[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

                              -------

                     U.S. GOVERNMENT PRINTING OFFICE

37-207 PDF                 WASHINGTON DC:  2007
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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



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