[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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