tell you why we
do it that way.
We had those meetings, but we think some improvements are
called for. Mr. Chairman, thank you for your leadership on
this.
[The prepared statement of Mr. Bartlett can be found on
page 51 of the appendix.]
Chairman Watt. Thank you for your testimony.
Ms. Hodge, you are recognized for 5 minutes.
STATEMENT OF MEGAN DAVIS HODGE, DIRECTOR, ANTI-MONEY
LAUNDERING, RBC CENTURA BANK, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION
Ms. Hodge. Thank you. Mr. Chairman, and members of the
subcommittee, I am Megan Davis Hodge, director of AML
compliance and BSA officer for RBC Centura Bank, headquartered
in Raleigh, North Carolina, appearing today on behalf of the
American Bankers Association, the ABA.
ABA, its members and bankers from the boardroom to the
teller line, have been steadfast partners in the effort to
deter, detect, and defend against those who would abuse our
financial system through fraud, money laundering, and terrorism
financing.
Mr. Chairman, we appreciate that you have chosen to focus
this hearing on better balancing law enforcement utility and
regulatory requirements. We share your goal. Our mission is too
important to squander resources on ineffective reporting. We
need to give priority to the efforts that achieve the greatest
bang for the buck and eliminate those that produce the least.
First, let me begin by briefly describing what banks must
do to comply with suspicious activity reporting obligations,
the cornerstone of the BSA.
First, to identify suspicious activity, the bank must
undertake a detailed analysis for every geographic area,
product, and customer category to identify that risk areas that
merit additional scrutiny.
Second, we must monitor the ongoing banking activity of our
customers to detect unusual activity. This detection could be
triggered by an observant teller or by a manual or automated
back office review of transaction records.
Once unusual transactions are flagged, an investigation is
conducted that is tailored to the specific circumstances of the
customer. These inquiries are sensitive and time-consuming.
After this detailed review, a SAR is filed if the bank
believes that the customer's activity meets the reporting
requirements. Through this process, the bank must comply with
filing deadlines, transaction threshold levels, and report form
requirements.
And finally, extensive records are required even if the
decision is made to not file a SAR.
This is not the end of mandated compliance. Periodic
summaries are given to senior management, and an independent
audit function takes place to ensure that the SAR process is
sound. Of course, none of this can take place without extensive
and regularly updated employee training. As the more than 300-
page interagency BSA examination manual demonstrates, there is
not a bank operation, product, or customer beyond the reach of
the SAR process.
What has this undertaking produced? It has produced a 600
percent increase in filings in the last 10 years, with no sign
of abating, that from our perspective represents an excess of
volume over value. Our conclusion is largely driven by two
factors.
First, regulatory pressures promote the ``when in doubt,
file'' mentality that inflates SAR volume out of proportion to
the risk represented by the underlying conduct.
Second, in the absence of constructive feedback from law
enforcement, banks identify an evolving array of fraud and
other potentially serious crimes that expand the SAR universe
regardless of the likelihood of action or interest by law
enforcement.
Changes can be made to address these issues and improve SAR
process efficiencies.
First, agencies can reduce the ``when in doubt'' defensive
SAR filings by assuring examiners follow exam standards. It is
the unwarranted substitution of examiner judgment for the
bank's well-considered risk assessment that is causing these
defensive filings. By abiding by the exam manual, which focuses
on effective programs, not quantitative outputs, fear of
second-guessing will disappear and best judgment reporting will
return.
Second, eliminate low-value SARs by better aligning SAR
thresholds to prosecutorial standards and by leveraging
specialized and accessible task forces to better pursue elusive
scams.
Third, enhance SAR feedback by more specific tracking of
the connection between SARs and the case results so that the
reporting effort and law enforcement value are more visibly
linked, as is done in other areas.
And finally, the time has come to eliminate currency
transaction reports on seasoned business customers. ABA
recognizes your strong leadership, Mr. Chairman, in pursing
such initiative. Your efforts and those of your colleagues on
the subcommittee were critical to passing H.R. 323, the
Seasoned Customer Exemption Act of 2007, by voice vote in the
full House.
Enactment of this legislation could be the most significant
step to improve our anti-money laundering efforts by trading
volume for value, not only with respect to CTRs but also with
regard to SARs. If we are better able to remove some of the
noise, both banks and law enforcement will be able to better
focus resources on improving results.
Thank you, Mr. Chairman. I would be happy to answer any
questions.
[The prepared statement of Ms. Hodge can be found on page
76 of the appendix.]
Chairman Watt. Thank you so much for your testimony.
Ms. Mroz, you are recognized for 5 minutes.
STATEMENT OF CAROLYN MROZ, PRESIDENT AND CEO, BAY-VANGUARD
SAVINGS BANK, ON BEHALF OF AMERICA'S COMMUNITY BANKERS
Ms. Mroz. Chairman Watt, Ranking Member Miller, and members
of the subcommittee, I am Carolyn Mroz, president and CEO of
Bay-Vanguard Federal Savings Bank, a $134 million depository
institution in Baltimore, Maryland. I am here today
representing America's Community Bankers, ACB. I am a member of
ACB's board of directors, and I serve on ACB's regulation and
compliance committee.
BSA compliance requirements are always at the top of the
list of the most burdensome regulatory requirements for
community bankers. Community banks are being held responsible
for the same BSA requirements as multinational banks despite
differences in their businesses and fewer resources available.
ACB supports the goals of these laws, but inconsistent
interpretation and a lack of regulatory guidance has made it
increasingly difficult for community banks to comply with anti-
money laundering demands.
For example, in addition to serving as Bay-Vanguard's
president and CEO, I am also our BSA compliance officer. We are
a small bank with only 31 employees. Large community banks
comply by employing a full-time senior level BSA officer, but I
don't have that luxury.
Regardless of bank size, many additional employees have to
work with the BSA officer to file the CTRs and SARs and to
respond to Section 314(a) requests for information. The added
payroll and benefit costs, as well as specialized training and
continuing education, are a significant expense for community
banks.
Also, third party audits and legal advice for SARs
determinations can cost a small bank well over $30,000
annually. These are real costs that have a great influence on
the bank's ability to grow the business and serve the
community. These burdens result in many lost opportunities.
Banks are providing much more data than law enforcement
appears capable of using. While we are committed to providing
the government with the necessary information to combat
unlawful activities, a greater emphasis should be placed on the
quality of the data rather than the quantity of the data.
We believe BSA requirements need to be modernized. For
example, ACB believes that the BSA should be amended to provide
an increase in the dollar value that triggers a CTR filing. The
current $10,000 threshold was established in 1970. When
adjusted for inflation, $30,000 in 1970 is equivalent to
$53,000 today. Studies have shown that increasing the reporting
threshold to $20,000 would decrease CTR filings by 57 percent,
and increasing the threshold to $30,000 would decrease filings
by 74 percent.
ACB also strongly urges the banking regulators, FinCEN and
the Department of Justice, to work to help institutions
identify activities that are truly suspicious and should be
reported. Without additional guidance regarding what events
should trigger an SAR, institutions will continue to face
excessive compliance risk in an often zealous regulatory
environment.
Financial institutions believe that the Federal Government
has little understanding of the amount of time and resources
that BSA compliance drains from an institution's ability to
serve its community. What may seem like insignificant costs to
law enforcement have very real business implications for
community banks.
As an example, 314(a) requests for specific data every 2
weeks are very costly and generate few enforcement results.
Banks should not be expected to report transactions to law
enforcement or conduct business in an environment that expects
compliance at any cost.
The time is now to review the BSA compliance requirements
to ensure that the burden shouldered by the Nation's community
banks is commensurate with a demonstrated benefit to law
enforcement. Banks stand ready and willing to respond quickly
and completely to legitimate requests from law enforcement
agencies. But compliance burdens that simply generate mountains
of data cannot be justified.
Thank you for your invitation to testify, and I would be
glad to answer any questions.
[The prepared statement of Ms. Mroz can be found on page
110 of the appendix.]
Chairman Watt. Thank you for your testimony.
And Mr. McClain, you are recognized for 5 minutes.
STATEMENT OF SCOTT K. McCLAIN, DEPUTY GENERAL COUNSEL,
FINANCIAL SERVICE CENTERS OF AMERICA
Mr. McClain. Thank you, Mr. Chairman, and members of the
subcommittee. My name is Scott McClain, and I serve as deputy
general counsel to Financial Service Centers of America, also
known as FiSCA. FiSCA is a national trade association
representing over 6,000 neighborhood financial service
providers throughout the United States.
FiSCA's membership is comprised of community-based
financial institutions that serve millions of customers from
all walks of life, including those with bank accounts as well
as the unbanked. Our members provide a range of financial
services, including check cashing, money transfers, and money
order sales, among others.
Let me first say that FiSCA and its members are committed
to the fight against money laundering and terrorist financing,
and we have committed significant resources in this area. Ours
is a regulated industry subject to many of the same types of
reporting and recordkeeping requirements as banks and other
depositories. As money service businesses, or MSBs, we are
subject to rigorous compliance examinations by IRS agents. When
viewed against the more traditional banking industry, our
record of compliance is quite good.
SAR and CTR compliance requirements have resulted in
substantial costs to the MSB industry in several key areas,
including labor costs, information technology costs,
professional service fees, and banking service charges. Banks
that service MSBs have likewise experienced mounting compliance
and monitoring costs, which are passed on to MSB customers in
the form of increased service fees. Any analysis of the value
of SAR and CTR information to law enforcement should take into
account the costs to the MSB industry.
Since 9/11, there has been a tremendous increase in
regulatory scrutiny of the financial services industry. Across
the board, MSBs have responded to these pressures by defensive
SAR filings. MSBs are persuaded that the key to avoiding
penalties is to file reports on even marginally irregular
activity. As a result, law enforcement agencies are deluged
with SARs that may be largely useless.
Pressure towards defensive SAR filings emanates in many
cases from field-level examiners who second guess decisions by
compliance personnel. Examiners have been critical of MSBs who
have not filed enough SARs. MSBs have also been cited for not
reporting transactions that the MSB knew to be legitimate. As a
result, MSBs are adopting a ``when in doubt, fill out''
philosophy.
To what extent are SARs valuable to law enforcement? What
percentage of filed SARs lead to active investigation, and what
percentage of those lead to criminal convictions? A critical
analysis of these questions and the overall burden that SARs
place on U.S. financial institutions is needed.
Additionally, FiSCA supports an increase in the reporting
threshold of CTRs. As has been noted earlier today, the present
$10,000 threshold was established in 1970. Since that time, the
threshold has not been increased, and it has been rendered
outdated due to inflation.
To a point made earlier by Mr. Bartlett of the Financial
Services Roundtable, the post-9/11 atmosphere of fear has given
rise to another indirect yet very costly burden to industry,
particularly the MSB industry, and that is the termination of
MSB bank accounts.
Depositories that service MSBs are faced with significant
regulatory burdens, and are required to expend ever-greater
resources in maintaining MSB compliance and monitoring systems.
Due to this uncertain regulatory environment, many banks have
opted to discontinue their check cashers and money transmitter
customers.
It is critical to the interests of national security that
transparency of MSB transactions be maintained by ensuring that
MSBs remain part of the regulated financial community and
continue to have access to depository services.
In conclusion, regulatory pressures and the lack of clear
guidance in this area have resulted in a tremendous number of
defensive SAR filings and duplicative CTR filings at tremendous
cost to industry. The value of these reports should be
evaluated, and the current reporting system and its cost to
industry should be critically assessed.
Again, we thank you for the opportunity to present these
views. I will be happy to address any questions that you may
have. Thank you.
[The prepared statement of Mr. McClain can be found on page
87 of the appendix.]
Chairman Watt. Thank you for your testimony.
And Mr. Menzies, you are recognized for 5 minutes.
STATEMENT OF R. MICHAEL STEWART MENZIES, SR., PRESIDENT AND
CEO, EASTON BANK & TRUST COMPANY, ON BEHALF OF THE INDEPENDENT
COMMUNITY BANKERS OF AMERICA
Mr. Menzies. Thank you, Chairman Watt, Ranking Member
Miller, and distinguished members of the committee. As
president and CEO of Easton Bank & Trust in Easton, Maryland,
the home of the world-famous Waterfowl Festival, it is my honor
to testify to you today as vice chairman of the--
Chairman Watt. World famous what festival?
Mr. Menzies. Waterfowl Festival, during the first week of
November every year. It is my honor to testify as vice chairman
of the Independent Community Bankers of America and our 5,000
members, and to discuss the Bank Secrecy Act with you today,
and to seek ways to prevent the Act from becoming form over
substance.
We strongly urge Congress to recognize and identify the
real costs that BSA requirements place on banks, especially
community banks. Bankers across the country have identified
this Act as one of the most burdensome of compliance acts in
the regulatory body. Our focus should be based on finding risk-
based approaches that balance the cost to the banking industry
and our customers, and benefits to law enforcement.
To that end, we support a streamlined seasoned customer
exemption from the CTR reports. In addition, law enforcement
should clearly demonstrate the results produced from data
collected. An open dialogue between law enforcement and the
industry would help all of us focus our efforts on being more
productive and effective. Fundamentally, specific feedback from
law enforcement would help banks identify suspicious
transactions. It would encourage us to understand that our
efforts are truly worthwhile.
I am heartened to hear Director Baity say that he plans to
take a fresh look at interaction with the banks and balancing
cost versus regulations, especially understanding that the
effort to modernize exemptions has been underway for almost 15
years now.
It is imperative that law enforcement understand the cost
in terms of dollars, training, time, and regulations. And these
costs are truly ultimately borne by our customers. We have 49
full-time employees, and more 8 percent of my staff is occupied
with BSA compliance. Every employee receives 2 or 3 hours of
BSA training every year. This training is costly and requires
our employees to divert significant attention away from
customer service.
In addition, we complete regular internal and external
audits of BSA compliance. Quarterly internal audits require a
minimum of 8 hours to complete. External audits cost us about
$4,000 a year. When FinCEN asks my bank to search our records
for data matches on suspicious individuals, each request
requires at least 2 hours of research by three employees every
2 weeks. If a match is found, the time increases significantly.
Last year, as you pointed out before, Chairman Watt, over
17 million reports were filed. In the first 4\1/2\ months of
2007, our bank has filed more than double the number of SARs
than last year. Although our CTR and SAR filings are automated,
it still requires a minimum of 5 minutes to complete each CTR
and up to 20 minutes to file an SAR.
Many institutions report the cost of using CTR exemptions
outweighs any associated benefit. As a result, many
institutions prefer not to use the exemptions and file the CTR
in every case where it is over $10,000. Unlike these banks, we
use the existing customer exemption, but we do it for only two
customers. Without the exemption, we would have filed 65 more
CTRs this year.
We applaud Ranking Member Bachus for taking the lead on
this issue, and once again sending a seasoned customer
exemption to the Senate in the form of H.R. 323, the Seasoned
Customer CTR Exemption Act of 2007. We applaud this committee
and the House for passing H.R. 323. We believe this bill is an
important step to bringing the costs and the benefits of BSA
reporting back into balance.
Specifically, H.R. 323 would streamline the exemption
process and make it easier for banks to use. While this sounds
like a small fix, it is important to community banks. It would
result in substantial savings to our banks and increase the
time employees can spend meeting our customers' financial
needs.
The requirement to renew exemptions was one reason that
banks chose not to use the exemptions. They fear--we fear--that
missing the renewal or an unreported transaction would make us
vulnerable to regulatory discipline and damage our reputation
possibly in the community.
ICBA looks forward to working closely with Chairman Frank,
Ranking Member Bachus, and members of this committee to find
solutions that reduce the BSA compliance burden while still
meeting the needs of law enforcement. Adoption of this
important legislation is one step that will decrease the
growing regulatory burden confronting all the banks of this
Nation.
Thanks so much for your time.
[The prepared statement of Mr. Menzies can be found on page
97 of the appendix.]
Chairman Watt. I would like to thank all of you for your
testimony. We have been advised that a series of votes may be
imminent, so we want to try to get through the questioning
session with this panel so that we don't have to detain you all
here while we go and vote and come back. So perhaps we got
carried away on the first panel, but we will try to restrict
that this time.
Since Mr. Lynch has not asked any questions yet, I am going
to recognize him first and then Mr. Miller. And I will go last,
in case we run out of time before we get through everybody.
Mr. Lynch is recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman. I want to thank Mr.
Miller as well for holding this hearing. I think it is an
important one.
I wear two hats here this morning. I am also the chairman
of the Task Force on Anti-Terrorist Financing, so these
suspicious activity reports and the currency transaction
reports are very important from an international standard as
well.
I just came back from the Middle East. I met with the
central bankers from Afghanistan, Jordan, and Turkey, and as
well as our Treasury folks, FBI, FinCEN--I know they were in
here a little earlier--trying to impose a system of
transparency internationally to stop anti-terrorist financing.
And so I think the goal of this process here is to figure
out, where is that balance where we can get enough information
to feel confident that we are preventing terrorists from using
the financial system to their end while not imposing undue
burden on our banking system.
And I was encouraged as well at Mr. Baity's comments that
we need to take a fresh look because some of these guidelines
have been put in place many, many years ago and they need a
fresh look.
But I have to admit, I come from this--because of the anti-
terrorist task force, I come with some caution because I see us
trying to regulate a global system where we are trying to
institute transparency and encourage these other international
banks, many of them in the Middle East, to give us suspicious
activity reports.
I was in Ramallah recently. A lot of banking, a lot of
economic activity, in Ramallah, in Jordan, in parts of the
Middle East that we know there are some nefarious groups there
that rely on illicit financing and money laundering to wage a
terrorist war. And we are getting no SARs. We are getting no
CTRs. And that has been difficult.
So while you are here saying we need less, I just think it
sends the wrong message sometimes internationally. So we really
do have to find that balance between getting enough information
and instituting a standard that will be adopted internationally
and will be effective internationally at the same time that we
can allow banks to operate with less of a regulatory burden.
I would like to ask, though, and a number of people have
mentioned the $10,000 trigger for suspicious activity reports
or cash transaction reports. And that has been in place for a
while. The International Convention on Anti-Terrorist Financing
has that in it. In other words, a cash transaction over $10,000
should trigger a report. But also, as little as $5,000 in a
transaction can require a report if other factors are present.
Now, based on what you are dealing with right now, where do
you think--and I will just ask the whole panel here--where do
you think our numbers should be? What should trigger in a
dollar amount or a factor consideration--what should trigger a
suspicious activity report or a CTR today?
Mr. Menzies. Congressman, I would be pleased to take a shot
at that as a community banker.
Mr. Lynch. Sure.
Mr. Menzies. I don't have a dollar amount as a community
banker. What I would like to see personally is substance over
form. And I don't know that I can tell you that that occurs at
$1,000 or $10,000 or $20,000 or $30,000. But I do believe I can
tell you that we are reporting form in many cases and they are
not of any substance at all.
Congressman Miller's description of the farmer was an
experience that I had, where the farmer went to the Farm Bureau
dinner and spoke with his brother and sold his brother his
tractor for $12,000, and his brother said, I am going to pay
you cash.
And he comes into the bank to deposit the cash, and he
looks at his niece, who is the teller, and he says, how can I
make this deposit so that you don't send it in to the IRS?
Because I am told that you banks are sending all this stuff in
to the IRS. And his niece now is involved in a structured
transaction, and if she doesn't report an SAR, she has broken
the law. And in my opinion, that is a great example of form
over substance. So I think that the--
Mr. Lynch. With all due respect, Mr. Menzies, that is a
pretty highly specific case. I mean, not every businessperson
out there has a niece who works as a teller. You are really--
Mr. Menzies. It is a pretty unusual case. But Congressman,
believe me, the public knows about the reporting process. This
secret is not a secret. And it is not because the bankers are
running around saying, listen, I am going to turn you in. The
public knows about it.
And as Congressman Miller pointed out, there are a lot of
people who are really concerned about these reports. And I am
not--
Chairman Watt. The gentleman's time is expired, but I will
allow each one of the witnesses to quickly--
Mr. Lynch. Mr. Chairman, just one point and I will yield
back.
Chairman Watt. Yes. Sure.
Mr. Lynch. But that is the point. People are concerned. The
terrorists are concerned. That is why they are avoiding the
formal financial system, the formal banking system, is because
they know. They won't use that system because they know a
report will be filed. That is the point. That is why Mr.
Haniyeh was confronted at Rafah Gate with $30 million in a
suitcase, because he couldn't use the traditional banking
system.
And that is what we want to do. We want to force them to
use a hand courier system because there is a great risk,
especially in the Middle East, to use that system. We don't
want them in the standard banking system. And so while you see
it as an encumbrance, there is also value in that, in squeezing
the illicit money out of the system.
I yield back.
Chairman Watt. I thank the gentleman.
The gentleman from California is recognized for 5 minutes.
Mr. Miller. Thank you very much. And I want to thank all of
you for the private meeting we had to discuss this issue. We
are never going to be able to touch on everything we dealt with
in that meeting, and I want to thank you very much.
You heard the previous panel. What I am really convinced of
is that we have a major failure to communicate here, and we
have to address it. It is like one guy is going out to dinner
with his family, and they have steak and lobster, and they say,
that was a really good meal. The guy at the next table has to
pay the bill.
And we need to understand how many of these SARs are
beneficial, and how many are useless. I think a lot of it is
going to deal with communication and how we go about doing it,
and I just don't think that level of communication exists
today.
The Bank Secrecy Act Advisory Group, I think, was intended
to accomplish that. And obviously, it is not, based on
information you gave me, the questions you gave me, the impact
on your associations, your groups, your individual members, and
yet when I talk to FinCEN out there and the FBI and law
enforcement, their perspective and what they think they are
generating from it.
But how successful do you think this advisory group has
been, and how do you think we could enhance it in some way or
modify it or change it or restructure it so that it would work?
It would be beneficial for all the parties to get together and
come up with something that people understand and your groups
understand, and something that really generates information we
need to have.
Why don't we start here and go right down.
Mr. Bartlett. Mr. Miller, I didn't know it existed until
this morning, if that gives you any indication.
Mr. Miller. That is my point. It is communication with the
industry. What I think this subcommittee could do would be to
send staff to attend it, to create a balanced group with an
open mind to look at the processes to determine how we can file
suspicious activity reports in which some identifiable or some
at least double-digit percentage of them are truly suspicious.
But we are not getting an open mind or an open discussion at
this point.
So if you would convene it and come to the meetings, and I
know you would, with an open mind, perhaps we could get all
sides to have an open mind in the discussion.
Ms. Hodge. The ABA believes that the BSAAG has been able to
make some progress and can continue to work with continued
focus on the issues as are being discussed today.
Mr. Miller. Okay. I am going to give each of you a chance
because we are not going to have time to go much farther today.
Ms. Mroz. I agree that I have never heard of that
organization until today. And one of the concerns that I have
is we are automatically linking CTRs and SARs, and I don't
think they are necessarily linked at all. I do duplicate CTRs
during the month for ma and pa customers of mine who are using
cash. They bring in--you know, they are a convenience store and
they sell cigarettes and gas. If they do that, they are over
$10,000, probably, in 2 days.
And so I am not getting any information from those CTRs. My
SAR investigations many times, most of the time, don't even
come from a CTR.
Mr. McClain. Thank you. We believe that the BSAAG has been
helpful and has resulted in some very good communication
between the regulator and the industry. Additionally, some
subcommittees were established on the BSAAG that resulted in
some fruitful results.
Our concern would be at this point that there are not
enough seats at the BSAAG and not all sections of industry are
represented at the BSAAG at this point. There are just a
limited number of seats open to the money service businesses
industry at this point. There is a revolving process for being
on the BSAAG, but again, we don't believe it is open enough for
enough sectors of industry. Thank you.
Mr. Menzies. I guess my own enhancement would be that they
should write clear and measurable and understandable goals and
objectives with a timeline to attain those goals and
objectives.
Mr. Miller. Well, Mr. Chairman, I think we need to look at
the costs and the impact on the banks, and we also need to look
at the benefit to counterterrorism and to money laundering and
things that are going on in this country.
But we need to look at the structure. And there has to be
some--there is an absolute disconnect today between law
enforcement, FinCEN, and the industry who has to comply here.
And we need to create a more transparent structure where people
understand that--if you understood that there was tremendous
benefit in what you were doing and the results that were coming
out of it, you might look at some of this a little differently.
But I think from what we have talked about in the past, you
are not sure that what you are doing is even being looked at,
nor if there is any real benefit to most of what your
compliance requires you to do. And I think that incumbent upon
us to look at some way to make sure that that changes in the
future.
And I thank you for your testimony, and I yield back.
Chairman Watt. I thank the gentleman. Let me recognize
myself for just a few minutes to make comments and ask a couple
of questions.
I think the thing that was most striking to me, as much
complaints as we get from the financial sector about compliance
with Sarbanes-Oxley and the cost of complying with Sarbanes-
Oxley, is the statistic that is in Mr. Bartlett's testimony,
that the cost of compliance with the Bank Secrecy Act is at
least twice the cost of compliance with Sarbanes-Oxley. That is
pretty dramatic since most of us on this committee are
constantly hearing about the cost of Sarbanes-Oxley, and so
there needs to be a look at how to understand this.
Now, let me just see if I can fix this in my own mind. Up
to 1996, there was nothing like the suspicious activity report.
You just had the currency transaction reports. Is it clear that
a currency transaction report can be just done by technology?
Do the community banks and independent bankers--do you have the
technology that will just allow you to spit out a $10,000 cash
transaction, and that is just a reporting function? Or is that
adding burden to you?
And Mr. McClain, how does that play itself out in your
world? I know the big banks can do it electronically, I
presume. The big banks can do that electronically. What about
community banks, independent banks, and the folks in your
industry, Mr. McClain?
Mr. McClain. If I may, to two points on your question, Mr.
Chairman. The cost, the labor costs, the man-hour costs that go
ultimately into creation of the CTR forms, is quite substantial
in the financial services industry. Virtually across the board,
financial service companies' centers are required to either
complete them manually--substantial man-hours go into that
process--or they are required to adopt rather expensive data
processing systems that allow them to automate some of that
process. So there are cost factors in both elements of that.
Additionally, with respect to the e-filing of the CTR
process through FinCEN, it is a very cumbersome process. It is
designed for banks. It is not designed for smaller mom and pop
operations such as a number of community financial service
centers. So we believe that that particular process should be
streamlined or looked at with regard to this industry, and that
would certainly facilitate that process.
Chairman Watt. Mr. Menzies and Ms. Mroz, do your
institutions--are they technologically able to comply with the
CTR provisions? I am setting aside the SAR provisions now.
Mr. Menzies. Mr. Chairman, we could if we were to invest in
that software and in that technology. We have not, and--
Chairman Watt. What would that cost for a typical bank?
Mr. Menzies. I don't know the exact cost. But I do know
that it would be more expensive for us to go acquire the
software than to continue to do it manually. One of the
challenges is that when a CTR is presented, if the owner of the
convenience store sends their clerk, Betty Lou, to make the
deposit, then that information has to be captured. And you
don't do that with software; you do it by the teller seeing
that Betty Lou is making the deposit, not the owner of the
convenience store. So there is some information that you just
don't automate.
Chairman Watt. Ms. Mroz?
Ms. Mroz. We are not automated, either. And one of the
other problems in addition is the aggregate. If they do two
transactions in one day and neither one of them are over
$10,000, we have a human being who is tracking those
transactions. We get a large transaction report of anything
over $5,000, and we try and match up. Someone is physically
every day checking that report to make sure that there aren't
multiple transactions from any one customer that also exceeds
$10,000.
And again, money is driving the bus. We can't afford the
software. I have heard quotes anywhere from $30,000 to $100,000
for that software. And for a community bank, that is just--we
can't afford it.
Chairman Watt. Ms. Hodge?
Ms. Hodge. Mr. Chairman, if I may, certainly larger banks
oftentimes have invested the financial resources in order to
facilitate a more automated filing process. But they are still
not immune from the situations that you have just heard
described that do require manual intervention, sometimes by the
teller itself as they are conducting the activity to obtain the
information accurately on the person conducting the
transaction, and then sometimes in the back office trying to
piece together the aggregated information or perhaps correct
errors that were made on behalf of the teller.
Chairman Watt. Well, obviously, there are a myriad of other
questions that we have not gotten to today. So I will just note
that some members may have additional questions for this panel
also and may wish to submit them in writing. And without
objection, the hearing record will remain open for 30 days for
members to submit written questions to these witnesses and to
place their responses in the record. And we would ask you, if
that occurs, to respond promptly.
We thank the witnesses for being here. I don't think you
want to wait for what appears to be about 45 minutes to have us
come back to continue this questioning. I hope you will find it
preferable to answer additional questions in writing. But we
want to thank you for being here. We think it has been an
effective first hearing on this issue, and the subcommittee
will stand adjourned.
[Whereupon, at 11:01 a.m., the hearing was adjourned.]
A P P E N D I X
May 10, 2007
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