    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                       REVIEWING FinCEN OVERSIGHT REPORTS

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                          OVERSIGHT AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 APRIL 28, 2010

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-129

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel
                  Subcommittee on Oversight and Investigations

                         DENNIS MOORE, Kansas, Chairman

    STEPHEN F. LYNCH, Massachusetts      JUDY BIGGERT, Illinois
    RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
    JACKIE SPEIER, California            RON PAUL, Texas
    GWEN MOORE, Wisconsin                MICHELE BACHMANN, Minnesota
    JOHN ADLER, New Jersey               CHRISTOPHER LEE, New York
    MARY JO KILROY, Ohio                 ERIK PAULSEN, Minnesota
    STEVE DRIEHAUS, Ohio
    ALAN GRAYSON, Florida

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        April 28, 2010...............................................     1
    Appendix:
        April 28, 2010...............................................    27

                                   WITNESSES
                           Wednesday, April 28, 2010

    Freis, James H., Jr., Director, Financial Crimes Enforcement
      Network (FinCEN)...............................................     5
    Hillman, Richard J., Managing Director, Financial Markets and
      Community Investment, U.S. Government Accountability Office....    15
    Larence, Eileen R., Director, Homeland Security and Justice, U.S.
      Government Accountability Office...............................    16
    Thorson, Hon. Eric M., Inspector General, U.S. Department of the
      Treasury.......................................................     7

                                    APPENDIX

    Prepared statements:
        Moore, Hon. Dennis...........................................    28
        Lynch, Hon. Stephen F........................................    29
        Freis, James H., Jr..........................................    32
        Hillman, Richard J...........................................    47
        Larence, Eileen R............................................    62
        Thorson, Hon. Eric M.........................................    80

                  Additional Material Submitted for the Record

    Moore, Hon. Dennis:
        GAO report entitled, ``Anti-Money Laundering, Improved
          Communication Could Enhance the Support FinCEN Provides to
          Law Enforcement,'' dated December 2009.....................    96
        GAO report entitled, ``Bank Secrecy Act, Suspicious Activity
          Report Use is Increasing, but FinCEN Needs to Further
          Develop and Document Its Form Revision Process,'' dated
          February 2009..............................................   140
        Audit Report from the Office of Inspector General, Department
          of the Treasury, entitled, ``SAR Data Quality Requires
          FinCEN's Continued Attention,'' dated January 19, 2010.....   193

                       REVIEWING FinCEN OVERSIGHT REPORTS

                                  ----------

                           Wednesday, April 28, 2010

                 U.S. House of Representatives,
                              Subcommittee on Oversight
                                    and Investigations,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:07 p.m., in
    room 2128, Rayburn House Office Building, Hon. Dennis Moore
    [chairman of the subcommittee] presiding.
        Members present: Representatives Moore of Kansas, Lynch,
    Adler; Biggert, McHenry, and Paulsen.
        Chairman Moore of Kansas. This hearing of the Subcommittee
    on Oversight and Investigations of the House Financial Services
    Committee will come to order.
        Our hearing this afternoon is entitled, ``Reviewing FinCEN
    Oversight Reports.'' We will begin this hearing with members'
    opening statements up to 10 minutes per side, and then we will
    hear testimony from our witnesses. For each witness panel,
    members will have up to 5 minutes each to question our
    witnesses.
        The Chair advises our witnesses to please keep your opening
    statements to 5 minutes to keep things moving so we can get to
    members' questions. Also, any unanswered question can always be
    followed up in writing for the record.
        Without objection, all members' opening statements will be
    made a part of the record, and I will now recognize myself for
    up to 5 minutes for an opening statement.
        The Financial Crimes Enforcement Network or FinCEN was
    first established by the Treasury Department in 1990 to provide
    a government-wide multi-source financial intelligence and
    analysis network.
        The organization was later formalized as an official bureau
    within the Treasury Department by the USA PATRIOT Act of 2001,
    when the Bank Secrecy Act's scope was expanded to focus on
    stopping terrorist financing as well as money laundering.
        FinCEN administers the Bank Secrecy Act (BSA) and is
    responsible for the process in which financial institutions
    file suspicious activity reports or SARs. FinCEN will then
    analyze that information and provide the information analysis
    to a wide range of law enforcement, intelligence, and
    regulatory agencies.
        As we know too well, the tragic attacks on the United
    States on September 11, 2001, exposed our broken intelligence
    system where one agency knew one thing but another agency did
    not know and was not empowered with that vital information to
    try to prevent these attacks.
        While most of our focus in Congress this past year has been
    to provide tough TARP oversight and strengthen our financial
    regulatory system following the financial crisis of 2008,
    stopping terrorist financing and money laundering remain top
    priorities.
        Let me be clear. We must remain vigilant and ensure that
    our law enforcement and other agencies have all the information
    they need to do their job in better protecting our country. Our
    constituents expect and deserve nothing less.
        Today, we will be reviewing three oversight reports--one by
    the Treasury Inspector General, and two by GAO--that examined
    FinCEN's efforts to improve SAR data quality and communication
    with law enforcement. With limited resources, FinCEN must
    leverage resources to do much better in both.
        I look forward to hearing how FinCEN has responded to these
    oversight reports and learning what concrete steps they have
    taken to address the recommendations made by GAO and the
    Treasury IG.
        While I am glad we have the Treasury IG testifying today on
    FinCEN oversight, I am not pleased Congress has effectively
    tied his hands and put his office and other Inspectors General
    under a tremendous burden with the material loss review
    mandates.
        While learning lessons from bank failures is important,
    tough oversight of fraudulent loan modification schemes,
    private bank BSA compliance, and many other priorities are just
    as important.
        Under the bipartisan leadership of Representatives Steve
    Driehaus and Christopher Lee of this subcommittee, the House
    acted last year by passing H.R. 3330 to provide the flexibility
    that our Inspectors General desperately needed.
        I was pleased to see a version of our legislation in the
    Senate financial regulatory reform bill, but as is often the
    case, when comparing House and Senate legislation, our version,
    we believe, is clearly better, and we will continue fighting to
    fully empower our Inspectors General with the oversight tools
    they need.
        I now recognize for 5 minutes the ranking member of the
    subcommittee and my colleague from Illinois--it is not Judy
    Biggert, she is not here right now--I am going to recognize Mr.
    McHenry, Patrick McHenry.
        Mr. McHenry. That might be a slight insult to Judy. She is
    much more attractive and a nicer lady.
        [laughter]
        Mr. McHenry. Thank you, Mr. Chairman. Thank you for holding
    the hearing today. Obviously, Treasury and FinCEN are certainly
    vital in the United States to stop the money laundering and
    financing of terror.
        Law enforcement needs a quick dependable way to track the
    money involved in crimes, and financial institutions often
    serve as the first line of defense in preventing financial
    crimes and providing critical information to law enforcement.
    This is a complex and difficult task, obviously, but it is also
    imperative that we make certain it is done correctly.
        Since its inception, FinCEN has had to depend on the IRS
    for the bulk of its computing and data storage, a situation
    that made sense at first, but is now at best inefficient.
        Congress last year approved an amendment by Congressman
    Paulsen, who is here today on the subcommittee, to start the
    process of updating FinCEN's computers, but unfortunately, the
    Obama Administration has reduced its Fiscal Year 2011 budget
    requests for FinCEN by nearly 10 percent.
        FinCEN needs the proper resources to do its job, and that
    means it must have its own computer system and the clear
    responsibility to make sure it works correctly.
        It is unrealistic to imagine that every suspicious activity
    report will result in an investigation or a conviction, but
    FinCEN and law enforcement should have the hardware and
    software and other resources to search data reported by
    financial institutions quickly and thoroughly. Faulty data is
    unacceptable, whatever the reason.
        If online retailers can instantly see that an order being
    placed is missing essential data, certainly FinCEN and the IRS
    should have the capacity and capability to detect incomplete
    suspicious activity reports and see the missing data.
        I look forward to hearing from the witnesses, especially
    the IG and the GAO, and I look forward to seeing an ongoing
    discussion about FinCEN's necessary resources to do its job.
        I yield back.
        Chairman Moore of Kansas. The Chair now recognizes Mr.
    Lynch from Massachusetts for up to 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. I want to thank you for
    holding this very important hearing today. I would like to
    welcome our witnesses and thank them for their willingness to
    help the committee with its work.
        I have met with GAO, as well as Director Freis, regarding
    the reports that I, together with Chairman Frank, requested
    some time ago, and I am eager to discuss them further during
    this hearing.
        I wanted to provide some context, however, as to my own
    experience with FinCEN, and my knowledge of the good work that
    they do.
        FinCEN's mission to provide a government-wide, multi-source
    financial intelligence and analysis network is global and often
    goes unknown or unrecognized. FinCEN's regulatory
    responsibilities include administering the Bank Secrecy Act,
    the United States' primary anti-money laundering
    counterterrorist financing regulatory regime.
        They also support law enforcement, intelligence and
    regulatory agencies through the sharing and analysis of
    financial intelligence, and lastly, and this is the area that I
    work with them most often on, I am proud to be the co-chair of
    the Anti-Terrorist Financing Task Force, which builds global
    cooperation and offers technical expertise among financial
    intelligence units throughout the world.
        The recent GAO study found that suspicious activity report
    filings increased from 163,000 per year in 2000 to 649,000 per
    year in 2007. I can only imagine that has increased since then.
        This is an immense amount of information to manage and
    review. FinCEN works with every major administrative department
    to detect fraud and abuse, from the Federal Housing Authority,
    trying to help identify bad lenders, to Health and Human
    Services, to root out fraud in the reimbursement process.
        FinCEN opens up its database and provides essential
    information in numerous cases each year. FinCEN's
    responsibility was also broadened under the 2001 PATRIOT Act
    which expanded the Bank Secrecy Act to include money laundering
    and terrorist financing.
        FinCEN plays a dual role in supporting domestic law
    enforcement and intelligence agencies through sharing their
    analysis of financial intelligence while simultaneously
    building that global cooperation with our counterparties in
    financial intelligence units (FIUs) around the world.
        In my travels abroad to the Middle East and other regions,
    I have been able to meet with FIUs in a variety of countries to
    view FinCEN's international work firsthand.
        As the co-chair of the Task Force on Terrorist Financing
    and Anti-Proliferation, I visited countries like Morocco,
    Tunisia, Jordan, and Afghanistan. We worked together in the
    West Bank. We have some problems in Gaza as well.
        I am just very thankful for FinCEN's help and guidance in
    all of those important places doing important work to combat
    the flow of illicit funds to terrorist organizations.
        I have seen the relationships developed between foreign
    governments and our Treasury officials. The information FinCEN
    can provide those FIUs is invaluable. These relationships
    formed as international governments establish FIUs and join
    FATF, the Financial Action Task Force, are key to FinCEN's
    long-term success in combating financial terrorism, both in the
    United States and abroad.
        However, despite this important dynamic, I am concerned
    that due to budget constraints, private contractors are
    increasingly doing the work that FinCEN has done in the past.
        In its 2006 report, FATF cited FinCEN's important role in
    facilitating domestic coordination and cooperation. However, it
    also warned that it is essential that FinCEN maintain its key
    role within the anti-money laundering and counterterrorism
    financing chain, and without proper funding and a presence in
    the international community, FinCEN cannot maintain that
    leadership role.
        The Obama Administration announced in November of 2009 an
    initiative to hold accountable those who helped bring about the
    last financial crisis. While that is commendable, this program
    is comprised of more than 20 Federal agencies including FinCEN,
    94 U.S. Attorney Offices, and State and local partners, and
    provides FinCEN with no additional resources to do all that
    extra work and coordinate and contribute to the Task Force.
        This is just one recent but glaring example of how FinCEN
    is spread far too thin with too few resources to adequately
    accomplish its mission.
        I am amazed that they do as much as they fo, as well as
    they do it, given the resources they have been given.
        I look forward to addressing these issues in the future and
    helping FinCEN maintain its prominence within the intelligence
    and law enforcement communities.
        Mr. Chairman, thank you very, very much for your
    willingness to hold this hearing, and thank you for the time,
    and I look forward to hearing from our witnesses.
        Chairman Moore of Kansas. Thank you, Mr. Lynch. I
    appreciate your testimony. Next, Mr. Paulsen has requested 2
    minutes. Mr. Paulsen, you are recognized, sir, for 2 minutes.
        Mr. Paulsen. Thank you, Mr. Chairman. I also want to thank
    you for holding today's hearing. I appreciate it.
        Financial institutions often serve as the first line of
    defense in detecting financial crimes and providing critical
    information to law enforcement, and the information that is
    provided to government organizations by FinCEN is essential to
    catching criminals and defeating terrorism ultimately.
        The ability to follow the money trail provides our
    intelligence and law enforcement community with information
    that leads to a broader understanding of terrorist
    organizations and drug dealers.
        As my colleague, Representative McHenry, had mentioned just
    a little while ago, I offered an amendment during last year's
    appropriations process to help provide funding to FinCen for
    additional resources to more effectively combat financial
    crimes, and it was my hope that this funding would be used to
    help provide needed support and coordination with Federal,
    State, and local law enforcement.
        I look forward to hearing more about the modernization that
    FinCEN is currently undergoing and I look forward to the
    testimony today, and thank the witnesses for coming before us
    today, Mr. Chairman.
        Chairman Moore of Kansas. Thank you, sir. I am pleased to
    introduce our first panel of witnesses. First, we will hear
    from Mr. James Freis, Jr., Director of the Financial Crimes
    Enforcement Network, FinCEN, at the U.S. Department of the
    Treasury. Then, we will hear from the Honorable Eric Thorson,
    Inspector General for the Treasury Department.
        We are glad to have you testify before our subcommittee
    again, Inspector General Thorson.
        Without objection, your written statements will be made a
    part of the record.
        Director Freis, you are recognized for 5 minutes to provide
    a brief summary of your statement, sir.

     STATEMENT OF JAMES H. FREIS, Jr., DIRECTOR, FINANCIAL CRIMES
                      ENFORCEMENT NETWORK (FinCEN)

        Mr. Freis. Thank you. Chairman Moore, members of the
    subcommittee, I am Jim Freis, the Director of FinCEN. It is a
    pleasure to be here today to discuss the findings from
    oversight reports published by the GAO and the Treasury
    Inspector General that review FinCEN's support to law
    enforcement and the quality and usefulness of suspicious
    activity reports, known as SARs.
        With the exception of the IG report on SAR quality, which
    is no longer representative of today's SAR quality standards,
    FinCEN agrees with the findings and recommendations included in
    these reports, and I am pleased to say that significant
    progress has been made on all fronts to improve upon the areas
    identified as in need of improvement.
        As the Inspector General notes in his testimony, the
    findings included in his report are based on SAR filings from
    Fiscal Year 2006, and do not take into account the significant
    efforts we have made since then toward the overall objective,
    which he and I share, to improve both the quality and the
    accuracy of SAR data.
        With respect to the GAO's examination into how FinCEN's
    mission, services, and resources in support of law enforcement
    agencies have evolved, FinCEN concurs with the findings and
    recommendations of this report, and we are encouraged to see
    that it recognized the value of our efforts and the unique
    expertise we provide in addition to correctly illustrating our
    important role in supporting law enforcement's prosecution of
    financial crimes, all this while balancing the needs and
    priorities of over 300 Federal, State, and local law
    enforcement agencies, and providing regular and ongoing support
    to Federal and State regulatory authorities and foreign law
    enforcement around the world.
        The report made a series of recommendations for actions
    that are designed to maximize the relevance and usefulness of
    FinCEN's law enforcement support capabilities, such as
    establishing a process for informing law enforcement agencies
    and soliciting input about the availability of our various
    analytical products and the process for selecting which
    products to pursue.
        As I note in my affirmative testimony, in October 2009,
    FinCEN's Office of Law Enforcement Support initiated an effort
    to address communication with law enforcement on three levels:
    first, our analytical products; second, the work flow process;
    and third, outreach. As part of this effort, FinCEN has
    developed plain language descriptions of the types of
    analytical products and services we provide and the data
    sources and analytical tools available to us. These
    descriptions are designed for broad dissemination to all levels
    of Federal, State, and local law enforcement to enhance the
    communication and understanding of the various analytical
    products and services available.
        Regarding the GAO's examination into the degree to which
    law enforcement agencies actively use SARs for investigative
    purposes, FinCEN was pleased with the results, and we believe
    it represents a meaningful body of empirical data from which
    the Congress can glean in order to satisfy questions regarding
    the vital role SARs play in safeguarding our financial system.
        The report also notes the efforts taken by FinCEN to
    improve the quality of SAR filings, and the increased and
    improved use of SAR data by law enforcement and regulatory
    authorities at all levels of government.
        In its conclusion, the GAO recommended that FinCEN further
    develop a strategy that fully incorporates certain practices to
    enhance collaboration among Federal agencies into the form
    change process.
        We agreed with the recommendation, which dovetails with an
    initiative FinCEN began well in advance of the report's
    publication. Over the past several years, we have been working
    toward modernizing our form management process to enable us to
    take advantage of the advances in electronic form development.
        In doing so, we consult stakeholders to whom we have
    delegated BSA examination authority, law enforcement, regulated
    financial institutions, and the interested public.
        We will continue to prioritize this multi-stakeholder
    comprehensive approach to form change collaboration which in
    turn will more than satisfy the GAO's recommendation.
        Financial crimes and other illicit activities are
    unfortunately here to stay, and we will remain vigilant in our
    mission to safeguard the financial system from those who wish
    to manipulate it for unscrupulous purposes.
        FinCEN is more committed than ever to maximizing the
    strengths and commonalities that exist between us, our law
    enforcement counterparts, and the industries we are responsible
    for regulating.
        We are very encouraged by the progress we have made thus
    far, and we are dedicated to continuing to build on these
    accomplishments by leveraging our resources, to not only assist
    law enforcement in holding criminal actors accountable, but to
    continue our proactive analysis of emerging trends and patterns
    in evoking our regulatory authorities to help stop crime before
    it is committed.
        Thank you for inviting me to testify before you today. I
    would be happy to answer any questions you may have.
        [The prepared statement of Director Freis can be found on
    page 32 of the appendix.]
        Chairman Moore of Kansas. Thank you, Mr. Freis. I will
    advise the panel members, subcommittee members here, and the
    people in the room that votes were called about 3 or 4 minutes
    ago. We still have more than 10 minutes left.
        The Chair at this time is going to recognize Mr. Thorson
    for testimony for up to 5 minutes, and following his testimony,
    we will recess for votes. Committee members will go over and
    vote and then return as quickly as possible so we can resume
    this hearing.
        Mr. Thorson, you are recognized for up to 5 minutes, sir.

    STATEMENT OF THE HONORABLE ERIC M. THORSON, INSPECTOR GENERAL,
                    U.S. DEPARTMENT OF THE TREASURY

        Mr. Thorson. Chairman Moore and members of the
    subcommittee, I appreciate the opportunity to appear before you
    this afternoon to discuss my office's most recent oversight
    report on FinCEN.
        That report, which we issued in January of this year,
    addressed data quality with suspicious activity reports or
    SARs, filed with FinCEN by banks and other financial
    institutions.
        As a brief background about my office, we provide
    independent audit and investigative oversight of most of
    Treasury's programs and operations. Our oversight includes
    FinCEN's administration of the Bank Secrecy Act or BSA.
        I consider oversight in Treasury's role in preventing money
    laundering and combating terrorist financing to be among our
    highest priority work. To that end, we first designated this
    area as one of Treasury's most significant management and
    performance challenges back in 1999 and have continued to do so
    since then.
        We have also conducted a number of audits of this area in
    the last decade or so, including many of FinCEN, as our
    resources have allowed.
        To be clear, our office identified Treasury's critical role
    in preventing money laundering and combating terrorist
    financing as high risk well before the horrific events of
    September 11, 2001.
        Unfortunately, much of the information I am presenting to
    you today is based on work that my office conducted some time
    ago, although I believe the conditions remain relevant.
        The current financial crisis has had a major impact on my
    office's ability to do work in this and other critical areas
    which I will discuss later.
        As the administrator for BSA, FinCEN requires banks,
    thrifts, credit unions, money services businesses, and others
    to file SARs for transactions that the institution knows,
    suspects or has reason to suspect are intended to evade Federal
    law or regulation, involve illegally obtained funds, or have no
    business or apparent lawful purpose.
        FinCEN established the SAR database in 1996 as a single
    collection point for SARs to provide law enforcement agencies
    with critical information for specific criminal investigations,
    as well as to facilitate comprehensive analyses of trends and
    patterns in financial activity.
        Filers of SAR reports are required to provide accurate
    information and face penalties if they do not. This is more
    than a matter of what is legally required.
        As FinCEN stated in October 2009, ``Accurate and complete
    SARs are critical to the utility of BSA data in combating
    financial crimes, terrorist financing, and other illicit
    activity. The value of any SAR filing is impaired when it is
    not accurate and complete.''
        We have accomplished four audits on the accuracy and
    completeness of SARs in FinCEN's database since 1999, and as
    Director Freis pointed out, our latest review was actually
    started in 2007, but was significantly delayed due to our
    failed bank workload.
        That audit found that SARs filed during Fiscal Year 2006
    often lacked critical information or included inaccurate data.
    Specifically, we found that 59 percent of the 1.1 million SARs
    filed in 2006 contained omissions or incorrect, inconsistent or
    inappropriate information in one or more of the 17 data fields
    that FinCEN deemed critical to law enforcement.
        SARs filed by money services businesses had the highest
    percentage of data quality problems, 88 percent, followed by
    SARs filed by securities and futures firms, 50 percent,
    casino's and card clubs, 49 percent, and depository
    institutions, 34 percent.
        The fields that most often had missing or erroneous data
    were related to the subject's taxpayer identification number,
    address, and name. We believe that the filer should have used
    more due diligence in preparing them.
        To improve SAR data quality, we recommended that FinCEN:
    number one, continue and enhance its filer education and
    outreach programs; and two, identify significant and recurring
    SAR quality problems for follow-up.
        FinCEN agreed with our recommendations and they identified
    a number of steps it has already taken to enhance filer
    education. Also, FinCEN told us that it has put a SAR
    validation process in place that identifies all SAR filings
    with significant errors for its compliance staff to monitor.
        We consider these actions an excellent response to our
    recommendations.
        As requested, I will now briefly address the impact of the
    failed bank reviews to Treasury IG's FinCEN oversight.
        As you recall, I testified before this subcommittee in May
    of last year on this very matter. We are congressionally
    mandated to review the causes of failed banks and the OCC or
    OTS supervision exercised over those failed institutions
    whenever the failure results in a loss of $25 million or more
    to the Deposit Insurance Fund.
        Since the current economic crisis began, my audit staff has
    done little else but conduct material loss reviews. In this
    regard, we have completed 17 reviews and have another 35 in
    progress. Regrettably, I believe my office will be busy
    conducting such reviews for some time to come.
        While these reviews are important, we are simply not
    learning that much new with each successive review. The
    requirement is also precluding us from doing other important
    oversight work.
        Last July, with the much appreciated support by Chairman
    Moore and this subcommittee, the House passed H.R. 3330 to
    increase that threshold to $200 million, while prudently
    requiring some level of review of all bank failures.
        As you pointed out, sir, the current bill, Senate 3217, as
    introduced, did include a provision to raise that threshold.
        Lastly, FinCEN faces many challenges as administrator of
    the BSA, particularly with respect to the fact that it must
    rely on other regulators to ensure their regulated industries
    comply with BSA requirements.
        While a lot of focus is on the current financial crisis, we
    must remember the terrorists and criminals still are busy.
        Therefore, I applaud the subcommittee for its attention to
    FinCEN's important role in administering BSA.
        That concludes my statement.
        [The prepared statement of Inspector General Thorson can be
    found on page 80 of the appendix.]
        Chairman Moore of Kansas. Thank you, Mr. Thorson. We will
    at this time recess the subcommittee. I would ask all
    subcommittee members to come back here immediately upon
    completion of votes on the House Floor.
        I would ask our witnesses to remain available for
    questioning when we get back, and I think we have four votes, I
    believe. It will probably take half an hour to 40 minutes, but
    we will be back as quickly as we can.
        All subcommittee members, please return. We will stand in
    recess.
        [recess]
        Chairman Moore of Kansas. The subcommittee is called back
    to order. I ask unanimous consent that we enter into the record
    the three oversight reports we are examining today: the GAO
    report of February 27, 2009, entitled, ``The Bank Secrecy Act,
    Suspicious Activity Report Use is Increasing, but FinCEN Needs
    to Further Develop and Document Its Form Revision Process'';
    the GAO report of December 14, 2009, entitled, ``Anti-Money
    Laundering, Improved Communication Could Enhance the Support
    FinCEN Provides to Law Enforcement''; and finally, the Treasury
    IG report of January 19, 2010, entitled, ``SAR Data Quality
    Requires FinCEN's Continued Attention.''
        Without objection, these reports will be made a part of the
    record.
        I now recognize myself for 5 minutes for questions.
        I want to start with Treasury Inspector General Thorson.
    Before I focus on FinCEN, Inspector General Thorson, if
    Congress were to enact H.R. 3330 to give your office and others
    the flexibility you need to better manage your resources and
    provide better oversight, what kinds of things with respect to
    FinCEN would your office be able to examine and report to
    Congress on?
        I presume the House legislation would be better for your
    office than the Senate language in the financial reg reform
    bill; is that correct, sir?
        Mr. Thorson. Yes. There are a number of things that raising
    that threshold would allow us to do. Specifically, with regard
    to FinCEN, I would have to refer to our audit plan, and we can
    certainly provide that for you.
        The idea and why we requested the increase in the threshold
    was to free up some of the audit resources. Certainly, aside
    from FinCEN, there are a lot of things within the Treasury
    Department that we have had to postpone that really are a major
    part of what our office is there for.
        I am giving you a little broader answer than you were
    probably looking for, but there are a number of things we would
    like to be able to do, and this would certainly help.
        Chairman Moore of Kansas. Thank you, sir. Director Freis,
    thank you for your testimony and for your public service.
        In the Treasury IG's January report, they list the top 25
    depository institutions, including IndyMac and NetBank, that
    had errors in over half of their SAR data in Fiscal Year 2006,
    and recommend that FinCEN should notify Federal regulators of
    these problems.
        Has your Bureau done so, and has FinCEN seen any
    improvements or more errors with depository institutions,
    especially in the past 2 years, as they have dealt with the
    financial crisis?
        Any comments, sir?
        Mr. Freis. Yes, Mr. Chairman. We have developed a process
    within FinCEN that is consistent with those recommendations, to
    work very closely with the supervisors of the financial
    institutions, so we do examine for problems in the filing of
    all our reports, not just SARs, and we follow up directly with
    the supervisor, and then the supervisor will monitor to see
    improvements.
        I am happy to say that we have seen a continual increase in
    the quality of the reports from the financial industry.
        Chairman Moore of Kansas. Mr. Thorson, do you have any
    comments on that?
        Mr. Thorson. First of all, we are very happy to see that
    and certainly accept FinCEN's explanations of the changes they
    have made. We obviously have not had a chance to look at that
    since then.
        I think all of us here have the same goal, and that is to
    do whatever we can do to increase the efficiency and
    effectiveness of FinCEN, as it helps all of us.
        Chairman Moore of Kansas. Director Freis, on page one of
    your testimony, you note ``FinCEN's efforts to maintain the
    `proper balance' between reporting requirements imposed upon
    the industry and the need to ensure information gets to law
    enforcement officials.''
        Which do you believe FinCEN does better, improving SAR data
    quality and working with industry on reporting requirements or
    working with law enforcement to get the information to them?
        Mr. Freis. I do not think it is a choice between the two,
    Mr. Chairman. I think our mission is to get information to law
    enforcement and increasing the quality is making that
    information more accessible to law enforcement.
        Ultimately, a large part of what I have tried to do in our
    dialogue with the financial industry is show them how it is in
    their interest, and particularly in these economic times when
    we are fighting the people who are trying to rip off the bank
    or rip off the customers and customers who lose money are not
    good customers for your bank. We have a common interest with
    the financial industry.
        Chairman Moore of Kansas. Thank you. Inspector General
    Thorson, from what you know, would you encourage FinCEN to do a
    better job working with industry on SAR data quality or working
    with law enforcement?
        Mr. Thorson. I think really both of those things but
    certainly the quality when you talk, for instance, IndyMac, one
    of the banks that we looked at after it failed, had an 86
    percent error rate.
        Everybody has the desire to certainly improve on those
    kinds of things, and I think what Director Freis has been
    saying is they are addressing it.
        You asked what would that threshold on MLRs improve on,
    that is one of the things that we would certainly be able to
    do, validate the actions taken on SARs as well as their IT
    modernization that he also mentioned.
        Chairman Moore of Kansas. Thank you, sir. My time has
    expired. Mr. Paulsen, you are recognized for 5 minutes.
        Mr. Paulsen. Thank you, Mr. Chairman. I will ask just a
    couple of questions. First, I will go to you, Mr. Thorson, if I
    could.
        Probably the most interesting part of your testimony comes
    at the end where you address FinCEN's IT system. I would like
    to ask you three questions at once and you can tackle them
    altogether, I guess, more or less.
        Number one, if FinCEN could stand up its own computer
    system, would that system address a lot of the data quality and
    form updating issues you and the GAO address?
        Number two, Treasury in general, not just FinCEN, has had a
    lot of difficulty with newer computer systems. Would you
    summarize now and then maybe give us a larger written report
    later on how FinCEN can successfully manage a transition to its
    own system?
        Number three, what in your view is the cause for the
    morphing of the FinCEN OFAC tracking system? What are its
    prospects for success, and is there anything that Congress can
    or should do in that capacity?
        Mr. Thorson. With the number of questions, I would like to
    provide you a very accurate answer, and I will do that in
    writing.
        One thing you mentioned was how do we implement this or how
    does FinCEN successfully implement that. I just would give you
    the answer I would give you on any major program, whether it is
    FinCEN or DOD. In this case, an IT program would start with a
    good solid plan of what it is you want to do, and what it is
    going to cost.
        In this case with Treasury, I would involve the Office of
    the CIO, and I would have strong independent oversight. That
    oversight is not there to second guess everything they do at
    all. It is there really to help them to make sure that they are
    looking at things that maybe they had not thought of.
        I hesitate to use the word ``partner'' because we are
    independent of everything. The truth is that is what our goal
    is, to help them accomplish their mission.
        A strong independent oversight would also be one of the
    factors I would put in there.
        Mr. Paulsen. Thank you. Mr. Freis, let me just follow up.
    As I mentioned earlier in my opening statement, FinCEN's
    mission and work to help safeguard the financial system and aid
    our law enforcement community is important. I support that
    certainly as we all do.
        As I mentioned in my opening statement, I am interested in
    FinCEN's ongoing modernization efforts. Will the modernization
    efforts that FinCEN is currently carrying out help resolve some
    of the issues that have been laid out in some of the reports
    that we have discussed that now have been brought up
    specifically?
        I am interested in how the modernization has helped you or
    helped you partner essentially with other agencies.
        Mr. Freis. Yes, indeed. The modernization is designed to
    address some of the issues that you mentioned and some of the
    issues that are in the GAO reports.
        Very consistent with what Mr. Thorson just said, the most
    important aspect in going to a big project, a big investment
    like this, is appropriate planning. We have been planning for a
    period of 3\1/2\ years for this IT modernization. It has been
    an unprecedented level of collaboration with all of the
    stakeholders.
        By that, I mean bringing together our law enforcement
    customers because ultimately, once again, we are trying to get
    them the data they need to fight the criminals, and working
    with the regulatory authorities on whom we rely for ensuring
    compliance and appropriate reporting by the regulated
    industries, and also working with the industry.
        Any way that we can help simplify their efforts to get us
    lower costs more quickly is a benefit to everyone, both the
    industry and law enforcement and of course, the general public,
    that we are looking to protect.
        We also have established significant levels of oversight
    with this program. First, making sure that we bring together
    the stakeholders that need to be closely involved.
        Mr. Thorson mentioned the Treasury CIO. We have a
    management executive group that oversees the work in the IT
    modernization, and that consists of myself as the Director of
    FinCEN, the Treasury CIO personally, and one of the two Deputy
    Commissioners at the IRS.
        As you know, we are transitioning the system in part from
    the IRS to FinCEN. Those are the three primary stakeholders. We
    work together in terms of the overall department priorities and
    working very closely with the Office of Management and Budget
    to make sure that they are helping us as we leverage across the
    different parts of the entire Administration.
        Mr. Paulsen. Thank you. My time is just wrapping up now.
    Mr. Thorson, if you have some follow-up in written form, I
    think that would be very helpful as well.
        Thank you, Mr. Chairman.
        Chairman Moore of Kansas. Thank you. The Chair at this time
    recognizes Mr. Lynch for 5 minutes, sir.
        Mr. Lynch. Thank you again, Mr. Chairman.
        Director Freis, and this actually applies to Mr. Thorson as
    well, in this tight budget environment, it is not likely that
    we are going to see any increases for staffing. Director Freis,
    how many folks do you have handling your whole operation right
    now?
        Mr. Freis. We have 325 people as of today.
        Mr. Lynch. You are handling a global operation, trying to
    interface with governments all over the world. I have seen you
    do that. You have 300 domestic law enforcement agencies that
    you have to deal with. Now, we have just added some more
    responsibility with respect to these financial institutions
    that we want you to interface with. You are doing work with the
    top oversight panel.
        Realistically, I do not see this getting better. I do not
    see the funding for your people getting better.
        GAO, you are sort of in the same boat, where just doing
    this oversight in addition to what we are already requiring you
    to do on material loss at these banks.
        I just see this system stretching further towards the
    breaking point. How do you expect to handle all this
    responsibility with no additional people, no additional money,
    and at the same time ramping up this new technology?
        I am just trying to figure out how this works and how this
    gets better.
        Mr. Freis. We appreciate your support and we certainly
    appreciate the direction from the Congress in helping us to
    prioritize the funding that we have received for the IT
    modernization. It is a critical aspect.
        When I look back at our statutory mission, what Congress
    laid out for us, more than half of it talks about our IT
    management functions and the way the single investment at
    FinCEN can leverage across all aspects of the government.
        Mr. Lynch. Director, I appreciate that. I have more meter
    maids in my city than you have folks to handle your
    responsibility around the world. You have far greater
    responsibility, with all due respect to my meter maids, they do
    a wonderful job as well.
        It is just trying to match the resources to the job that
    needs to be done. Unless we change our budgetary priorities to
    give you the tools you need to do your job, I just see a
    failure coming. There will be a failure and then everybody will
    throw up their hands and say, why did we not fund FinCEN, why
    did we not provide the resources that they needed to do their
    job, how did this failure happen? It will all be in retrospect
    looking back at some colossal intelligence failure that
    continues to go on.
        I, for one, support getting you more resources and
    increasing your staffing commensurate with the responsibilities
    that we have given you.
        We are not nearly there in terms of the importance of the
    job that you do.
        Like I said earlier in my statement, I am amazed that you
    do as much as you do with the little resources that you have.
    You have to be maxed out here in terms of all the
    responsibilities that you have.
        I think it is disingenuous sometimes for Congress to come
    down on you and say, why are you not doing this, why are you
    not doing that? You have to cooperate better. You have to
    communicate better. Just covering all the bases you have to
    cover is a job in itself.
        Is there any hope that at least with the technology
    upgrade--are there ways we can do this to multiply the
    effectiveness of the employees that you have using new
    technology?
        Mr. Shaul from Mr. Frank's office, who has been helping me
    with some of the SAR stuff, has suggested, for instance, if we
    could move to a bar coding type of method to track SARs and to
    make them more complete, some of that information will be
    embedded so we do not have the problems that we had with
    IndyBank.
        Is that something that you think might be helpful as a
    force multiplier so you are not running around doing the stuff
    manually or less efficiently than you might be doing?
        Mr. Freis. Certainly, the IT can be a force multiplier, but
    most of what we are doing in terms of the IT modernization, one
    of the core pillars of it, is moving away from paper and manual
    processing to leveraging that electronically.
        Right now, the people who are doing that manual processing
    are IRS employees. We, as the Treasury Department and the
    government will benefit from that, FinCEN will not benefit--
        Chairman Moore of Kansas. The gentleman's time has expired.
        Mr. Lynch. Thank you, Mr. Chairman.
        Chairman Moore of Kansas. I want to thank our witnesses for
    testifying here today, Mr. Freis and Mr. Thorson, Inspector
    General Thorson. Thank you both for testifying.
        If you have any additional comments to make, please make
    those in writing and submit them. I will excuse you at this
    time and call our second panel, if you would please be seated.
    Thank you, gentlemen.
        We will convene with the second panel of witnesses. I am
    pleased to introduce our second panel. First, we will hear from
    Mr. Richard J. Hillman, Managing Director, Financial Markets
    and Community Investment, with the Government Accountability
    Office.
        Then, we will hear from Ms. Eileen Larence, Director,
    Homeland Security and Justice Issues, also with GAO.
        Without objection, your written statements will be made a
    part of the record. Mr. Hillman, sir, you are recognized for 5
    minutes.

     STATEMENT OF RICHARD J. HILLMAN, MANAGING DIRECTOR, FINANCIAL
           MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT
                         ACCOUNTABILITY OFFICE

        Mr. Hillman. Thank you, Mr. Chairman. I appreciate the
    opportunity to be here today to discuss recent work we have
    completed at FinCEN.
        My statement today is based upon GAO's 2009 report on the
    use of suspicious activity reports and challenges FinCEN has
    encountered in its form revisions process.
        Specifically, I will discuss three issues: factors that
    have contributed to an increase in the number of SAR filings
    for depository institutions; actions taken by FinCEN and law
    enforcement agencies to improve the quality of SAR reporting;
    and challenges FinCEN encountered in its attempt to revise the
    SAR form in 2006, and steps FinCEN could take to improve
    collaboration in its form revision process.
        Regarding the first issue, SAR filings have increased
    significantly from 2000 through 2008. Total SAR filings by
    depository institutions have more than quadrupled from about
    163,000 in 2000 to more than 732,000 in 2008.
        Two key factors largely explain the increase: first,
    automated monitoring systems can flag multiple indicators of
    suspicious activity and identify significantly more unusual
    activity than manual monitoring; and second, several public
    enforcement actions against a few depository institutions
    prompted other institutions to more closely look at their
    clients and account activities.
        Another factor has been institutions' greater awareness of
    and training of Bank Secrecy Act requirements after September
    11, 2001.
        As you know, SARs are a key information source for law
    enforcement agencies, as well as the Federal regulators.
    Because the information they contain is critical for
    investigations of money laundering, terrorist financing, and
    other financial crimes, it is important that filers accurately
    fill out the reports.
        FinCEN and law enforcement agencies have taken some actions
    to improve the quality of SAR filings and educate filers about
    their usefulness. For example, FinCEN and Federal law
    enforcement representatives regularly participate in anti-money
    laundering issues, including events focused on SARs.
        Moreover, law enforcement representatives said they also
    establish relationships with depository institutions to
    communicate with staff about crafting useful SAR narratives.
        In addition, FinCEN, law enforcement agencies, and
    financial regulators have taken steps in recent years to make
    better use of SAR filings. For example, FinCEN uses SARs to
    provide analytical products to law enforcement agencies and
    financial regulators. Some law enforcement agencies use SAR
    data with their own datasets to facilitate complex analytical
    processes, and Federal, State, and local law enforcement
    representatives have collaborated to review and start
    investigations based upon SARs in their areas.
        Financial regulators are also using SARs. For example, they
    use them in their examinations process to assess compliance and
    take action against abuses by depository institution insiders.
        Finally, our view of FinCEN's form revision process for the
    SARs highlights challenges and weaknesses in FinCEN's
    management of multi-agency efforts. I will note that not only
    does FinCEN need to coordinate and collaborate with numerous
    law enforcement agencies and financial regulators, it also
    relies on the IRS for information technology support of BSA
    data including SARs, specifically.
        FinCEN developed a revised form in 2006, but then learned
    that it could not be used because of information technology
    limitations that the IRS could not address.
        Furthermore, some law enforcement groups expressed concerns
    that certain of the 2006 revisions could be detrimental to
    their investigations.
        Bank regulators, on the other hand, were satisfied with the
    revisions. In short, FinCEN's stakeholders had not all been
    involved early enough in the process.
        In 2008, FinCEN developed a new process for revising forms,
    including SARs, which may increase collaboration with some
    stakeholders. However, available documentation on the process
    did not detail the degree to which the new process would
    incorporate GAO identified best practices for enhancing and
    sustaining Federal agency collaboration efforts.
        For example, it did not specify roles and responsibilities
    for stakeholders or depict monitoring, evaluation or reporting
    mechanisms. Therefore, we recommended that FinCEN further
    develop and document its strategy to fully incorporate certain
    of these practices into their revision process and distribute
    that documentation to all stakeholders.
        In recent discussions with FinCEN officials, we have
    learned that it is taking some additional steps toward greater
    collaboration with law enforcement agency representatives,
    prosecutors, and multi-agency law enforcement teams and others
    to determine the contents of the form, but it is still too soon
    to determine the effectiveness of this process.
        In closing, I would like to note that the story of the SARs
    revision process highlights some of the key long-standing
    concerns that we identified over the years concerning FinCEN's
    ability to carry out its mission effectively given that it must
    depend on other agencies.
        We recognize that the mission of FinCEN creates some of its
    own challenges but we also believe that management has
    opportunities to strengthen its coordination and collaboration
    across agencies.
        Mr. Chairman, thank you, and I will be happy to answer any
    questions at the appropriate time.
        [The prepared statement of Mr. Hillman can be found on page
    47 of the appendix.]
        Chairman Moore of Kansas. Thank you, Mr. Hillman.
        Ms. Larence, you are recognized for 5 minutes, ma'am.

    STATEMENT OF EILEEN R. LARENCE, DIRECTOR, HOMELAND SECURITY AND
             JUSTICE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Ms. Larence. Mr. Chairman and members of the subcommittee,
    I appreciate the opportunity to summarize our review of
    FinCEN's support to Federal, State, and local law enforcement
    as they investigate and prosecute terrorist financing, money
    laundering, and other financial crimes.
        In some ways, parts of FinCEN are in transition as they
    examine how to continue to be a relevant and meaningful
    resource to its more than 300 law enforcement customers.
        As more of these customers obtain direct access to the
    financial data FinCEN collects under the Bank Secrecy Act, they
    could do their own data queries and analyses and decrease the
    request to FinCEN for this kind of tactical case support by
    about 80 percent so FinCEN could examine other ways it could
    support law enforcement and effectively use its resources.
        The agency decided that it could use its expert knowledge
    about the financial data to conduct more complex and strategic
    analyses. For example, the agency could identify new patterns
    and emerging trends that could forewarn of new financial
    concerns.
        Given the evolving role of FinCEN, we surveyed Federal and
    State law enforcement agencies, including FinCEN's primary
    customers, to determine how useful they found FinCEN's current
    services and products.
        In general, the 25 law enforcement agencies responding to
    our survey in late 2008 found these services and products
    useful, and cited three in particular as most useful: first,
    having this direct access to the financial data; second, having
    liaisons at FinCEN; and third, being able to use FinCEN's
    secure communications to query U.S. financial institutions for
    data on persons or organizations under investigation, a
    capability that the PATRIOT Act provided.
        Law enforcement also reported that some of FinCEN's complex
    analytical products are particularly helpful in their
    investigations. This is especially true of technical reference
    manuals that cover issues such as Internet payment mechanisms.
        We identified four relatively easy commonsense ways that
    FinCEN could improve its working relationship and
    communications with law enforcement and help the agency be more
    relevant and responsive to these customers, increase the value
    and impact of its analyses, and ensure it uses its limited
    resources effectively.
        First, FinCEN could better inform law enforcement about the
    types of complex analytic products it can provide and let law
    enforcement know when it issues a new product. At the time of
    our review, 14 of the 25 law enforcement agencies had not
    received any or only one of FinCEN's strategic analytic
    products since 2004.
        Second, FinCEN could better define the types of requests
    for analytic support it will accept and the criteria it will
    use to set priorities for its analytic resources. FinCEN could
    also let law enforcement know whether and why it accepted or
    rejected a request.
        These basic practices would help build FinCEN's customer
    relations with law enforcement.
        Third, FinCEN could more actively solicit law enforcement's
    input on ongoing as well as planned analyses, significantly
    increasing their usefulness and relevance.
        Fourth and finally, FinCEN could establish a mechanism for
    agencies to provide law enforcement sensitive comments on
    proposed regulatory changes so as not to compromise key
    investigative techniques or strategies.
        The good news is that the Director acknowledges that FinCEN
    agreed with our recommendations. In fact, because we were doing
    work at the committee's request in the agency, FinCEN itself
    conducted its own internal study and acknowledged similar
    concerns as those we had identified.
        Last week, we asked FinCEN for an update, and learned it is
    initiating or plans to initiate corrective actions in a number
    of these areas. As Director Freis acknowledged, it is drafting
    both a menu of products and services, as well as a menu of
    resources that it plans to distribute electronically to law
    enforcement.
        It is also drafting a survey to determine what information
    law enforcement needs to support their investigations and a new
    form to capture and track requests for analytic support.
        In addition, FinCEN has developed a process to let law
    enforcement know the agency will fulfill a request, and
    furthermore, FinCEN organized some of its staff and workload so
    as to better engage law enforcement. And finally, FinCEN did
    solicit law enforcement input on a recent proposed regulatory
    change up-front before the change was a done deal, although in
    part, Congress provided them direction to do this.
        The agency is establishing a way for law enforcement to
    submit sensitive comments on proposed changes.
        Mr. Chairman, these are all good steps. FinCEN just needs
    to implement them and then track their success to ensure that
    the agency is using its resources most effectively in meeting
    law enforcement's needs.
        This will help to ensure that parts of FinCEN will survive.
        The subcommittee's support for FinCEN and oversight of its
    contributions will help to ensure that it is following through
    on these reforms.
        This concludes my statement. I would be happy to answer any
    questions.
        [The prepared statement of Ms. Larence can be found on page
    62 of the appendix.]
        Chairman Moore of Kansas. My thanks to both witnesses for
    their testimony. I appreciate that very much. I will recognize
    myself for 5 minutes for questions.
        Ms. Larence, with respect to law enforcement and how FinCEN
    prioritizes which reports they do, how should they improve that
    priority system? Should they permit law enforcement to help
    decide, for example, perhaps a request from the FBI Director
    has a higher priority than an FBI agent in Seattle?
        Would involving law enforcement in that prioritization
    system help?
        Ms. Larence. Yes. We think that involving law enforcement
    in setting the criteria would help, but then also making sure
    FinCEN is transparent about that criteria. We do not argue that
    law enforcement should call all the shots because law
    enforcement itself recognizes that FinCEN brings particular
    expertise to the table because they have access to all of the
    data and because they have a broad perspective across the
    industry, regulators, and law enforcement itself. Law
    enforcement would just like to be more of a partner in that
    process.
        Chairman Moore of Kansas. Thank you. Since you each focused
    on separate issues, it may be difficult for you both to give us
    a sense of which problem is more urgent, better communication
    with law enforcement or improving SAR data quality.
        How would each of you rank your respective issue on a scale
    of one to five, five meaning FinCEN is doing a great job, and
    one meaning they need to improve?
        Mr. Hillman, do you have any thoughts, sir?
        Mr. Hillman. Similar to the last panel, I believe that both
    of the actions that you are calling for are essential for
    FinCEN in achieving its mission. It must work with other
    regulators and other depository institutions in accomplishing
    its mission. It must serve law enforcement in meeting its
    terrorist financing and other financial crimes' work.
        I would put a high priority on both of those activities
    because if they were unsuccessful, then our country would be
    unsuccessful.
        Chairman Moore of Kansas. Thank you, sir. Ms. Larence, do
    you have any comments?
        Ms. Larence. Clearly, the law enforcement community found
    direct access to the data itself the most important service
    that FinCEN can provide, so I would argue that is where FinCEN
    would need to put its priorities.
        Chairman Moore of Kansas. Thank you. Starting with you, Mr.
    Hillman, has FinCEN been responsive to GAO's recommendations?
    What additional steps should they take or focus on to improve
    their performance?
        Mr. Hillman. One of the major areas we found in our report
    on the SAR activities was that their forms revision process was
    not a collaborative process. They had made changes to that form
    and many individuals within the law enforcement community,
    specifically SAR review teams in other High Intensity Financial
    Crime Areas (HIFCA) had limited ability to influence the
    changes that they wanted to make to those forms.
        Since that recommendation was made, FinCEN has really taken
    to heart the need to ratchet up their coordination and
    communication in the forms revision process. We have seen
    substantial efforts on the part of the organization in
    obtaining views from outside parties early in the process, much
    of what we had recommended in the past.
        What we have not seen, however, are some other important
    facets of collaboration, including identifying and reporting
    and evaluating progress associated with their initiatives.
        We are also concerned that we have not really seen a plan
    for the effective implementation of this modernization effort,
    and given past progress in the information technology area, a
    plan is very important.
        Chairman Moore of Kansas. Thank you, sir. The Chair next
    recognizes Mr. Paulsen for 5 minutes, sir.
        Mr. Paulsen. Thank you, Mr. Chairman. Maybe I will start
    with Mr. Hillman. Mr. Hillman, what are your views as to the
    current level of budgetary funding provided to FinCEN? Do they
    have adequate resources to effectively carry out their mission?
        Mr. Hillman. We really have not looked at the resources
    that have been provided to the organization. However, we do
    acknowledge the unenviable task that it has in achieving its
    multiple mission responsibilities, relying on the limited
    resources it does have and the other regulators at its
    disposal.
        Given that environment, that just puts a premium on
    ensuring effective collaboration and coordination across all of
    the financial regulators, law enforcement agencies, depository
    institutions, and others that are producing BSA data for that
    organization.
        That is what we have emphasized with FinCEN, improving its
    opportunities to collaborate and coordinate to get the biggest
    investment it can from the resources that it has.
        Mr. Paulsen. How important is it from your perspective for
    FinCEN to complete its SAR form revision process and how often
    do you think such a review or changes should take place in the
    future, given the changing nature of the financial system and
    of financial crimes?
        Mr. Hillman. They are required by law--from the Paperwork
    Reduction Act--to review their forms process every 3 years.
    They generally look at those forms a little bit ahead of that
    schedule to ensure they can complete that review in a timely
    fashion.
        I believe they are doing a diligent job in looking at their
    forms revisions. What we have found, however, is that the
    revisions that they have made had not been fully coordinated
    with others to determine that those form changes were going to
    improve the efficiency of the process, and then once they had
    decided on the revisions that they wanted to make, they had not
    coordinated effectively with the IRS and they were even in fact
    unable to implement the revisions they were proposing.
        Today, FinCEN is still using forms that they developed in
    2003 in their forms revision process, and are unable to use
    technology to enhance their efforts going forward.
        Mr. Paulsen. Ms. Larence, as you probably know, FinCEN
    issued a report on fraud in the mortgage market well before the
    bubble collapsed. It was virtually ignored by the law
    enforcement community.
        Should FinCEN be held responsible for reports and
    information that are simply not used by law enforcement? Do you
    have any suggestions on that front at all?
        Ms. Larence. In talking with some of the FBI agents and
    liaisons, I think they felt like FinCEN brought a different
    perspective to that issue than the FBI could. The FBI has
    access to different information and takes a case perspective.
        They thought FinCEN could bring value but they would have
    liked to have maybe collaborated with FinCEN more.
        FinCEN itself in its internal review admitted that what
    they hear from law enforcement is the quality of their reports
    is very high, but sometimes the relevance is not as high. We
    argue if they would collaborate more with law enforcement to
    determine what kinds of information they need, what they are
    focusing on, they would stand a better chance to be more
    relevant.
        Mr. Paulsen. Regarding GAO's recommendation that FinCEN
    establish a process to inform law enforcement about the
    availability of completed analytical products, the December
    2009 report indicated that FinCEN was not inclined to share
    certain products completed for one customer with other law
    enforcement agencies due to confidentiality rules.
        How should FinCEN handle this situation so that vital data
    and reports can be made available to all law enforcement
    agencies?
        Ms. Larence. A couple of things. They do follow what they
    call the third party rule. That is, they would ask the
    originating agency if they could have permission to share, and
    how extensively could they share, those products.
        What we heard from law enforcement was they would just like
    to even know that the product existed, and that way they may be
    able to pursue channels to get that information.
        It looks from what FinCEN is telling us, we have not had a
    chance to audit that yet, but they have put a process in place,
    both to better inform and market their products as well as to
    communicate better with law enforcement on their responses to
    law enforcement's requests.
        Mr. Paulsen. Thank you, Mr. Chairman.
        Chairman Moore of Kansas. Thank you, sir. The Chair
    recognizes Mr. Lynch for 5 minutes.
        Mr. Lynch. Thank you again, Mr. Chairman. Let me ask both
    of you. We are talking a lot about FinCEN's responsibility to
    interact and collaborate with law enforcement. That is just
    one-third of what their mission is.
        They also have a mission with 325 employees, they have 300
    law enforcement agencies, then they have every single reporting
    financial services firm in the country, thousands, and then on
    top of that, they have 160 countries that currently have
    financial intelligence units--116, excuse me, and we are
    working on maybe another 40 right now to try to get financial
    intelligence units stood up, and FinCEN is working on those.
        They have 325 employees. I think it is mind boggling to
    expect anybody to be able to do that with that small a number
    of employees. I just do not see it happening. These folks are
    stretched thin.
        I know you did not look specifically at that, but do you
    have any--
        Mr. Hillman. That actually was not the scope of our review
    in looking at SARs and SAR revisions, but it is clear FinCEN
    has a daunting responsibility with the resources that it has.
    It continues to put a premium on proper guidance and forms to
    the other regulators and depository institutions that supports
    its activities.
        In the recent past, we have seen a ratcheting up on the
    part of FinCEN in putting a good guidance out on their Web site
    for others on attending conferences. We learned that between
    2006 and 2008, FinCEN representatives had attended over 300
    different conferences and multi-agency groups to spread the
    word as to what types of activities they were hoping to see
    achieved.
        Law enforcement is doing the same thing and working with
    depository institutions and helping to ensure they get adequate
    and high-quality narratives in these SAR forms.
        We just need to continue to leverage the available
    resources to accomplish the goals and mission of FinCEN.
        Mr. Lynch. Right now, it seems like FinCEN is going out to
    these different agencies. They went out to California and they
    have been working closely with the FBI.
        Ironically, the FBI has put as many resources into
    analyzing the information provided by FinCEN than we have
    provided FinCEN to actually develop the data and provide the
    intelligence. It is sort of backwards.
        I just do not know how long we can continue to do that. I
    know FinCEN has a connection with all these different
    departments. We are providing extra resources to these other
    agencies, and yet we are level funding FinCEN that is providing
    all these agencies.
        I just see organizationally, it is a real problem. I do not
    know how to get past that without providing additional
    resources to FinCEN.
        Ms. Larence?
        Ms. Larence. We tried very hard to be able to help answer
    that question, at least in terms of the work they are providing
    to law enforcement, through the Analysis and Liaison Division.
        FinCEN needs to be able to demonstrate this is what we are
    doing with the resources that we have right now in terms of
    supporting the law enforcement community. Here are the critical
    gaps or here are the missed opportunities that we have to be
    able to provide significant support. FinCEN needs to be able to
    demonstrate these gaps.
        We just had a hard time getting that kind of management
    information to be able to make that story.
        Mr. Lynch. Let me ask, in your reports and in your analysis
    in looking at this, is FinCEN bringing in--you would think that
    one way we might be able to close that gap is to sort of bring
    in the law enforcement people, do a number of seminars on the
    financial analysis products that they have.
        I know there is outreach. I am not so sure that is the best
    use of their time. Maybe bring all those folks into Washington
    and do a bunch of these conferences and do a training on the
    products and on the data and how to use FinCEN better.
        Of course, that is going to be a double-edged sword because
    they are going to get more and more SARs. They are going to get
    more and more business. It is sort of like the problem I had
    with some of my local hospitals. They are losing money on every
    patient. Then they do outreach and they get more patients
    coming into the hospital and they are losing even more money.
    It is sort of a downward spiral of a self-fulfilling prophecy.
        That is the problem that FinCEN has. I do not think they
    are doing it purposely. By not doing outreach, they are
    probably reserving some of their resources that they have.
        Any thoughts on that?
        Ms. Larence. I think they have some existing channels that
    they can use more effectively. They have a bi-monthly
    roundtable with law enforcement. They have changed the agenda
    already where they are better publicizing the products and they
    are using the roundtable to solicit ideas from law enforcement
    about the kinds of issues and analyses that would be helpful.
    They have already taken some steps there.
        They have been increasing their attendance at conferences
    and doing outreach. They have been partnering with some of the
    IGs to get the word out. They are looking at using the
    available channels that they have.
        I think also with issuing these menus of products and
    services and resources and using their existing gateway and
    secure outreach portals that they have to law enforcement just
    to publicize them will help a lot.
        Mr. Lynch. Thank you. Thank you both. I yield back.
        Chairman Moore of Kansas. Thank you. I understand that
    Ranking Member Judy Biggert is on her way. If Mr. Paulsen has
    any additional questions, he can go ahead at this time until
    she arrives.
        Mr. Paulsen. Thank you, Mr. Chairman. Just a couple of
    follow-up questions for Mr. Hillman, if I could.
        As you know, the suspicious activity report, the SAR report
    filings continue to increase. However, the quality of SAR
    filings continues to be an issue in depository institutions.
        Officials have commented they would like clear guidance on
    what law enforcement looks for, what they really want, what
    they find useful in these reports.
        Based on your work, what actions have FinCEN and law
    enforcement agencies taken to assist financial institutions in
    improving the quality of the SAR filings, and what should be
    done in the future on this front?
        Mr. Hillman. This is one area that has been a continual
    concern on the part of depository institutions, concern that
    they do not know exactly how law enforcement is using this
    data, not knowing how exactly how to satisfy those needs.
        We have found, however, that FinCEN has done a number of
    things to improve communication and coordination with the
    depository institutions and to educate them about the
    importance of SAR filings.
        For example, they have a variety of written products
    reporting trends in SAR data, providing tips on SAR filings.
    They have also posted a variety of guidance on their Web site.
        One important piece of guidance outlined the 10 most
    important common filing errors in SARs and steps to avoid them.
    In 2008, they also produced a guideline from SAR filings on
    proceeds and foreign corruption.
        FinCEN representatives, as I previously mentioned, also are
    participating in a number of conferences for depository
    institutions to share information with them and law enforcement
    is doing the same, to best assist depository institutions in
    providing the right information on SAR narratives and to help
    depository institutions better understand the types of
    information that they need for their investigative activities.
        Going forward, FinCEN really needs to continue to educate
    filers on the important uses of SARs and the benefits to law
    enforcement.
        Mr. Paulsen. One more question. In the past, financial
    industry officials have expressed concerns about the extent to
    which law enforcement agencies use suspicious activity reports
    and whether the effort put into filing them is actually helping
    law enforcement investigations.
        Just again a quick follow-up, because I think you had a
    little bit of this in your answer, but what steps have FinCEN,
    law enforcement, and others taken to make better use of SARs in
    general? This is a common theme I think we hear.
        Mr. Hillman. Absolutely. FinCEN, law enforcement, and
    financial institution regulators are each taking steps to
    ensure they are using quality information that is available
    from SARs.
        FinCEN, as we previously discussed, has produced various
    non-public analytical products and they have also pushed out
    bulk downloads of their SAR data to law enforcement
    organizations and others for them to combine that SAR
    information and other BSA information with other investigative
    information they have at their disposal to enrich their
    investigative activities.
        We have also seen some concerns being expressed by law
    enforcement agencies and others who use SAR forms, basically
    going to concerns with the formatting and the efficiency of the
    downloading process.
        A couple of important concerns have to do with the fact
    that SAR narratives produced on their systems come forth in all
    capital letters. There is no additional formatting for an
    individual, a SARs review team, for example, who may be looking
    at hundred of these SARs in an individual instance, from better
    understanding what was in that data.
        We also have had concerns expressed by financial regulators
    in that the downloads that are available in producing SARs
    analyses do not allow regulators to provide all the SARs that
    they need in that analysis at one point in time. There are
    concerns their analyses may not be fully complete.
        In addition, financial regulators have expressed concerns
    that the data input that is being provided by FinCEN, and to
    some extent by the IRS as well, is not producing accurate
    results.
        There are opportunities for FinCEN and the IRS to improve
    the uploading of information in their systems.
        Mr. Paulsen. Thank you, Mr. Chairman.
        Chairman Moore of Kansas. Thank you, Mr. Paulsen, for your
    questions. Now I recognize for 5 minutes for questions the
    ranking member of the subcommittee, my colleague and friend
    from Illinois, Ranking Member Judy Biggert.
        Ms. Biggert?
        Mrs. Biggert. Thank you very much, Mr. Chairman. Thank you
    for giving me the opportunity to ask questions. I,
    unfortunately, have been in a markup all day. We still have
    eight amendments to go. I had quite a few amendments. It
    usually does not last this long.
        Chairman Moore of Kansas. We are glad you are here.
        Mrs. Biggert. My first question would be, what are the
    answers to addressing FinCEN's shortcomings and what does
    FinCEN need to do their job and to do it well? Is it new
    authority? Resources? Is it a set timeframe to update
    information systems? Briefly.
        Mr. Hillman. I will take the issue on the information
    systems. I believe that is one of the significant challenges
    facing this organization at the time.
        They have had a dismal record in the past in establishing
    robust and successful information technology modernization
    initiatives, and they are undergoing one now as we speak.
        The advice that I would provide to FinCEN is that they take
    the time to thoroughly develop a plan for moving forward in
    their information technology initiative before implementing
    individual steps, and that they solicit the input of Treasury's
    Chief Information Officer in their deliberations on their
    modernization efforts.
        The Director, when he was here earlier this afternoon,
    discussed the fact that the CIO himself is on a panel with the
    Director and the Deputy Commissioner to oversee the
    modernization effort.
        FinCEN itself as an organization with so few resources, it
    really could leverage the technology expertise available in the
    Information Office to achieve its purposes more effectively.
        Ms. Larence. In terms of the issues that we looked at,
    these are not new findings. FinCEN had several internal studies
    starting in 2005, 2006, and 2008. FinCEN knows what it needs to
    do. It just needs to do it. It needs to track it to make sure
    the changes are effective. It needs to hold itself accountable
    with law enforcement for these changes.
        I think setting timeframes and establishing an
    accountability system where it publicly reports out to law
    enforcement and to the Congress on what its commitments are and
    whether it is making those commitments.
        Mrs. Biggert. Do you think Congress should set a timeline
    or a certain time when they should complete--outline the
    specific goals?
        I know the same situation is really in HUD, every year we
    ask them if they have their information system up and running
    and the technology, and it just keeps delaying and delaying.
        How can Congress get them moving and should there be a
    deadline set?
        Mr. Hillman. I believe that it would be important for
    Congress to request a plan from FinCEN as to how it intends to
    successfully modernize its information technology, and then to
    request periodic progress reports on their activities.
        In that way, there would be some very important oversight
    from the Congress in ensuring that FinCEN is making true
    progress in achieving its ultimate goals.
        Ms. Larence. We noticed in the most recent work on proposed
    regulatory changes that FinCEN collaborated very well with the
    law enforcement agencies within DHS, in part because Congress
    directed them to do that through statute.
        It is pretty clear that if Congress gave support and
    incentives such as setting recurring timeframes and holding
    FinCEN accountable to them, that does help.
        Mrs. Biggert. I think in the first panel, Director Freis
    said we have been planning for 3\1/2\ years and now they
    restarted the planning process. How much time do you think it
    would take them to complete the process of updating their
    technology?
        Mr. Hillman. With their current technology efforts, the
    staff within FinCEN, when we were updating the status of our
    recommendations for this hearing, were reluctant to share with
    us any timeframes for completing any individual efforts, but
    suggested that the total modernization effort was likely not to
    be completed until 2014.
        Mrs. Biggert. Does law enforcement find FinCEN more or less
    relevant now that agencies can access and analyze the Bank
    Secrecy Act data on their own?
        Ms. Larence. What we found in our review is that kind of
    case-specific tactical support the agencies are now doing
    themselves, so they did not really need FinCEN to do that for
    them.
        They did recognize that FinCEN had valuable expertise,
    again, because FinCEN understood industry, regulators, and law
    enforcement. They do think FinCEN could have a more strategic
    and forward-looking approach to trying to anticipate issues,
    looking for patterns and trends in the data.
        Law enforcement does think FinCEN brings value to the
    table. They just want to collaborate better so they have an
    opportunity to help to define with FinCEN the kinds of analyses
    that will be most relevant and useful to support their
    investigations and their cases.
        Mrs. Biggert. Do you think law enforcement really needs
    these complex analyses?
        Ms. Larence. I think they find them very helpful, if they
    are timely and useful. What we heard is if FinCEN involved law
    enforcement in helping to again define what to pursue in those
    analyses and also get them involved on ongoing reviews, that
    would help the information to meet law enforcement's needs and
    be more relevant than it is today.
        Mrs. Biggert. Do you see some of the agencies, law
    enforcement agencies, need FinCEN more to help them conduct
    their investigations and prosecutions than others?
        Ms. Larence. We did note that they have now more than 300
    potential law enforcement customers. These range from some of
    the five biggest players, such as the DEA, the FBI, and ICE,
    down to smaller State law enforcement agencies, and to some
    extent, even local law enforcement agencies.
        These agencies are going to need a variety of skills and
    support from FinCEN. I think FinCEN has a lot of potential
    customers out there.
        Mrs. Biggert. Thank you. Thank you both for being here.
    Thank you, Mr. Chairman. I yield back.
        Chairman Moore of Kansas. My thanks to the distinguished
    lady from Illinois. Again, I want to thank our witnesses for
    their testimony this afternoon.
        Today's hearing was helpful in improving our understanding
    of the challenges facing FinCEN and ways those challenges can
    be addressed. This is something we will continue to monitor
    closely.
        The Chair notes that some members may have additional
    questions for our witnesses which they may wish to submit in
    writing. 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.
        Again, I want to thank the witnesses for appearing today
    and for your testimony. The hearing is adjourned. Thank you
    all.
        [Whereupon, at 4:47 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 April 28, 2010

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