[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]






 
                    LEGISLATIVE PROPOSALS TO COUNTER

                     TERRORISM AND ILLICIT FINANCE

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

                             JOINT HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                AND THE

                       SUBCOMMITTEE ON TERRORISM

                          AND ILLICIT FINANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 29, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-60
                           
                           
                           
                           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                           






                      _________ 

           U.S. GOVERNMENT PUBLISHING OFFICE
                   
31-287 PDF          WASHINGTON : 2018      


                           
                           
                           

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                 BLAINE LUETKEMEYER, Missouri, Chairman

KEITH J. ROTHFUS, Pennsylvania,      WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
BILL POSEY, Florida                  DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida              NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina     AL GREEN, Texas
ANDY BARR, Kentucky                  KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado               MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas                DENNY HECK, Washington
MIA LOVE, Utah                       GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
             Subcommittee on Terrorism and Illicit Finance

                   STEVAN PEARCE, New Mexico Chairman

ROBERT PITTENGER, North Carolina,    ED PERLMUTTER, Colorado, Ranking 
    Vice Chairman                        Member
KEITH J. ROTHFUS, Pennsylvania       CAROLYN B. MALONEY, New York
LUKE MESSER, Indiana                 JAMES A. HIMES, Connecticut
SCOTT TIPTON, Colorado               BILL FOSTER, Illinois
ROGER WILLIAMS, Texas                DANIEL T. KILDEE, Michigan
BRUCE POLIQUIN, Maine                JOHN K. DELANEY, Maryland
MIA LOVE, Utah                       KYRSTEN SINEMA, Arizona
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              RUBEN KIHUEN, Nevada
WARREN DAVIDSON, Ohio                STEPHEN F. LYNCH, Massachusetts
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 29, 2017............................................     1
Appendix:
    November 29, 2017............................................    45

                               WITNESSES
                      Wednesday, November 29, 2017

Bley, Daniel H., Executive Vice President and Chief Risk Officer, 
  Webster Bank, on behalf of the Mid-Size Bank Coalition of 
  America........................................................     6
Byrne, John J., President, Condor Consulting, LLC................     7
Fox, William J., Managing Director, Global Head of Financial 
  Crimes Compliance, Bank of America, on behalf of The Clearing 
  House..........................................................     9
Ostfeld, Stefanie, Deputy Head of U.S. Office, Global Witness....    11
Poncy, Chip, President and Co-Founder, Financial Integrity 
  Network........................................................    13

                                APPENDIX

Prepared statements:
    Bley, Daniel H...............................................    46
    Byrne, John J................................................    50
    Fox, William J...............................................    58
    Ostfeld, Stefanie............................................    69
    Poncy, Chip..................................................    88

              Additional Material Submitted for the Record

Perlmutter, Hon. Ed:
    Letter from Dr. Louise Shelley, Director, Terrorism, 
      Transnational Crime and Corruption Center..................   118
    Letter from Chuck Canterbury, National President, National 
      Fraternal Order of Police..................................   121
    Letter from John Cassara, former U.S. Intelligence Officer 
      and Treasury Special Agent.................................   123
    Letter from Amanda Ballantine, National Director, Main Street 
      Alliance...................................................   125
    Letter from Michael Freeman, President, National District 
      Attorneys Association......................................   127
    Letter from Abby Maxman, CEO, Oxfam America..................   128
    Letter from John Arensmeyer, Founder and CEO, Small Business 
      Majority...................................................   131
    Letter from Gary Kalman, Executive Director, FACT Coalition..   133
    Letter from Eric LeCompte, Executive Director, Jubilee USA 
      Network....................................................   137
    Letter from Shruti Shah, Vice President of Programs and 
      Operations, Coalition for Integrity........................   139
    Letter from Ian Schwab, Director of Advocacy and Impact 
      Strategy, The Enough Project...............................   142
    Letter from Amol Mehra, Executive Director, International 
      Corporate Accountability Roundtable........................   144
Byrne, Hon. Bradley:
    ACAMS report--The Way Forward................................   147


                    LEGISLATIVE PROPOSALS TO COUNTER



                     TERRORISM AND ILLICIT FINANCE

                              ----------                              


                      Wednesday, November 29, 2017

                     U.S. House of Representatives,
                     Subcommittee on Financial Institutions
                                   and Consumer Credit, and
             Subcommittee on Terrorism and Illicit Finance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 2:26 p.m., in 
room 2128, Rayburn House Office Building, Hon. Stevan Pearce 
[Chairman of the Subcommittee on Terrorism and Illicit Finance] 
presiding.
    Present: Representatives Pearce, Pittenger, Rothfus, Royce, 
Tipton, Williams, Poliquin, Love, Hill, Zeldin, Trott, 
Loudermilk, Davison, Budd, Kustoff, Tenney, Hensarling, 
Perlmutter, Maloney, Velazquez, Lynch, Scott, Green, Himes, 
Foster, Kildee, Delaney, Sinema, Heck, Vargas, Gottheimer, and 
Waters.
    Chairman Pearce. The subcommittees will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittees at any time. Members of the full 
committee who are not members of the Subcommittees on Financial 
Institutions and Consumer Credit, or Terrorism and Illicit 
Finance may participate in today's hearing.
    All members will have 5 legislative days within which to 
submit extraneous materials to the Chair for inclusion in the 
record.
    This joint hearing is entitled ``Legislative Proposals to 
Counter Terrorism and Illicit Finance.'' I now recognize myself 
for 2-1/2 minutes to give an opening statement.
    I want to thank everyone for joining us today. Today's 
joint hearing will examine legislative proposals to combat 
money laundering, terrorist financing, human trafficking, and 
other illicit activities within our financial system.
    Nearly 50 years old, the Bank Secrecy Act (BSA) was 
designed and passed before the emergence of the common 
technology we take advantage of today. From the very basic, 
like how a currency transaction report (CTR) is filed, to the 
extremely complex, including what information is most useful to 
the U.S. Financial Intelligence Unit, the BSA framework needs 
modernization.
    The Office of National Drug Control Policy estimates that 
Americans spend over $65 billion per year on illegal drugs, yet 
seizures by law enforcement are less than $1 billion a year. 
Overwhelmingly, the proceeds from drug trafficking escape 
detection in the U.S. financial system.
    To be clear, this issue is not created by a lack of effort 
from law enforcement or financial institutions. In fact, we 
spend billions of dollars annually on AML/CFT (anti-money 
laundering/combating the financing of terrorism) efforts. 
Illicit finance is ever changing and ever evolving, which 
requires financial institutions and law enforcement to detect 
new methods in a fluid environment where every action from law 
enforcement is countered by criminals.
    The solution is providing these entities with the tools 
they need to better detect, report, and pursue illicit 
activity. This includes modernizing the current framework to 
ensure that emerging forms of financial technology can be 
secure and accountable and that Treasury's Financial Crimes 
Enforcement Network (FinCEN) can utilize the same technology to 
streamline regulatory and intelligence work.
    As it stands today, the current AML/CFT compliance regime 
is a practice and procedures whose policy, goals, supervision, 
and enforcement need more clarification and coordination to 
prevent undue regulatory burden on financial institutions while 
strengthening national security interests and enhancing law 
enforcement investigations. Reporting under the BSA was meant 
to provide information to law enforcement that is of a high 
degree of usefulness. However, in 2016 alone, over 15 million 
currency transaction reports and over 1.5 million suspicious 
activity reports were filed with the Federal Government. This 
influx of reports drowns out the actionable information with 
white noise, allowing criminal activity to go undetected.
    Without a serious review and modernization of anti-money 
laundering, the AML/CFT, combatting the financing of terrorism 
framework, the United States will continue to be deficient in 
its ability to combat terrorism, terror, and illicit financing.
    The Counter Terrorism and Illicit Finance Act is a 
legislative proposal compiled after over 10 months of hearings, 
briefings, and feedback from stakeholders, academics, and 
Administration officials from two subcommittees of 
jurisdiction. It identifies the current weaknesses in how the 
AML system operates and includes reforms designed to promote 
innovation and detection strategies, establish AML and 
counterterrorism financing priorities, identify ownership of 
shell companies, and streamline reporting requirements.
    The consequences of money laundering are significant to 
financial systems, economic development, and governments 
worldwide. As criminals invent new methods of moving illicit 
funds through our financial system, settling for the status quo 
is unacceptable.
    Delaying these reforms puts American lives at risk from 
drug cartels, human traffickers, organized crime, and 
terrorism. In today's hearing, I hope our witnesses can discuss 
how we are currently combatting terrorism and illicit finance 
and how the legislation before us will improve the existing 
system.
    I would also welcome any feedback on how to improve the 
reforms proposed in Counter Terrorism and Illicit Finance Act. 
Inhibiting criminal activity isn't a new problem, but I hope 
that today we can help inform the subcommittees on the 
importance of reforming the current law.
    Again, I would like to thank our witnesses for being here 
today, and I look forward to their expert testimony on this 
important issue.
    I now recognize the Ranking Member of the Terrorism and 
Illicit Finance Committee, the gentleman from Colorado, Mr. 
Perlmutter, for 2-1/2 minutes for an opening statement.
    Mr. Perlmutter. Thanks, Mr. Chair, and thanks for having 
this hearing.
    And to our panelists, thanks for being here today.
    This is a subject we have been studying pretty thoroughly. 
I think we all understand that we need to make some changes and 
to modernize some statutes that have been in place since the 
'70s and the '80s. We don't want the financial institutions to 
make work, go through certain routines that really don't help 
us as a Nation stop crime, stop terrorism. There are benefits 
to it, but we can be much more effective with a lot less 
routine work. And that is really what this committee would like 
to see done, and that is why we are going to be taking up the 
bill at some point that Mr. Pearce just mentioned, Counter 
Terrorism and Illicit Finance Act.
    So I'm very interested in your testimony today. A belief by 
both sides of the aisle that we have steps that need to be 
taken. I would encourage the panel, and I ask you to take a 
look at a couple of sections that I am going to want 
information about, which is the expansion of the crimes for 
which there would be information-sharing.
    We have a letter from the Defense Bar, which I would ask to 
enter into the record, complaining about--
    Chairman Pearce. Without objection.
    Mr. Perlmutter. --the pretty dramatic expansion of the 
crimes covered, as well as the section that Mrs. Maloney has 
been suggesting on beneficial ownership. And we have a couple 
of letters that I would ask to be entered into the record: One 
by Angel Capital Association, which is joined in by the 
National Association of Manufacturers, NFIB, National Venture 
Capital, and Real Estate Roundtable, and the Chamber of 
Commerce as one of the letters. The other being the letter from 
the Bar Association--
    Chairman Pearce. Without objection.
    Mr. Perlmutter. --complaining about what they believe are a 
lot of limitations, a lot of confusion in terms of definitions, 
and also changing the risks from the banking community to the 
legal community.
    But I appreciate all of you being here today; look forward 
to your testimony.
    And, with that, I would yield back to the Chair.
    Chairman Pearce. The gentleman yields back.
    The Chair now recognizes the Vice Chairman of the Financial 
Institutions and Consumer Credit Subcommittee, the gentleman 
from Pennsylvania, Mr. Rothfus, for 2-1/2 minutes, for an 
opening statement.
    Mr. Rothfus. Thank you, Chairman.
    I want to commend my colleagues on this committee for their 
efforts on the bills that we are going to discuss today.
    Strengthening and modernizing our Bank Secrecy Act anti-
money laundering framework is essential if we want to counter 
the very real security threats that we face and disrupt the 
heartbreaking human trafficking and drug trades that destroy so 
many lives.
    Just before we went home to spend time with our families 
this Thanksgiving, I traveled through Afghanistan and Iraq to 
visit our troops and get a firsthand update on the challenges 
we face in that part of the world. The flow of illicit cash, 
whether generated through the sale of drugs or weapons, bogus 
trade transactions, or through human trafficking, continues to 
provide a lifeline for terrorist groups and rogue actors. This 
fuels instability throughout the Middle East, and it makes the 
jobs of the brave men and women of our military much harder.
    Of course, as many of us know, this problem extends far 
beyond that part of the world. Bad actors, like Hezbollah, are 
involved in illicit finance and trafficking all over the world, 
including in Africa and closer to home in Latin America. The 
violence and corruption that they support in the countries in 
which they operate is unacceptable. And the drugs they pump 
into our communities, which ruin so many lives, need to be 
stopped.
    I am more convinced than ever that this committee's efforts 
to interrupt the finances of these bad actors will ultimately 
save lives. These bills, and especially the Counter Terrorism 
and Illicit Finance Act, represent a promising start as we 
begin this process.
    I am looking forward to hearing from our witnesses today 
about how we can build on a more potent BSA/AML regime that 
makes the best use of scarce public and private sector 
resources. It is clear to me that our existing framework puts 
heavy burdens on financial institutions and appears to 
emphasize compliance with rigid standards over efficacy. This 
imposes a significant cost on financial institutions and takes 
resources away from other important functions. We need to be 
looking at how technology, innovation, and greater cooperation 
can be employed to yield better results in this fight.
    I thank the Chairman. I yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair now turns to the introduction of our witnesses. 
We welcome the testimony of, first of all, Mr. Daniel Bley. 
Since 2010, Mr. Bley has been Executive Vice President and 
Chief Risk Officer at Webster Bank Financial Corp. and Webster 
Bank, based in Waterbury, Connecticut.
    Prior to joining Webster, Mr. Bley worked at ABN AMRO and 
the Royal Bank of Scotland from 1990 to 2010, having served as 
managing director of financial institutions, credit risk, and 
group senior vice president, head of financial institutions and 
trading credit risk management.
    Mr. Bley earned a B.A. from the University of Michigan in 
Ann Arbor and an MBA from London Business School in London, 
England. Mr. Bley also served on the board of directors of 
Junior Achievement of Western Connecticut.
    Mr. John Byrne. Mr. Byrne is the President of Condor 
Consulting in Centreville, Virginia, the financial services 
regulatory firm handling due diligence issues and training for 
Government and the private sector in anti-money laundering, 
financial crime, and regulatory oversight. From 2010 to October 
2017, Mr. Byrne was the Executive Vice President of the 
Association of Certified Anti-Money Laundering Specialists, the 
largest and most prominent global AML Trade Association. Mr. 
Byrne has also held several senior positions at Bank of America 
in Washington, D.C., with responsibilities in AML strategies 
and regulatory relations. Mr. Byrne earned a B.A. degree from 
Marquette University in Milwaukee and his law degree from 
George Mason University.
    Mr. William J. Fox serves as Managing Director of Global 
Financial Crimes, Corruption, and Sanctions at Bank of America 
Corporation. Mr. Fox has served at Bank of America since 2006. 
Mr. Fox joined Bank of America from Financial Crimes 
Enforcement Network, FinCEN, where he served as the FinCEN 
Director. Prior to his of appointment as FinCEN Director, he 
served as the Treasury's associate deputy general counsel, 
acting deputy general counsel. After September 11, 2001, he 
also served as the principal assistant and senior advisor to 
the Treasury's general counsel on issues relating to terrorist 
financing and financial crime. He was recognized for his work 
on those issues with a meritorious rank award in 2003. Mr. Fox 
joined the Department of the Treasury in December 2000 as the 
acting deputy assistant general counsel for enforcement. From 
1988 to December 2000, he served at the Bureau of Alcohol, 
Tobacco, and Firearms. Mr. Fox received his bachelor's degree 
in history and a law degree from Creighton University in 
Oklahoma.
    Stephanie Ostfeld is the Deputy Head of the U.S. Office of 
Global Witness. Global Witness is an international nonprofit 
established in 1993 that examines corruption, poverty, and 
human rights. During her time at Global Witness, Ms. Ostfeld 
has focused on corporate transparency, anti-money laundering 
law, and the effective enforcement of antibribery and AML law 
in the oil, gas, and mining sectors. Ms. Ostfeld also served on 
the executive committee of the Financial Accountability and 
Corporate Transaction Coalition. Ms. Ostfeld has also served as 
senior policy adviser at the Global AIDS Alliance and the 
American Jewish World Service. Ms. Ostfeld earned a bachelor of 
science degree in engineering from the University of 
Pennsylvania and a master's degree in human rights from the 
University of Denver.
    Mr. Chip Poncy is the President and Cofounder of the 
Financial Integrity Network. FIN is a strategic and technical 
advisory firm dedicated to assisting its clients around the 
world achieve and maintain the financial integrity needed to 
succeed in today's global economy and security environment. 
Chip Poncy also serves as senior adviser of the Center on 
Sanctions and Illicit Finance, CSIF, at the Foundation for 
Defense of Democracies. From 2002 to 2013, Mr. Poncy served as 
the inaugural director of the Office of Strategic Policy for 
Terrorist Financing and Financial Crimes, OSP, and a senior 
adviser at the U.S. Department of the Treasury. As a senior 
adviser from 2002 to 2006, Mr. Poncy assisted Treasury 
leadership in developing the U.S. Government's post-9/11 
strategy to combat terrorist financing.
    Mr. Poncy graduated with honors from Harvard University and 
Johns Hopkins School of Advanced International Studies, and he 
holds a juris doctor from the Georgetown University Law Center.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony.
    Without objection, each of your written statements will be 
made a part of the record.
    And, Mr. Bley, you are recognized for 5 minutes.


                   STATEMENT OF DANIEL H. BLEY

    Mr. Bley. Chairmen Luetkemeyer and Pearce, and members of 
the subcommittees, thank you for the opportunity to present 
testimony on the need to modernize and improve the Bank Secrecy 
Act. I am Daniel Bley, Chief Risk Officer of Webster Bank, 
founded in 1935 and headquartered in Waterbury, Connecticut. 
Webster has $26 billion in assets and serves communities 
throughout New York and New England.
    Today, I am representing the Mid-Size Bank Coalition of 
America, the voice of 83 banks with headquarters in 34 States. 
MBCA banks are primarily between $10 billion and $50 billion in 
assets and support customers through more than 10,000 branches 
in all 50 States. MBCA members maintain combined deposits in 
excess of $1.2 trillion and are typically the largest local 
banks serving the basic banking needs of communities.
    The Bank Secrecy Act is amongst the most complicated and 
costly requirements with which a bank must comply, and it is 
one of the highest priorities for mid-size banks. MBCA banks 
deeply appreciate the importance of this regulation and our 
role in helping law enforcement identify and shut down illicit 
financial activity.
    We are committed to ensuring a successful program that 
reduces financial crime and protects our customers and our 
banks. To this end, MBCA banks have collectively invested well 
over a half a billion dollars in technology and are on average 
estimated to each spend upwards of $8 million annually on staff 
and support.
    Nearly all of the larger MBCA banks are using or are moving 
into more sophisticated technology for detecting suspicious 
activity well beyond the previous tools.
    The high cost is particularly concerning for mid-size banks 
that have significantly less scale than the large banks against 
which to spread these costs. MBCA applauds the idea as 
introduced with this bill and believes it will improve the 
program, benefiting businesses, consumers, law enforcement, and 
banks.
    And I would like to share our perspectives on four key 
components. Reporting thresholds, the proposed review of 
efficiency and effectiveness; changes to beneficial ownership; 
data collection; and the role of Treasury.
    The proposed change in reporting thresholds would be 
immediately and positively impactful for increasing information 
usefulness and reducing burden.
    We estimate, if implemented, the SAR (suspicious activity 
report) filings at mid-size banks would reduce by 8 to 10 
percent, and CTR filings by 50 to 80 percent. Together, this 
translates to an estimated 8 to 10 percent of BSA's staffing 
costs that are working solely on the half a million small 
dollar reports that are estimated to be filed by mid-size banks 
annually.
    Section 3 focuses on improving the process. And we believe 
all of the ideas included would achieve the objective. MBCA 
members are happy to share other specific ideas as well.
    One such idea is to establish a more structured or 
automated template with limited free text format. This would 
reduce complexity and could lower preparation time by 
potentially half or more without sacrificing usefulness. 
Another idea is to create a shorter form automated filing 
approach for small dollar reports.
    One concerning fact to be considered with this review is 
that the false positive alert rate for mid-size banks is 
estimated at over 90 percent, meaning detailed reviews of an 
excessively high number of transactions that are ultimately 
deemed to be unimportant. The proposed change to the beneficial 
ownership data gathering model is necessary as the existing 
regulation effective in May 2018 is suboptimal in many ways. It 
allows for uneven application. It creates data integrity risks, 
and it puts unnecessary burden on businesses to supply data to 
multiple institutions. The proposed public-sector-led approach 
efficiently solves for these challenges.
    MBCA banks appreciate the introduction of the expanded role 
of Treasury in steering supervision and support for innovation. 
This could increase transparency and consistency, elements that 
are critically needed. We hope this will also help reintroduce 
the risk-based approach to supervision that has been missing in 
recent years, even though it is captured in the existing act.
    We believe better solutions can be built if there was more 
coordination between Treasury, law enforcement, regulators, and 
the financial institutions.
    In summary, MBCA members appreciate and support this 
thoughtful bill. It successfully addresses the most important 
challenges in the current act, and it makes it better. It will 
benefit individuals and businesses, will strengthen law 
enforcement efforts with better information, and will reduce 
burden for banks so we can better serve our customers.
    Thank you again for the opportunity to testify, and I am 
happy to address any questions or concerns of the committee's 
interest.
    [The prepared statement of Mr. Bley can be found on page 46 
of the Appendix.]
    Chairman Pearce. Thank you.
    Mr. Byrne, you are recognized for 5 minutes.


                   STATEMENT OF JOHN J. BYRNE

    Mr. Byrne. Chairman Pearce and members of the 
subcommittees, I am John Byrne, and I have been part of the AML 
community for over 30 years. It is clear to me that the private 
and public professionals who have financial crime prevention 
functions are all dedicated to stopping the flow of illicit 
funds.
    We may disagree with how to achieve this collective goal, 
but no one can challenge the commitment of all of those 
involved. It is, therefore, so important that, as improvements 
are considered to what constitutes the AML infrastructure, all 
participants be actively consulted.
    I have seen all too often that the focus of the Bank 
Secrecy Act appears to be mainly regulatory compliance and not 
getting immediate access to law enforcement, information they 
need for investigations and deterrence of criminal abuse of our 
financial system. I have covered many of the provisions in 
today's proposal in my testimony, but I will highlight only a 
few.
    Sections 2 and 3. CTRs have been part of the AML fabric 
since 1972 and SARS since 1996. There was certainly value for 
law enforcement in both reporting regimes, but I feel that SARS 
are, without a doubt, more essential to successful 
investigations, prosecutions, and overall detection of 
financial crime. The subcommittee should be commended for 
attempting to review and improve these requirements.
    I would respectfully recommend, however, that there are 
elements in both reporting regimes beyond the dollar thresholds 
that should be considered for improvement, and they are 
identified in my testimony.
    While I respect Mr. Bley's views that he just espoused, in 
discussing the ideas of raising the threshold on CTRs, I talked 
to a number of institutions who said that, for them, it may 
have little impact on burden because automated systems have 
been implemented to assist in the identification of reportable 
transactions.
    I do not have enough data on all impacted filers to assess 
the pros and cons of raising the thresholds. So, if the 
subcommittees intend to propose such a plan, I would encourage 
that all participants in the filing process, especially law 
enforcement stakeholders, be included in discussions around any 
potential change.
    However, to both simplify and ensure law enforcement 
utility, I would submit there is a need for a new call to 
dramatically change cash reporting, and that is, eliminate all 
CTRs and have impacted financial institutions report cash 
activity directly to FinCEN. With this change, law enforcement 
would get direct access to cash activity at the levels decided 
by Congress with input, obviously, from law enforcement, and 
they could develop metrics on what activities, types, and other 
factors are important to the detection of all aspects of 
financial crime. It is clear to me that a change this massive 
couldn't be done overnight. So creating several pilot programs 
may be the best option.
    The subcommittees are also looking at suspicious activity 
reporting thresholds and adjusting those. I will leave to 
current members of the financial sector to comment, but I will 
say this: Many banks file SARS in the hopes that law 
enforcement will actually start an investigation. If the dollar 
amounts are raised, will there be less consideration to lower 
dollar frauds and financial crime? Also, as we know from our 
law enforcement partners, terrorist financing models have often 
occurred at extremely low dollar amounts, and so will we be 
losing valuable financial intelligence?
    Section 4. The subcommittees are also to be commended for 
the inclusion of section 4 that fixes a long-held barrier to 
enhancing information sharing. This is a welcome expansion and 
should result in more effective reporting and eventual 
detection of many forms of financial crime.
    Sections 5 through 7, on the no-action process, I think 
that will go a long way, if you create that, to prevent what I 
would call ``policy as rule'' that I talk about in my 
testimony. So that section, I think, deserves a lot of support.
    Section 7 highlights the use of technology. And several 
members have referenced that already today. One of the common 
complaints I have heard is that, all too often, regulators make 
it difficult for financial institutions to experiment with new 
tools for the fear of regulatory criticism during transitionary 
periods. This section may alleviate those problems.
    Section 9. One of the major recent challenges to the 
financial sector is the impending CDD (Customer Due Diligence) 
Rule that is required to be implemented next May. With the 
focus from FATF (Financial Action Task Force) and the media 
outcry from the Panama and Paradise Papers, we know that there 
is universal focus on the mechanisms used to obscure beneficial 
ownership of corporate vehicles. A direct obligation to file 
with FinCEN is indeed a welcome proposal.
    And then, last, I would be remiss if I did not also 
reference the collateral damage that can and does occur with 
confusion regarding risks in today's AML regime. When the 
financial sector receives limited advice and counsel regarding 
how best to manage risk, the logical response by some 
institutions is to exit or not onboard certain classes of 
customers. This concept, ``derisking,'' impacts access to the 
traditional banking sector and has harmed victims in conflict 
zones from receiving funding for water, utilities, and other 
resources.
    These subcommittees can provide a valuable service to the 
AML and global communities by adding to the studies and reports 
in the bill an update to the challenges regarding financial 
access.
    In conclusion, I would thank the subcommittee for this 
opportunity to offer my views on the need to change after 30 
years of AML. The key to going forward is to, whatever changes 
are made, ensure that improvements occur through private/public 
partnerships.
    Thank you for this opportunity, and I am also happy to 
answer any questions.
    [The prepared statement of Mr. Byrne can be found on page 
50 of the Appendix.]
    Chairman Pearce. Thank you.
    Mr. Fox, you are recognized for 5 minutes.


                   STATEMENT OF WILLIAM J. FOX

    Mr. Fox. Thank you, Mr. Chairman, and Ranking Member 
Perlmutter, thank you very much, and distinguished members of 
the subcommittee. I really am proud to be here today on behalf 
of The Clearing House, where I serve as the Chair of its AML 
Summit Committee. I have a few remarks that I would like to 
make to the subcommittees this afternoon.
    First of all, we would like to commend the House Financial 
Services Committee and the subcommittees that you chair on your 
leadership regarding our Nation's anti-money laundering and 
counter financing of terrorism regime, a regime that we believe 
is critical to our national security.
    The enactment of the USA PATRIOT Act more than 16 years ago 
was the last time that the Congress conducted a broad review or 
adopted significant amendments to our national regime. The 
current suspicious activity reporting regime remains largely 
unchanged since it was developed in the mid 90s. Similarly, 
large cash reporting regime remains largely unchanged, if not 
unchanged at all, since the Bank Secrecy Act was originally 
passed or enacted in 1970.
    Just think of what's happened since that time. Today, most 
banking business can be conducted from your mobile phone. Both 
money and information move in nanoseconds.
    It is very simple and common to move money across borders 
in ways never seen before. Even the concept of what money is, 
is changing. Today, anonymous cryptocurrencies are traded 
outside the formal financial system in a way that makes it 
increasingly difficult to know the source and purpose of the 
funds that have been moved.
    The Clearing House believes that the mechanisms through 
which our member institutions discharge their responsibilities 
under the regime are highly inefficient and outdated. We 
believe it is time to take a fresh look. A core problem with 
the current regime is that it is geared toward compliance 
expectations that bear little relationship to the actual goal 
of preventing or detecting financial crime. These activities 
require different skill sets, tools, and work. All of this begs 
a question: What is the ultimate desired outcome of our 
Nation's AML/CFT regime in a post-September 11th-2017 world? 
The Clearing House believes we should start by defining clear 
and specific measurable outcomes or goals for each component of 
our national regime, including the anti-money laundering 
programs that exist in financial institutions.
    Progress toward achievement of these goals should be 
measured and reported. From these outcomes or goals, priorities 
should be set for the components of the regime, similar to the 
prioritization that occurs in our intelligence community. We 
believe defining and measuring desired outcomes would change 
the focus in financial institutions from one that is focused on 
technical compliance to one that is focused on achieving 
desired and measurable outcomes of the regime. In other words, 
the programs will be effective.
    To that end, in early 2017, The Clearing House issued a 
report offering recommendations on redesigning our national 
regime to make it more effective and efficient. Many of the 
concepts found in the report are reflected in the Counter 
Terrorism and Illicit Finance Act before the subcommittees 
today.
    I will quickly go through a couple of the recommendations 
that The Clearing House is making.
    First, relating to prioritization. The Clearing House 
believes that the Treasury should take a preeminent role in 
setting policy, measurable outcomes, coordinating and setting 
priorities, as well as in examining institutions' compliance 
with and enforcing our national regime.
    Treasury is uniquely positioned to balance the sometimes 
conflicting interests relating to national security, the 
transparency and efficacy of our global financial system, the 
provision of highly valuable financial intelligence to the 
right authorities, financial privacy, financial inclusion, and 
international development.
    Second, regarding rationalization, The Clearing House 
supports the draft legislation study of current BSA reporting 
requirements. Enhancements to information sharing and 
enterprise-wide suspicious activity information sharing, as 
well as the exclusion of a Federal beneficial ownership 
recordkeeping requirement.
    Due to our size and geographic footprint, at Bank of 
America, we are one of the largest filers of currency 
transaction reports and suspicious activity reports in the 
United States. Other than anecdotes about the usefulness of our 
reporting, we do not receive direct feedback from the 
Government on whether the bulk of our reporting is useful or 
not. At Bank of America, in order to try to measure the 
usefulness of our reporting, we have developed a metric 
tracking when we get follow-up requests from law enforcement or 
regulatory agencies for backup documentation relating to our 
reports.
    Today, we receive such requests in connection with roughly 
7 percent of the suspicious activity reports that we file. From 
my time in the Government, I know that these reports are used 
in many different ways. Most of which do not require the backup 
documentation that you can get through the SAR process. 
Accordingly, I think our reporting is far more effective than 
the metric would say. However, I do not know that for sure.
    Measuring the usefulness of suspicious activity reporting 
would also help the Government rationalize whether the 
reporting, which may be technically required under the law, is 
ultimately useful in achieving the goals of our AML/CFT regime. 
We are pleased to see the draft legislation would require a 
Treasury-led study to review the current reporting regimes 
under our AML/CFT regime, and we believe that that is really 
important.
    The third area we would like to cover is innovation. The 
Clearing House supports the language in the draft bill 
encouraging innovation. We have some ideas in our testimony, 
and we have covered that pretty well there.
    With that, Mr. Chairman, we are ready to take questions.
    [The prepared statement of Mr. Fox can be found on page 58 
of the Appendix.]
    Chairman Pearce. Thank you, Mr. Fox.
    Ms. Ostfeld, you are recognized for 5 minutes.


                  STATEMENT OF STEFANIE OSTFELD

    Ms. Ostfeld. Thank you. Good afternoon, Chairman Pearce, 
Ranking Member Perlmutter, and the distinguished members of the 
subcommittees. Thank you for holding this important hearing and 
inviting Global Witness to testify.
    We are an investigations and advocacy organization that 
seeks to expose and break the links between natural resources 
and corruption and conflict. For the last 6 years, with Global 
Witness, I have been looking at how illicit funds flow through 
the system. And there are three things that have really struck 
me.
    Now, the first is that, in basically every case of 
corruption we have ever investigated, anonymously owned 
companies have been used to move and hide money. The second 
thing I have noticed is it is not just corruption. Anonymously 
owned companies are what unite all crimes that generate money. 
But perhaps what is most striking is how easy and common it is 
to set up an anonymously owned company right here in the United 
States. We are at the heart of this problem.
    Global Witness is very encouraged that the committee is 
interested in advancing beneficial ownership legislation and 
strengthening U.S. anti-money laundering laws. A bill that is 
fit for purpose needs to collect the right information, make it 
accessible to the stakeholders who need it, and ensure that the 
beneficial ownership information is kept up to date.
    The discussion draft did some of this, but we have a number 
of concerns. So my written testimony concerns 14 detailed 
recommendations of how you could strengthen the proposed 
legislation, but I am going to use the remainder of my time to 
briefly discuss seven of them.
    So, first, with respect to section 9, the discussion draft 
favors bank's access to beneficial ownership information while 
severely limiting domestic law enforcement's access, because it 
only allows Federal law enforcement to access beneficial 
ownership through a criminal subpoena. This means State and 
local law enforcement do not have direct access to it, even 
though the bulk of U.S. criminal investigations happen at the 
State and local level. It also means that Federal agencies that 
only have civil and administrative subpoenas aren't able to 
access it either.
    Law enforcement officers need to be able to acquire company 
ownership information quickly and easily without alerting the 
subjects of the investigation.
    The bill needs to ensure domestic law enforcement has 
access, and this includes Federal, State, and local, to 
FinCEN's database of beneficial ownership information. At a 
minimum, the language in the discussion draft needs to be 
amended to allow civil, criminal, or administrative subpoenas 
or summons or the equivalent at the State, local, and Federal 
level.
    Second, the discussion draft also severely limits foreign 
governments access to beneficial ownership information. It 
excludes cases that involve civil misconduct, like securities 
violations, business misconduct, patent and copyright 
violations, cybersecurity violations, but it also goes a step 
further, that there is language in the discussion draft that 
will severely limit its utility to foreign governments when 
they are trying to access beneficial ownership information. It 
means they can only access it for an intelligence purpose and 
not for a law enforcement purpose. For it to serve the law 
enforcement purposes of foreign governments, beneficial 
ownership information needs to be able to be introduced in 
court. This means it could be discoverable at a later date. As 
written, it appears to prevent this. It has little utility to a 
foreign prosecution.
    Third, the discussion draft appears to favor foreign owners 
over U.S. applicants. It must require foreign nationals to file 
their beneficial ownership information with FinCEN, and this 
needs to include submitting a scanned copy of the relevant 
pages of their non-expired passport to FinCEN.
    Fourth, an enforcement mechanism should be added to the 
discussion draft to ensure that applicants file beneficial 
ownership information with FinCEN. As written, it doesn't have 
one.
    Fifth, banks should implement the customer due diligence 
rule on time in May 2018. There is a clearly identified need 
for banks to be collecting beneficial ownership information for 
their customers so that they can assess risk. If this proposed 
legislation becomes law, regardless of how long Congress gives 
FinCEN to set up the database, it is going to take a 
significant amount of time to get it up and running and 
populated with the required beneficial ownership information. 
Adequate customer due diligence within banks, which is what the 
regulation requires, cannot stop in the interim because the 
banks need to know its customer does not stop.
    Sixth, the CTR and SAR reporting threshold shouldn't be 
raised as proposed in the legislation as it would create a 
record-free zone for a much larger number of transactions. It 
would lift the burden on wrongdoers, like drug traffickers and 
terrorists, who must deal in cash, while doing very little or 
nothing to relieve any burden on legitimate commerce.
    And, seventh, finally, while banks play an important role 
in keeping dirty money and terrorist finance from entering the 
U.S. financial system, they shouldn't be alone in bearing that 
responsibility. Those seeking to move suspect funds utilize the 
services of a wide range of professional gatekeepers to the 
financial system who handle large sums of money. Company 
formation agents, the real estate sector, and transactional 
lawyers should also be required to know with whom they are 
doing business and engage in efforts to prevent their services 
from being used to launder dirty money.
    So thank you for inviting me to testify today and share my 
views on this important issue. Global Witness looks forward to 
working with you and your colleagues on the subcommittees to 
strengthen U.S. anti-money laundering framework so we can stop 
the U.S. from being a safe haven for illicit money and 
terrorist financing from around the world. Thank you.
    [The prepared statement of Ms. Ostfeld can be found on page 
69 of the Appendix.]
    Chairman Pearce. Thank you.
    Mr. Poncy, you are recognized for 5 minutes.


                     STATEMENT OF CHIP PONCY

    Mr. Poncy. Thank you, Chairman Pearce, Ranking Member 
Perlmutter, and distinguished subcommittee members. I am 
honored to testify before you today.
    We are confronting a pivotal moment in our 48 years of 
combatting illicit finance under the Bank Secrecy Act, more 
commonly known as the BSA. As our counter illicit financing 
efforts have become more important, they have also become 
increasingly challenged. This is provoking fundamental 
questions, including about effectiveness, efficiency, costs, 
roles, and responsibilities. The combination of these 
developments necessitate significant reform of the BSA and the 
expanded AML/CFT regime it supports.
    This hearing marks an important and welcome opportunity to 
discuss how best to pursue such reform. I am grateful for the 
leadership of these subcommittees in addressing these issues 
for the reasons that my colleagues here have spoken.
    The draft Counter Terrorism and Illicit Finance Act 
proposes bold and necessary changes required to address many of 
the urgent challenges we face, challenges in combatting all 
forms of illicit financing, and in protecting the integrity of 
our financial system and our national security. Such proposed 
legislation also reflects the congressional leadership required 
to take action to secure these vital interests.
    However, Congress should amend this proposed legislation to 
further strengthen the effectiveness and to further promote the 
efficiency of our AML/CFT regime. My recommendations for such 
amendments are explained at length in my written testimony and 
may be summarized as follows.
    One, incorporate into the proposed legislation a new 
section expanding the objectives of the BSA to explicitly 
include protecting the integrity of the financial system and 
protecting our national security. Such clarification of purpose 
will recognize the heightened importance of what we do through 
our AML/CFT regime and will help guide our efforts moving 
forward.
    Two, incorporate into the proposed legislation a new 
section, first, to restructure and enhance financial 
investigative expertise at the Department of the Treasury and, 
second, to provide protected resources to law enforcement, the 
intelligence community, and counter illicit financing targeting 
authorities. Such action is required to more effectively and 
consistently pursue illicit financing networks. It is also 
necessary to fully capitalize on the investments that our 
financial institutions are taking to support these efforts.
    Three, strengthen section 3 of the proposed legislation to 
direct a more aggressive approach for Treasury to enhance 
financial transparency. Such action is required to address 
longstanding and substantial vulnerabilities in our financial 
system. Such actions are also necessary to fully leverage new 
technologies and providing more information at a lower cost to 
our financial institutions.
    Four, strengthen and expand the information-sharing 
provisions in sections 4 and 7 of the proposed legislation. 
This action will enable our best financial investigators from 
the Government to work directly with our best analysts in the 
industry to attack illicit financing networks.
    Five, strengthen section 6 of the proposed legislation by 
directing Treasury to develop and expand initiatives and 
consultations with industry. Such initiatives and consultations 
should inform priorities for U.S. policies across the full 
spectrum of combatting illicit finance, money laundering, 
terrorism financing, sanctions compliance, bribery, and 
corruption.
    Such consultation should also stimulate operational pilots 
to capitalize on expanded information-sharing authorities and 
capabilities.
    Six, amend section 9 of the proposed legislation to support 
urgent implementation of the Treasury CDD Rule while supporting 
urgently the adoption of company information reform. Both of 
these actions are essential to our national security. This has 
been discussed at length through two decades of testimony, 
including in front of this committee. It is not an option to 
pursue company information reform or customer due diligence by 
financial institutions. For reasons that have been elaborated 
at length in my testimony and from testimony from others for 
decades, both of those actions are necessary. I am very happy 
to take questions on that issue.
    I would like to close with a word of thanks to all of you, 
to my friends, partners, colleagues across the AML/CFT 
community, and to my family. My family has given me the freedom 
to contribute to this mission, both in Government and in 
private practice. Finally, I would like to recognize and 
welcome Maddy Poncy, an 11-year old reporter from the Hunters 
Wood Elementary School, and urge her to continue to educate the 
next generation about the importance of public service.
    Thank you.
    [The prepared statement of Mr. Poncy can be found on page 
88 of the Appendix.]
    Chairman Pearce. Thank you. The Chair now recognizes the 
Ranking Member of the full committee, the gentlelady from 
California, for 2-1/2 minutes for comment, opening statement.
    Ms. Waters. Thank you very much for convening today's 
hearing and for the opportunity to discuss two proposals. One 
that sharpens the Nation's focus in countering human 
trafficking, and another that would make broad reforms in an 
effort to modernize the Bank Secrecy Act. This latter proposal 
aims to achieve two important objectives: One, strengthen the 
efficacy of our current anti-money laundering framework and, 
two, reduce any undue compliance burdens.
    These are worthy objectives and are reflected in a number 
of important provisions in the bill, including sections that 
would address vulnerabilities associated with anonymous shell 
companies and provide financial institutions with greater 
feedback. Nonetheless, a number of other provisions in the 
discussion draft fail to strike the appropriate balance and 
warrant additional scrutiny.
    In particular, while compliance issues that community banks 
and credit unions face is an important consideration, we 
should, for example, be careful not to lift SAR and CTR 
reporting thresholds if doing so undermines law enforcement's 
ability to stop bad actors. Similarly, while the no-action 
letter concept and encouragement of the use of technology may 
provide welcome clarity for institutions, these provisions need 
to be more carefully scoped to minimize potential harm. 
Additional care must also be given to address privacy and civil 
liberties concerns before altering the information-sharing 
powers under the PATRIOT Act. Finally, more must be done to 
close other known vulnerabilities and our anti-money laundering 
rules, especially in the real estate sector.
    So I look forward to the opportunity to working 
collaboratively to perfect these missions. And I thank you so 
much, Mr. Chairman.
    And I yield back my time.
    Chairman Pearce. The gentlelady yields back.
    We turn now to questions, and the Chair now recognizes 
himself for 5 minutes for questions.
    Mr. Byrne, in the testimony before the Senate Judiciary 
Committee yesterday, the Assistant Attorney General Kenneth 
Blanco stated that ``the pervasive use of front companies, 
shell companies, nominees, and other means to conceal the true 
beneficial owners of assets is one of the greatest loopholes in 
this country's AML regime.'' The Financial Action Task Force in 
its December 2016 evaluation of the United States anti-money 
laundering efforts identified the lack of requirement for the 
collection of beneficial ownership information as the most 
critical vulnerability in our efforts to combat money 
laundering and illicit finance. This law has allowed criminals 
to hide their identities and abuse our financial system through 
anonymous shell companies. So the rest of the world is 
addressing the question far more thoroughly than we are. Is our 
country, the United States, at risk of becoming the haven for 
criminals?
    Mr. Byrne. I don't think there is any question, Mr. 
Chairman, that the lack of information gathering that currently 
exists is more than problematic.
    I think we have always talked about--and Chip alluded to 
this in his testimony--we have talked about this in terms of 
the CDD Rule being one part of this and beneficial ownership 
part of that being separate. The fact that we have States in 
this country where corporate formation information is so 
limiting I think does make it much easier to create these shell 
organizations and these front companies. So I do think--and I 
think the FATF is focused on that as well. So I think the fact 
that this subcommittee--these subcommittees are looking at 
making those adjustments, that there is a rule that is pending, 
will go a long way toward helping that, but it does, as an AML 
professional, it does concern me about the ease in which 
corporate formations issues can occur in the States to be 
fronts for illegal activity. Absolutely.
    Chairman Pearce. How is the information used by law 
enforcement if this beneficial ownership information is 
provided?
    Mr. Byrne. How is?
    Chairman Pearce. How is that information used by law 
enforcement? What are the processes? What do they use it for?
    Mr. Byrne. Well, for investigative purposes, to follow up. 
I would certainly defer to some of my other panelists. But I 
think there is a long history of law enforcement saying they 
need that information. And I know that the FBI and other 
organizations have come before this subcommittee and others to 
say how important it is to get access, more access to that 
information.
    Chairman Pearce. All right.
    Mr. Bley, in your testimony, you mentioned the CDD Rule 
that goes into effect next May. And you comment that it is 
going to place unnecessary burden on our businesses, would slow 
the account-opening process, and would increase maintenance 
costs.
    Can you explain some of the negative impacts on businesses 
from a CDD Rule and describe how our proposal would help 
alleviate those burdens while still ensuring law enforcement 
has the information they need?
    Mr. Bley. Absolutely. There is an agreement amongst all the 
mid-size banks that collection of this data could add value 
from a law enforcement perspective. And the real question is 
just what is the most efficient way in which that information 
should be gathered, most efficient, not just for banks but also 
for all the businesses throughout the country. And we believe 
the public sector approach is the most efficient because it 
allows for better data integrity, a more efficient process 
where businesses only have to submit the information one time 
in a consistent way, and it is not impacting their ability to 
work with their various financial institutions.
    And so the combination of all those affects means it is 
just a more efficient and effective program. It also allows all 
the information to be centrally captured in one way and 
accessible by all those that need it in order to perform their 
activities.
    Chairman Pearce. Mr. Fox, as the Office of Comptroller of 
the Currency releases on an annual basis its bank supervision 
plan that sets forth the agency's supervision priorities and 
objectives for the upcoming fiscal year, I am interested in how 
this process helps financial institutions prepare for their 
exams. And then, similarly, would a similar process work for 
AML/CFT priorities if the Treasury Department released those 
annually? Is that helpful for compliance obligations? Give us 
some input on that.
    Mr. Fox. Sure.
    Mr. Chairman, actually, we study that quite closely because 
knowing the priorities of our supervisor, our principal 
supervisor in the United States, helps us plan and make sure 
that we know what the agency is going to care about, and what 
they are likely to come and examine and ask us about, right? So 
it causes a focus in the institution and that prioritization 
actually becomes, in many ways, the institution's 
prioritizations. So that is, it is very helpful for planning.
    I think it would be helpful in the AML space. As you know, 
one of the OCC's (Office of the Comptroller of the Currency) 
principal priorities for the last few years has been BSA AML 
exams.
    Chairman Pearce. Thank you all. My time has expired.
    The Chair now recognizes the gentlelady from Arizona, Ms. 
Sinema, for 5 minutes.
    Ms. Sinema. Thank you, Mr. Chairman, and thank you to our 
witnesses for being here today. Human trafficking is a growing 
multibillion dollar problem that demands action by the Federal 
Government and Congress. Terrorist organizations like ISIS 
employ human trafficking as a means of funding their operations 
while terrorizing and tormenting local communities. There have 
also been over 36,000 reported cases of human trafficking in 
the U.S. since 2007. And nearly 7 in 10 of those cases involve 
sexual exploitation.
    The rise of the Internet changed the human trafficking 
landscape in the United States. Prostitution has expanded from 
the streets to the online marketplace where victims, many of 
whom are children, are traded to the world.
    According to the Department of Justice, traffickers make on 
average $150,000 to $200,000 dollars per child. I believe we 
have a moral obligation to protect victims of human trafficking 
and a national security responsibility to cut off the financial 
means used by traffickers and terrorists.
    I am grateful to Congressmen Royce and Keating, 
Congresswomen Maloney and Love for introducing H.R. 2219, the 
End Banking for Human Traffickers Act of 2017, and I am proud 
to be a co-sponsor of this bipartisan legislation.
    The bill includes the Secretary of the Treasury and the 
President's interagency task force to monitor and combat 
trafficking. It requires the task force to recommend revisions 
to anti-money laundering programs to specifically target money 
laundering linked to human trafficking. And I appreciate the 
committee's work to improve and advance the bill.
    My question for you, Mr. Byrne, and thank you again for 
being here today, your testimony has cited the need for greater 
private sector expertise and the President's interagency task 
force to monitor and combat human trafficking. Can you expand 
on some of the concerns you have about current practices and 
tell us what Government might be missing?
    Mr. Byrne. Sure. And we do appreciate the drafting of the 
legislation.
    I think, as I said in my testimony, one of the things that 
perhaps the private sector hasn't done well is explained how 
much has actually gone on proactively against human 
trafficking. In my previous role with the ACAMS organization, 
we began a relationship with Polaris, as I think the committee 
is aware. It is a well-respected international anti-human 
trafficking organization. And what we have been able to do with 
Polaris--and just met with them 10 days ago--is sit down with a 
number of bankers that do analytics and with Polaris' staff--
they have just recently come out with a study on new typologies 
on human trafficking--and to try to put those two groups 
together to create more red flag indicators, more examples 
where banks could be--and financial institutions in general--
can be on the lookout to report human trafficking activity, 
whether it is forced labor, sex trafficking, all the different 
categories. So that relationship with Polaris occurs outside of 
any regulatory requirements.
    Previous to that, the number of large financial 
institutions, including Mr. Fox's Bank of America, worked 
closely with Homeland Security to do something similar 3 to 4 
years ago. They created a number of, again, red flags and 
indicators. And we published that--``we,'' meaning the trade 
association--we published that to the broader AML community so 
they could be better prepared to look for activity that could 
be indicators and file suspicious activity reports.
    So Homeland Security has done a tremendous amount of work 
here. They have been with Operation Blue and all the other 
things that--the Blue Campaign and everything else that they 
have done--have been tremendous partners. But there is a lot of 
private sector expertise that we are beginning to share with 
the public sector that I think can enhance how we look for, 
report, and detect this. And so there is a lot of information 
out there.
    What we are doing with Polaris will be available probably 
early next year and certainly can make the committee--make that 
information available. But you should feel somewhat comforted, 
as horrific as this crime is and has challenged the world for 
so long, that the private sector is working very diligently 
with both the public sector and groups like Polaris to deal 
with this.
    I would only say this about the legislation. Whatever gets, 
quote, ``required,'' if you consult with the private sector in 
terms of training and other issues, I think it would make it a 
better piece of legislation. But the theme makes a lot of sense 
and I think would go a long way to continue to help in this 
very challenging space.
    Ms. Sinema. Thank you, Mr. Byrne.
    Mr. Chairman, I yield back.
    Chairman Pearce. The gentlelady yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman, and excuse my 
voice.
    I would like to thank each of you for being here today. 
Your input, advice, is very important for this committee. I 
would like to particularly thank Mr. Fox and Mr. Poncy for the 
extraordinary role that you played in building a stronger 
collaboration with our partners throughout the world, and over 
60 countries have benefited from your input and your direction.
    To that end, I would like to ask you, Mr. Fox, that, in 
your opinion, what do financial institutions--what type of 
difficulty do they have in sharing information with our law 
enforcement and as it relates to similar investigations with 
other countries around the world? Can you speak to those 
challenges?
    Mr. Fox. Sure. Congressman, thank you very much. And thank 
you for your comments.
    I think that the sharing of information, both vertically, 
if I can call it that, from the Government to the private 
sector, and then among the private sector themselves is one of 
the most important ways that we can attack illicit finance. And 
some of the really serious problems that Ms. Sinema--was 
speaking about with human trafficking and things like that. I 
think one of the challenges that we have is that we have 
authority here in this country through the U.S. PATRIOT Act 
provisions to be able to do that. It is done aboveboard. It is 
done with care. But at the same time, it is done robustly.
    And we, you are aware, Congressman, about our consortium of 
banks that has really made a difference in some of these areas, 
like human trafficking and other more sensitive areas.
    So that is a great, great thing. The difficulty is sharing 
with other governments, and that sort of thing. The U.K. itself 
has developed a little bit different system. They are using a 
committee format, something that they call the Joint Money 
Laundering Investigations Task Force, the JMLIT. And that has 
worked well in the U.K. We participate in the U.K. because we 
are there. And we think that that works. And in fact, in some 
ways, it is nice because you always have to come to the 
committee and you have to come with something. So there is 
always a topic to talk about.
    But other jurisdictions, it is not as easy to share 
information, either with financial institutions themselves or 
vertically with the Government without some extraordinary 
process.
    Mr. Pittenger. Does law enforcement provide you with a 
request for information through a 314(a) request or some other 
matter?
    Mr. Fox. Well, Congressman, we get the routine requests 
that we get from FinCEN every 2 weeks. But I think, more 
importantly, law enforcement has really stepped up over the 
last year, year and a half, I would say, maybe 2 years, with 
requests and with work, kind of almost joint work with 314(a) 
information. And that has made a huge difference for those 
investigations and those law enforcement agencies when they 
have done that.
    Mr. Pittenger. Thank you.
    Mr. Poncy, currently it is difficult for financial 
institutions to share information across borders with other 
branches of the same institution. How does this actually create 
more risk in the financial system?
    Mr. Poncy. Thank you, Representative Pittenger. And thank 
you for your leadership on the Task Force to Combat Terrorism 
Financing. You guys have done terrific work over the last 
several years, both here and abroad. I want to recognize that 
and thank you for it.
    The cross-border information-sharing issue is central to 
our efforts to understand risk. When you look at how the 
international financial system works and the bad guys that we 
are chasing through it, anybody worth chasing is in several 
different places, different institutions, different countries. 
And if we are not able to connect those dots, we are in a very 
difficult position, whether in industry or in Government, 
trying to figure this out.
    The idea of allowing a financial institution to share 
information with its branches, its affiliates abroad, which is 
captured in the proposed legislation, is overdue and will be 
very helpful.
    As I argue in my recommendations, I think there is more 
that we can do. Part of this challenge is cross border. Part of 
this is the way that we share information and who is in the 
room, what kind of information we are sharing. Think of it this 
way: The way that the BSA was developed was transactional and 
reactive. We were looking for specific individuals and actors 
and specific institutions based on specific transactions or 
vice versa. The way the system works now, we have the ability 
to turn the lights on. We have the ability to look at risk more 
systemically with more information to identify patterns of 
activity proactively. The more that we can do to allow our 
institutions and our authorities to work together with more 
information using the latest technologies to understand what 
risk looks like and then pursue it, the more effective and more 
efficient we will be. Those principles are clear. The real 
question is, how do we get from here to there?
    I think what you have done in this proposed legislation, to 
put Treasury in a position to manage this, is exactly the right 
way to go. And there are more details in my specific 
recommendations, but that is the general thrust.
    Mr. Pittenger. Thank you.
    Chairman Pearce. The gentleman's time is expired.
    The Chair will now recognize the gentlelady from California 
for 5 minutes for questions.
    Mr. Perlmutter. She is not here.
    Chairman Pearce. I will recognize the Ranking Member for 5 
minutes, Mr. Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman, and thank you to our 
panelists.
    I appreciate your testimony.
    So, Mr. Poncy, you are talking about exactly the purpose of 
this bill, that we are trying to be more effective, more 
efficient bring ourselves into this century with the 
legislation, with the innovation, that is possible. And I think 
both sides of the aisle are supportive of this.
    We have seen that there are just a lot of ineffective kinds 
of requirements of the financial industry to try to prevent bad 
guys from doing bad things. We want to be better at that. One 
of the big expansions, however, is in section 4, page 5, of the 
proposed legislation, lines 8 through 16. And it is a very 
innocuous section, but it is a pretty big expansion. So it 
says, in this, we change the PATRIOT Act--and I would open this 
to all panelists--by striking ``terrorists or money laundering 
activities'' and inserting ``terrorist activities, money 
laundering activities, or a specified unlawful activity as 
defined in section 1956(c)(7),'' which seems pretty limited on 
its face, except, if you go to that section, there are a couple 
hundred crimes, from endangered species to pollution to 
nutrition to housing to mail theft.
    Can somebody explain to me why we want to expand it in this 
fashion? Because this is a hot button spot for privacy 
advocates and others.
    Mr. Poncy. Thank you so much, Congressman Perlmutter. That 
it is a great question.
    The frustration is, when you look at the expansion of money 
laundering and money laundering predicates over the past 30 
years, it is astounding. We started in the BSA looking for 
cash, looking for drug money, looking for tax compliance. It is 
now clear under global standards and under U.S. law, under 
1956, that all forms of serious criminal activity create 
proceeds that then are subject to money laundering prosecution, 
confiscation, and pursuit. We need those authorities. They 
exist now in 1956.
    The question is, if you are trying to understand risk in 
the financial system, you may see something that doesn't look 
right, you may think it is suspicious, you may not know if it 
is money laundering, terrorism financing, you may not know if 
it is fraud. If you have to tie that information-sharing 
request to a specific understanding of money laundering, you 
are going to put a chilling effect on information sharing.
    If you expand it to say we already have money laundering 
covering everything in 1956 for a reason, enabling our 
financial institutions to share information even where they are 
not sure whether it is a predicate offense or money 
laundering--is it an act of money laundering? Is it an act of 
crime?
    There have been rulings and administrative rulings from 
FinCEN on this that are fairly narrowly interpreted, because it 
concerns the way 314, the PATRIOT Act, was written. What is 
very clear in the debates over the last 16 years is that that 
expansion that you have read is going to enable more sharing of 
information around what everyone agrees is suspicious or 
criminal activity but might not qualify under the narrow 
constriction of 314. That is the intent.
    Mr. Perlmutter. I think the concern that was raised by the 
defense bar was that it is just a very big expansion and that, 
potentially, whether it is the banking institutions or some 
others are now really detectives all the time and a fear that, 
instead of we get more limited in SARs, we are now expanding 
SARs. So just a general concern for those of you to think 
about.
    The second area I would like to talk about is really Mrs. 
Maloney's section of the bill on beneficial ownership. And the 
complaint that I have received is initially, should the 
financial institutions be the police or the initial detectives, 
should the lawyers be that, or should it be somebody else?
    I would just open it up to the panel, why this burden 
should be shifted at all and whether or not the IRS ought to 
play a role. Mr. Hill has mentioned to me, everybody sends 
their tax return into the IRS; why don't we just use them as, 
in effect, a clearinghouse?
    And I would just open it up in my last 12 seconds to 
anybody who can answer it--in now 8 seconds.
    Mr. Fox. Thank you, Mr. Ranking Member.
    Listen, I think we all just recognize that the information 
is highly valuable to law enforcement. We think that by the 
financial institutions collecting--we want the information, 
frankly, ourselves. We can use it to do our work. Right? But 
the fact is law enforcement is not going to have ready access 
to our data unless they have a reason to suspect that some 
entity is doing something untoward and they could subpoena.
    So we actually support that. I think Mr. Hill has a really 
interesting idea where some recipient gets this. I think it 
should be studied and thought about a little bit, but we at The 
Clearing House support it. Because we think the information 
should be gotten, and it shouldn't be the institutions just to 
get it.
    The other thing to remember is that the institutions are 
going to collect to the rule, which is 25 percent. If it is 
less than that--
    Mr. Perlmutter. You won't.
    Chairman Pearce. The gentleman's time has expired.
    The Chair would now recognize the gentleman from 
Pennsylvania, Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Mr. Bley, section 2 of the Counterterrorism and Illicit 
Finance Act addresses threshold updates to currency transaction 
reports and suspicious activity reports.
    Can you describe to us how increasing the CTR/SAR 
thresholds would reduce regulatory burdens on financial 
institutions and their customers?
    Mr. Bley. Certainly. Thank you for the question. And I 
have, actually, two answers to that.
    I can give you the exact numbers. We do our analysis, and 
we can see that increasing the thresholds is going to reduce 
the number of filings. It is a pretty straightforward 
calculation. And it is impactful, because there are a 
significant number of large--a large volume of small-dollar 
reporting and filing that takes place.
    But, frankly, the MBCA's view on this is not that the 
actual threshold level exactly or precisely is what is at stake 
here; it is really part of a holistic solution to improving the 
efficiency of the program. Having an excessive number of false 
positives, an excessive number of filings on small-dollar cash 
transactions is just not going to deliver valuable information 
that is going to be of significance.
    But, ultimately, what we believe is best is the combination 
of everything. And one idea that we put out is the possibility 
of some form of--a different form of reporting that would be 
more efficient and effective for smaller-dollar reports.
    And so it doesn't, per se, matter whether it is a $30,000 
limit or a $25,000. What matters is that it is an efficient and 
effective delivery of small-dollar information. But we also 
believe that, fundamentally, the sheer volume that is being 
submitted could not possibly be used effectively for 
investigations. It might ultimately connect to a financial 
crime, but we are talking about numbers that are so extreme, it 
is hard to believe that it could be as valuable.
    Mr. Rothfus. If I could move over to Mr. Fox, could you 
give us a little more background on the SARs? Can you please 
describe how a SAR is triggered and why certain activities, 
regardless of the transaction amount, trigger them?
    Mr. Fox. Sure.
    So what we do and what I think most institutions do is that 
we have sophisticated systems or processes, if you are not big 
enough for systems, to really try to detect what could be 
unusual activity, right, for our customers. So it all starts 
with your customer, knowing your customer, knowing what is 
normal for them, and really understanding what could be.
    If you see activity that just doesn't make sense for either 
that type of customer or you see activity that really does look 
bad, then that gets escalated to an investigation, where an 
analyst actually looks at that material and will make a 
judgment about whether or not it is suspicious.
    Suspicion is a pretty low threshold. Actually, it is one of 
the lowest, I think, in the Federal system. But it still is a 
threshold. So if we think that the facts--these are fact-based 
judgments--demonstrate that there is something that is 
suspicious, we will then move to file a report on it.
    Mr. Rothfus. And, to be clear, increasing SAR thresholds 
should not deter filings of suspicious reports of any amount, 
correct?
    Mr. Fox. I don't know that for sure, sir. I don't think it 
would with us. I think we would continue to file suspicious 
reports.
    The danger of increasing a threshold, I think, is that you 
could say that--right now, we do not file SARs unless it is 
extraordinary under the $5,000 threshold that exists today. 
Right? So what we take that rule to mean is that the Government 
has told us that they are not interested if it is below $5,000, 
with some exceptions. But if we see something that is odd at 
$100 or $25 that we think could be related to something 
serious, we are going to file that SAR.
    Mr. Rothfus. Mr. Poncy, as you know, the Counterterrorism 
and Illicit Finance Act details a no-action letter policy that 
is meant to increase certainty for institutions.
    How important is it that we allow financial institutions to 
experiment with their AML programs for the purposes of 
improving their efforts to identify money laundering and 
terrorist financing?
    Mr. Poncy. Thank you, Congressman.
    I think such experimentation is incredibly opportunistic. 
The compliance officers and the risk managers we have in our 
financial institutions are increasingly entrepreneurial, and 
the more that we can encourage them to think with us on how to 
assess and manage risk, the more effective our system will be.
    Giving them the latitude to do that involves two things. 
One, they have to be protected from downside exposure. If there 
is any exposure--as a general counsel for a financial 
institution, it is very difficult to say, I want to go play in 
that game where we can find bad guys if it is going to expose 
me to regulatory risk or to enforcement risk. It is very hard 
to responsibly allow that. So we have to cover the downside 
risk for well-intentioned and legitimate efforts to pilot new 
innovation. We have to do that.
    Second, there has to be upside for that to say, I am going 
to now put resources out of where I know I need them because my 
examiner and others are telling me and put them in a place 
where I can experiment and try to be better. What is my upside 
in that? There are ideas that Treasury or ideas that these 
folks have that we have talked about for literally a decade.
    Again, the structure of management in the BSA here is 
critical. And putting Treasury in a position where it could 
aggressively cooperate with industry in stimulating these sorts 
of operational pilots, I think, will create a market on how 
better to assess and manage all the risks that we care about, 
from terrorism financing to money laundering, to human 
trafficking, to tax evasion, to bribery and corruption.
    Mr. Rothfus. I thank you. And my time has expired.
    Chairman Pearce. The gentleman's time has expired.
    The Chair would now recognize Mr. Lynch for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman and also the Ranking 
Member, for arranging this hearing. You have been doing great 
work. I really appreciate it.
    And I want to thank the witnesses for helping the committee 
with its work, as well. Thank you.
    I have to say that I think there are a lot of good things 
that are being raised in this discussion draft. There are one 
or two things that concern me on the negative side. And that is 
raising the cash transaction, the reportable amount from 
$10,000 to $30,000.
    So, right now, if you have a transaction $10,000 or over 
the bank will take identification, a license, a Social Security 
number, and make that whole report. The draft discussion wants 
to raise that to $30,000. Now, this is a per-day limit. So, 
under the discussion draft, if we went to $30,000 in cash, you 
could literally take $179,000 in cash, in transactions--and 
that includes deposits, withdrawals, and currency exchange, so 
if we are changing from dollars to rubles or rubles to 
dollars--you can basically do $180,000 or just $179,000 in cash 
per week and not trip the wire for reporting if this discussion 
draft passes unamended.
    So I have a great concern about that. I think that the 
$10,000 was there for a reason. And I know it is a 1972 
standard, I think, so we need to change that. But I don't think 
going to $30,000 in cash per day is really warranted. I think 
we might want to take a little bit more cautious approach.
    The other thing is I would love to have the Financial 
Crimes Enforcement Network personnel here at this hearing, 
because I have had discussions with them, the same issue. I 
have said, do we really need all these CTRs? We have got tens 
of millions of cash transaction reports and suspicious activity 
reports; can you even look at these? And they say they need 
them all. And I know they are looking for a needle in a 
haystack, I said, but now you have this huge haystack.
    So I asked the folks at FinCEN, I said, do you need this? 
And they said, yes, this helps us catch the bad guy. We need 
context. We need all those reports. That is what they tell me.
    But I would really like to hear--maybe in a future hearing 
we have the folks whose job it is to catch the bad guys, have 
them come in and tell us why they need this stuff and demand of 
them some accountability.
    Because I think you are on the right track; I don't think 
we need all of these reports. As a matter of fact, it can bog 
us down, by getting too much information. But I think we need 
to right-size it rather than blow the lid off, as might happen 
under this discussion draft.
    So, Ms. Ostfeld, thank you very much again. I know we 
worked before on some of the anti-money-laundering stuff.
    The report by The Clearing House starts with the premise 
that, quote, ``the current anti-money-laundering and combating 
the financing of terrorism statutory and regulatory framework 
in the United States is outdated and, thus, ill-suited for 
apprehending criminals and countering terrorism in the 21st 
century.''
    Is that really true? I mean, we deal with FATF, right? A 
hundred and eighty countries. And they review each country at 
least year to year, some of them more often. Are we really 
doing that poorly that we have to throw out this system? Could 
we undermine some good things that we are doing by changing 
everything?
    Ms. Ostfeld. Thank you, Congressman Lynch.
    I can't speak for The Clearing House report, but what I can 
say is that we haven't updated these laws in a very long time, 
and investigation after investigation continues to reveal dirty 
money getting into our system. So, while I wouldn't say we want 
to throw out all of our money-laundering protections, there are 
concrete steps we could take to strengthen it.
    And so some of that is putting this customer due diligence 
rule into play in May of next year, as the regulation stands. 
Another piece is ensuring that it is no longer possible to set 
up an anonymously owned company in the United States.
    Mr. Lynch. Right.
    Ms. Ostfeld. The rest of the world is moving on this. And 
while we used to be the leader--we were the first country 
really talking about this, all the way back in 2008, but, since 
then, the U.S. hasn't moved forward.
    FATF told us in 2006 we are not compliant. They told us 
again in December 2016 we are not compliant. And the United 
States was part of developing those rules and pushing them 
around the world.
    And so you have now every EU member state has to put into 
practice a central beneficial ownership registry. They are all 
doing this. They are all in the process of--
    Mr. Lynch. But we are not, right?
    Ms. Ostfeld. And we are not.
    Mr. Lynch. Right. Well, I appreciate that.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Pearce. The gentleman yields back.
    And the Chair now recognizes the gentleman from California, 
Mr. Royce, for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    And I will start again with Stefanie Ostfeld. Thank you 
very much. Let me ask you a question on human trafficking and 
the fact that traffickers are increasingly using the financial 
system in order to fund their illicit activities. And, clearly, 
many countries are lagging behind our system here.
    But do you think you would be supportive of a new standard 
here in the State Department's Trafficking in Persons Report to 
include whether foreign governments have a framework in place 
to prevent financial transactions involving the proceeds? And 
we are talking about severe cases here, trafficking underage 
girls, things like that. But what would be your position on 
that?
    Ms. Ostfeld. Well, thank you, Mr. Royce. I would obviously 
have to look at it to put forward a clear position, but, yes, 
that makes sense to me, that the State Department would report 
on that.
    Mr. Royce. If you could take a look at my legislation on 
this, I would appreciate it very much.
    And the next question I was going to ask, maybe of Mr. Bill 
Fox or anybody else that wanted to comment, but the 
Counterterrorism and Illicit Finance Act requires Treasury to 
issue rules permitting a financial institution to share 
suspicious activity reports with their foreign branches.
    And so here is the conundrum. I support this concept, which 
would improve enterprise-wide management, but my own introduced 
bill would expand similar SAR sharing under two conditions. The 
first condition would be the foreign branch or affiliate must 
be located in a country that is a member of the Financial 
Action Task Force or is part of a FATF-style regional body. 
And, second, such country must have adequate privacy and data 
security protections in place.
    So, Mr. Fox, if you would like to begin to opine on that, 
and then I would like to hear other members of the panel.
    Mr. Fox. Thank you, Mr. Royce. I agree. The Clearing House 
supports the language that is in the draft bill to be able to 
share.
    I think one of the challenges, if you just take a look at 
the J.P.Morgan enforcement action involving the Bernie Madoff 
matter, it is a classic example of what happens when 
information can't be shared across border for a financial 
institution. And so--
    Mr. Royce. I understand that part of the problem. But look 
at it from the standpoint of the risks to allowing SAR sharing, 
on the other hand, with foreign branches or affiliates in 
certain countries. And you have to get an appropriate way here 
to ensure that widespread information sharing between 
institutions within the same family still protects sensitive 
information, given some of these governments, because you can 
have foreign access.
    So that is the balance I am looking for here, and that is 
why these provisions are out there in the legislation we are 
pushing.
    Mr. Fox. I think it is a sound issue to raise. I really do. 
I think we would, of course, manage the sharing of any 
information throughout our program in the way that we would do 
things. And there may be information--if we had the authority 
to share our actual SARs or SAR information across border, we 
would take a look at that and determine whether or not we were 
comfortable in a particular jurisdiction that that information 
was safe and secure. Because, again, these are reports about 
our customers, right? We don't want that out. We don't want it 
leveraged in the wrong way.
    So I think we would do that anyway, but I think you have 
raised a very good issue that should be thought about pretty 
heavily.
    Mr. Royce. Any other perspectives on my legislation on 
this?
    Yes?
    Mr. Byrne. Congressman Royce, I think those standards that 
you have articulated make a lot of sense. I think, 
historically, the reason why they could not share in the past 
has been because regulators and enforcement lawyers have said 
what you just alluded to: You can go to some countries where 
the controls are not that strong.
    So having it at a FATF or a FATF regional organizational 
jurisdiction I think would give both comfort and structure to 
this and could get us to a place of enterprise risk management, 
which we desperately need.
    Mr. Royce. And leverage them into similar arrangements.
    Mr. Byrne. Absolutely.
    Mr. Royce. Thanks, John.
    Any other input there?
    Mr. Poncy. Just very quickly, Congressman. Those are great 
interests.
    I would just again point to the need for ownership at a 
tactical level of these issues. We have members in FATF--I was 
the head of the U.S. delegation to FATF for a number of years. 
There are members of that whole body that we are not very 
friendly with and that we have real concerns with. It is a good 
marker. Another good marker is reciprocity. You have to give to 
get. We need information from others as well.
    There are a set of factors that I would be happy to work 
through with your staff to look at, these are factors of 
consideration that Treasury should be considering when 
certifying this kind of information sharing. I think that is 
smart. And it is going to be impossible to legislate that on a 
country-by-country basis. I think you need to delegate that to 
Treasury underneath criteria that I would be happy to work with 
your staff on.
    Mr. Royce. Thanks, Chip.
    Thanks, Chairman.
    Chairman Pearce. The gentleman's time has expired.
    The Chair now recognizes Ms. Velazquez for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Ms. Ostfeld, I share Mr. Royce's concern about developing 
methods for financial institutions to share information on SARs 
with their foreign affiliates and branches. However, I am 
worried about the civil liberty and privacy concerns that arise 
with the expansion of information sharing, particularly in the 
overseas conflicts.
    What safeguards would you recommend to ensure that civil 
liberties and privacy safeguards are not eroded?
    Ms. Ostfeld. Thank you, Congresswoman.
    So, right now, as has been said by others, there is 
information that banks can't share with other parts of the 
bank, much less its foreign counterparts, without risking a 
lawsuit. This doesn't make sense. And so that is what I think 
this part of the bill is trying to get at.
    For that reason, we support the effort to expand that. 
However, it is definitely worth taking into account civil 
liberties concerns and scrutinizing them further. It definitely 
should be something that is looked at, to make sure that 
safeguards are put into the bill, that it doesn't have any 
other kind of effects that weren't intended.
    Ms. Velazquez. Yes.
    Mr. Fox, would you like to comment?
    Mr. Fox. Sure. I think that there is always going to be a 
balance between privacy and information sharing. And I think 
that the way we view it at Bank of America--and I think member 
institutions at The Clearing House feel the same way--is that 
we are stewards of that, right? We have a responsibility to our 
clients and our customers to keep their financial data safe and 
secure.
    Ms. Velazquez. Thank you.
    And, Ms. Ostfeld, in your testimony, you indicate that we 
should be encouraging banks to incorporate new technologies 
into their compliance activities but warn that it must be done 
responsively.
    What technological innovations should we be encouraging, 
and what safeguards would you recommend?
    Ms. Ostfeld. Well, I think it is important to either task 
Treasury or Treasury and the regulators to incentivize these 
innovations. Because I think the concern is, how will banks 
move forward with this? And the point is for them to look into 
this, to work with the banks on this, so banks at an early 
stage can be checking with the regulators to see what they 
think works for any particular process.
    Ms. Velazquez. Thank you.
    Mr. Fox or Mr. Bley, in our letter to Secretary Mnuchin, 
Representative Royce and I also raised the need for law 
enforcement to provide feedback to financial institutions on 
the effectiveness of their SARs.
    How would you implement a process to provide financial 
institutions with feedback to improve law enforcement outcomes?
    Mr. Fox. Thank you, Congresswoman. That is a really 
important issue. I really enjoyed that letter, by the way.
    Let me tell you, I think that this is why this is 
important. We get feedback from law enforcement and from FinCEN 
anecdotally, and that is always good to hear, right? It is 
always good to hear that you are actually helping. But to be 
honest with you, we don't get bulk feedback on our filings.
    The reason it is important is that we tune our systems 
based on our own decisions of whether to file, mainly for other 
factors, too, but mainly for those decisions. So if we have 
those decisions wrong, we could be creating an echo chamber 
that just causes worse filing, right? You know what I mean? So 
if they could just give us a thumbs up or a thumbs down.
    It is a little bit like, if you have ever been through 
Heathrow and you hit the smiley face at the end of the 
security. It is either a smile or a frown. If we could just get 
that kind of feedback about our filings, we could do wonders 
with tuning our filings to make them better, more focused. And 
then you would separate the wheat from the chaff, if you will, 
and leave innocent customers out of that reporting. It would 
actually make us better that way.
    So we think that is a really important point that you 
raised and--
    Ms. Velazquez. Thank you.
    Mr. Bley, what is your take?
    Mr. Bley. I concur wholeheartedly with Mr. Fox. It is 
exactly the scenario we have. If we can get information back, 
we can tune better and we can deliver more meaningful 
information. That is the end of the story.
    Ms. Velazquez. Very good. Thank you.
    I yield back, Mr. Chairman.
    Chairman Pearce. The gentlelady yields back.
    The Chair now recognizes the gentleman from Texas, Mr. 
Williams, for 5 minutes.
    Mr. Williams. Thank you, Mr. Chairman and also Ranking 
Member, for your work on this issue.
    I believe that the legislative proposals before us today 
largely represent steps in the right direction toward combating 
the abuse of our financial system by bad actors. Our framework 
is in need of an update, and I look forward to the testimony 
provided by all of you today. And thank all of you for being 
here. Appreciate it.
    My first question, Mr. Bley--and thank you for being here 
today as a representative of the Mid-Size Bank Coalition of 
America. I appreciate your testimony and look forward to your 
knowledgeable answers to my questions.
    Now, when considering a reform of this nature or any 
legislation, for that matter, the impacts a proposal will have 
on consumers and small businesses are a foremost concern of 
mine since I am a small-business owner of 44 years and 
understand the need to help Main Street. And I am Main Street, 
still own my business.
    As you rightly point out in your testimony, community 
financial institutions are already struggling under the Dodd-
Frank Act, and the need for them to provide BSA and AML 
compliance can sometimes mean the difference between 
profitability and operating at a loss and even job loss.
    Further in your testimony, you mention that all of the 
ideas in the bill have merit. However, one specific idea I 
would like to discuss with you is the proposed CTR threshold 
change. This committee should strive to provide regulatory 
relief for institutions while at the same time increasing the 
usefulness of information that you refer to.
    So what current resources do MBCA institutions devote to 
CRT filings, and what relief will the proposed ruling's 
threshold change to $30,000 provide? And then what--and we have 
talked about this--and then what relief will this provide to 
community financial institutions?
    Mr. Bley. Thank you for that question. And I will give you 
information on the impact, directly to your question, but I 
also want to emphasize that just changing the thresholds isn't 
the solution to this problem. It is part of a holistic package 
of making the information more meaningful and more significant. 
And we really applaud the broader solution that is on the 
table.
    But it is important to recognize that just changing a 
threshold itself reduces the size of that haystack of 
information that is out there. And for midsize banks, we 
estimate CTR filings would drop by 50 to 80 percent, and that 
was with the original $25,000 limit that was in the bill 
earlier. And SAR filings would probably drop by 8 to 10 
percent, structuring filings would drop.
    There are just so many--and that, together, represents 
about 10 percent, 8 to 10 percent, of the staff within the BSA 
organizations that are just looking at the hundreds of 
thousands of CTR and small-dollar report filings every year.
    Mr. Williams. OK.
    Another question for you. One of the problems you identify 
in your testimony is the high rate of false positives that are 
generated by transaction monitoring systems. One way the 
proposal before us seeks to lower that rate is by allowing for 
increased adoption and innovation in artificial intelligence 
software used by financial institutions in reporting.
    So how have midsize banks benefited from the innovative 
machine learning pilot programs? And how can artificial 
intelligence in reporting benefit financial institutions across 
the spectrum, from large to small?
    Mr. Bley. This is particularly impactful for midsize banks, 
because we just don't have the scale and scope to be able to 
spread the cost of analyzing the information that is just 
ultimately proved to be unuseful. Generously, a 90-percent 
false-positive rate is really an unacceptable outcome for a 
successful program.
    We have been investing in the same kinds of tools that the 
large banks have been using, very high-cost, sophisticated 
tools. And they are generating more meaningful alerts to us, 
but, at the same time, the tuning process and the regulatory 
environment that will analyze your tuning process to ensure 
that you are calibrating appropriately is just not working. It 
doesn't get you to a lower false-positive rate.
    And there are a number of ideas that have been put out with 
the midsize banks. In fact, we have worked very closely with 
the OCC to try and identify techniques that we could use. So it 
is both the tools and also intelligent ways of applying the 
tools. And the regulators have worked productively with us on 
ideas, but, ultimately, we don't know and they don't know what 
is acceptable without good collaboration with Treasury, with 
FinCEN, to make sure that this is an acceptable application of 
the rule.
    So I think the moral of my story is that they were 
investing in the tools but we need more collaboration in order 
to put that into practice and make the information that much 
more meaningful.
    Mr. Williams. Thank you for your testimony.
    And I yield my time back.
    Chairman Pearce. The gentleman yields back.
    And the Chair now recognizes the gentleman from Georgia, 
Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    This has been a very informative panel. And I would like to 
let you know that I am Co-chairman of the Congressional FinTech 
Caucus. And I truly believe that both our anti-money-laundering 
and the Bank Secrecy Act, they offer great opportunities for 
our FinTech companies to come together, partner with our banks, 
and come up with some innovative solutions to this. And I think 
that if it is done right, it can both ease the burden on banks 
struggling to meet their requirements while also improving the 
job banks are doing at threat detection and risk management. It 
is a win-win situation.
    So, Ms. Ostfeld, let me start with you. And as one graduate 
of the University of Pennsylvania to another, let me welcome 
you to your testimony to the Financial Services Committee. But 
after reading your testimony, I find that you agree with me 
about the use of technology.
    Now, in a couple of pages in your testimony, you say this, 
on page 3: ``Use of new technology should be encouraged, but 
must be done responsibly. A section of Treasury should be 
created or tasked with reviewing, approving, and monitoring the 
use of new technology by financial institutions. There should 
not be a safe harbor provision.'' And you say that in two parts 
of your report.
    And then you also say that you are ``supportive of banks 
incorporating new technology into their compliance activity. 
However, we are not supportive of the sweeping nature of safe 
harbor positions.'' And, quite honestly, I couldn't agree with 
you more on that.
    However, in section 7 of this legislation we are taking, in 
the Counterterrorism and Illicit Finance Act, my Republican 
friends want to provide an explicit safe harbor for financial 
institutions that use technological innovation to fulfill the 
bank secrecy minimum and the anti-money-laundering program 
requirements.
    So, when you look at your testimony there--and let me just 
ask you this, Ms. Ostfeld. Do you think that without the safe 
harbor that banks would have an incentive to invest in these 
new technologies and partner with fintechs?
    Ms. Ostfeld. Thank you, Congressman Scott.
    Yes. I think something that could happen is Congress could 
direct the regulators to create innovation programs. This is 
something that could happen which would include consultations 
with the banks so that everybody is actually working together 
to come up with these new ideas, and it makes it clear to banks 
that banks are working with regulators early on in this 
process, what they think will actually work to help them with 
their compliance obligations. I think it is something that 
could absolutely happen without a blanket safe harbor.
    Mr. Scott. Well, thank you very much for that.
    Mr. Chip Poncy, can you comment on what actions Congress or 
the White House could take outside of the safe harbor that 
would ensure that financial institutions are implementing the 
latest advances in threat detection as they fulfill their Bank 
Secrecy Act and the anti-money-laundering obligations?
    Mr. Poncy. Thank you, Congressman.
    I do think that there are steps that both Congress and the 
Administration should take, and I have elaborated on those in 
my testimony.
    But I think the easiest way to understand this is, 
technology is used in a lot of different ways in compliance. 
Think about this from the perspective of a customer experience. 
You walk into a bank, you are identified, you are verified. We 
use pieces of paper, we use independent databases to do that. 
There is a whole range of biometric technologies that are going 
to facilitate the easier verification that somebody is who they 
say they are. This is particularly important when you are 
dealing with communities that aren't necessarily documented or 
parts of the world where identification documentation isn't the 
greatest. There is that use of technology.
    There is the use of technology to collect, manage, and 
protect bulk data. That technology is exploding, the ability to 
manage that data in a way that drives analytics to identify 
patterns of interest. There are ways that we should be working 
to enhance that capability.
    And then there are technologies that can encrypt and 
protect that data, to address some of the civil liberty 
concerns that Congresswoman Velazquez was talking about, that 
would allow you to access and analyze that data without 
necessarily getting into the personal identifier information 
that people are rightfully concerned about.
    So there are lots of different ways that technology can 
assist in compliance and risk management. To do this well, to 
do it strategically and methodically, I would argue you need 
two principals. You need somebody to captain the ship. And I 
think what you have done with the proposed legislation to start 
to put Treasury in a position to manage this and make them 
accountable, with the authority to manage it and with the 
support of the Administration, from Justice to the regulators, 
is one approach, is one factor--
    Mr. Scott. Thank you, Mr. Poncy.
    Chairman Pearce. Thank you.
    The Chair would recognize Mr. Davidson, from Ohio, now for 
5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman.
    Thank you to our witnesses. I really appreciate your 
testimony and your expertise in the field.
    I want to share Mr. Perlmutter's concerns about privacy 
and, frankly, the burden on small businesses--unintended, 
perhaps, consequences, perhaps unavoidable consequences. But it 
seems that there are a number of ideas that could make this an 
easier way to accomplish the mission of securing our country 
in, frankly, a more constitutional way. I am very concerned 
about the information-sharing apparatus. Frankly, the whole 
premise of BSA/AML is, in some ways, deputizing a large swath 
of the private sector.
    I am also concerned about cybersecurity and a number of 
other provisions here. So I know in a few short minutes you 
can't cover all that. But, Mr. Bley, we have seen consequences 
of data breaches at Uber and Equifax and, of course, the SEC 
(U.S. Securities and Exchange Commission), but Government 
databases are compromised just like the SEC's was. What 
additional safeguards would be included in this bill to ensure 
that personally identifiable information of millions of 
American citizens are not compromised?
    Mr. Bley. I think this is a critically important question 
for banks in general, not just regulated to BSA. We are 
collecting an intense amount of information from all our 
customers, and there is no doubt that cybersecurity and the 
ability to protect that data remains of the highest priority 
for midsize banks and, I am sure, all banks across the country.
    It is our belief that we are going to continue to invest in 
the tools that we need to protect our customers' data whether 
this bill passes or not and whether or not we modernize the BSA 
act.
    But that was one of the main reasons that I believe the 
beneficial ownership rule should be done at a public-sector 
level, because, as it is currently structured, businesses are 
supplying information to multiple institutions stored in 
multiple environments, and it is really, in some ways, creating 
a privacy risk as opposed to reducing it. And so a central 
public-sector model should allow for the ability to protect 
that more carefully.
    Mr. Davidson. What would someone's remedy be if they feel 
the ownership structure of their company has been improperly 
released or made public from this database?
    Mr. Bley. From the central database?
    Mr. Davidson. Correct.
    Mr. Bley. I think this is something we would have to manage 
and that would have to be managed through the central 
infrastructure.
    Mr. Davidson. What would be the consequences? Is there 
anything in the bill where authorities at Treasury would 
contain--there are certainly criminal fines and penalties for 
businesses that don't disclose things. What about people who 
misuse the database? Law enforcement, banks, whomever has 
access. Are there penalties or fines for people that misuse the 
data?
    Mr. Bley. I certainly didn't see that in the bill itself.
    Mr. Davidson. Is there recordkeeping to say who has misused 
it, whether they have been provided retraining or perhaps 
terminated, perhaps prosecuted? Is there anything that would 
keep records of that for people that have abused the access to 
this information?
    Mr. Bley. I am probably not the best person to respond to 
that question.
    Mr. Davidson. I haven't seen it in there.
    And then there are the concerns about the nature of 
beneficial ownership. If you were asking who is the beneficial 
owner, most people would say, who has control of the company? 
But that is not the narrow definition here. It is an incredibly 
broad definition which doesn't even make it clear that it has 
to be an actual owner. ``Someone who might exert influence.'' 
It could be a lender. It could be someone on the board. It is 
so undefined, it is hard to fathom that we would launch this as 
an actual law.
    How could we possibly narrow this definition and still 
accomplish our mission? To the panel.
    Mr. Poncy?
    Mr. Poncy. Thank you, Congressman.
    And I certainly want to leave room for Ms. Ostfeld, but I 
just want to say very quickly: Treasury engaged in a 6-year 
rulemaking process; had unprecedented public hearings in New 
York, Chicago, Los Angeles, Miami, Washington, D.C.--
unprecedented in the 40-year history of the BSA--to get to 
understand what kind of a definition for ``beneficial 
ownership'' would work for customer due diligence for financial 
institutions.
    Is it perfect? I don't know that anyone says it is perfect, 
but--
    Mr. Davidson. Could they make it more broad? You said they 
spent 6 years. In 6 years, they have come up with a definition 
that would be hard to imagine finding a way to write it so that 
it is more broad than it is today. Surely we can narrowly 
tailor this. The Fourth Amendment was very narrow. If there is 
probable cause, then you go get a warrant.
    Mr. Poncy. So the definition--
    Mr. Davidson. My time has expired, and, Mr. Chairman, I 
yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair would now recognize the gentlelady from New York, 
Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. Thank you. Thank you, Mr. Chairman and 
Ranking Member Perlmutter.
    This hearing is very important to me because I have been 
working on legislation to require disclosure of beneficial 
ownership information for almost 10 years, and this is the 
first legislative hearing we have had on a beneficial ownership 
bill. So I deeply want to thank the Chairman, as well as 
Chairman Luetkemeyer, for working with me and Mr. Perlmutter 
all year long on this beneficial ownership issue.
    At the beginning of the year, I offered an amendment to the 
committee's oversight plan that said the committee should 
address this beneficial ownership issue, and Chairman Pearce 
spoke in favor of my amendment and said he would work with me 
on this issue. And he has been true to his word and has worked 
very productively on this issue, and I want to publicly thank 
him.
    Of course, the legislation package that we are considering 
today is just a discussion draft, and there are still some 
changes that I would like to see made to the beneficial 
ownership piece of the package, but I am really encouraged by 
the progress we have made.
    The issue was first brought to me by a really legendary 
district attorney, District Attorney Morgenthau in Manhattan, 
who was very famous for cracking a lot of difficult cases. And 
he said they could be tracking suspected terrorism financing, 
drug money, gun money, sex trafficking money, and they would 
hit a wall when they hit the beneficial ownership and no one 
knew who they were.
    Likewise, we have had problems with the CFIUS process, 
where they want to protect ownership in the United States from 
any element that might hinder our national security, and they 
haven't been able to find out who is buying or trying to buy 
sensitive information of the United States because it is in a 
beneficial ownership package.
    So I think that this is a very important tool for law 
enforcement. And it has been endorsed by many levels of law 
enforcement. And it would help us to protect our citizens and 
to help law enforcement do their job. So I hope that we will 
continue to build support of it.
    So the very first question that I want to ask, and I want 
to ask it of everybody on the panel, just yes or no, and just 
go right down the panel, I just want to know: Do you support 
this legislation, or the concept of it, requiring companies to 
disclose their beneficial owners to Treasury at the time that 
the company is formed? Just a yes or no answer.
    Mr. Bley?
    Mr. Bley. Yes.
    Mrs. Maloney. OK.
    And Mr. Byrne?
    Mr. Byrne. Yes.
    Mrs. Maloney. Mr. Fox?
    Mr. Fox. Yes.
    Mrs. Maloney. Ms. Ostfeld?
    Ms. Ostfeld. Yes, we support your bill, H.R. 3089, and we 
think that the discussion draft is a good first step but it 
needs some amendments.
    Mrs. Maloney. Yes. I do too.
    Mr. Poncy, president and cofounder?
    Mr. Poncy. Thank you, Congresswoman. I agree entirely with 
what Ms. Ostfeld just said.
    Mrs. Maloney. OK. Thank you. That is a positive step 
forward.
    I would like to ask Ms. Ostfeld: You and I have worked 
together on this issue for many years now, and your 
organization, Global Witness, did a fantastic undercover 
investigation that was featured on ``60 Minutes'' last year, 
where you had undercover investigators posing as corrupt 
dictators, and you had them approach 13 lawyers asking for help 
hiding money. ``We don't want anyone to know who we are, but we 
want to be able to have access, easy access, to our money.'' 
And, amazingly, 12 of the 13 lawyers agreed to do it, using 
anonymous shell companies.
    And I encourage everyone to watch this clip. It is a very 
important one. And you would hear on it that they said, ``Don't 
go to banks, because they will find out who you are. Go to the 
LLC. No one will know who you are.''
    So my question for you is, what are the most important 
improvements that you think should be made to the beneficial 
ownership section?
    Ms. Ostfeld. Sure. For the bill to be fit for purpose, it 
needs to do three things. It needs to collect the right 
information, it needs to be accessible to the right 
stakeholders, and it needs to keep it up to date. Right now, it 
is not accessible to the right stakeholders.
    But because the definition has been asked a few times, any 
strong definition of ``beneficial ownership,'' for it to work, 
needs to have two prongs. You need to understand who actually 
owns it, as in shareholders, legal ownership; and you have to 
understand who owns the entity, as in effective control. So 
this is control by other means. This could be by a trust, power 
of attorney, some other kind of way for controlling it, because 
you want to understand who is benefiting economically from this 
and who essentially pulls the strings, which isn't always the 
shareholder.
    So any definition needs to encompass both of those prongs, 
which both your bill and the discussion draft do that. The 
discussion draft was negotiated that it is not quite as strong 
as your bill, but it still does that. So we support the 
definition in the bill.
    However, it makes it very difficult for law enforcement to 
access this, both domestic law enforcement--it says only 
Federal law enforcement with a criminal subpoena. So this means 
State and local law enforcement does not have access to it, and 
it means parts of the Federal Government and Federal law 
enforcement that doesn't have access to criminal subpoenas, 
that only have civil and administrative subpoenas, don't have 
access to this. So that is something that needs to change. It 
needs to be available for civil, criminal, and administrative 
subpoenas or State, local, and Federal law enforcement.
    But it also makes it really hard for foreign law 
enforcement--
    Chairman Pearce. If I could get you to wrap up your answer, 
please.
    Ms. Ostfeld. It makes it very difficult for foreign law 
enforcement to access it. And you need to make sure that what 
we are sharing with foreign law enforcement is what we are 
asking foreign law enforcement, in return, to share with us. 
And it needs to be able to be entered in court.
    The other piece is there seems to be a loophole that makes 
it easier for foreign owners to--
    Chairman Pearce. The gentlelady's time has expired.
    The Chair would now recognize Mr. Budd for 5 minutes.
    Mr. Budd. Thank you, Mr. Chairman.
    And thank you to all our witnesses for joining us here 
today and for your time.
    I want to use my time to continue to discuss the 
Counterterrorism and Illicit Financing Act. There is no doubt 
that the Bank Secrecy Act needs an upgrade, where efficiency, 
along with safety, is our ultimate end goal. And while there 
are provisions in this bill that need addressing, like the new 
beneficial ownership requirement found in section 9, I am 
hopeful that we can get to a good final product.
    So I want to talk through about section 7 of the Pearce-
Luetkemeyer legislation that deals with technological 
innovation.
    And, Mr. Bley, you stated in your testimony that the BSA is 
among the most complicated and costly requirements with which a 
bank must comply. And I agree this bill gives them some freedom 
to innovate in this space. But does this provision do enough to 
help with the community banks or the smaller, midsize banks 
that you represent and the credit unions, who don't have the 
same financial resources as the larger institutions, to keep 
pace with the technological advancements that frequently 
change?
    Mr. Bley. Thank you for that question.
    And I do think it does actually create the framework for 
supporting innovation. And there are ideas out there that do 
provide support for small and midsize banks that may be 
different than what some of the larger banks need to do.
    And one such idea that I discussed in my written testimony 
is a utility that we have been developing that allows for more 
collaboration and consolidation of BSA work and information 
amongst the banks with an independent utility. And we have 
developed such a thing, and banks are starting to look at how 
they can engage with it.
    In order to use a collaborative, independent utility, we 
are going to need support from the regulators from Treasury to 
say this works. And what that does is it allows you to benefit 
from the scale that you don't have as a small bank by using a 
central source to manage many of the aspects of the BSA 
program.
    So that is an example that I believe is in the spirit of 
what this legislation produces.
    Mr. Budd. Good. Thank you.
    So the development of AI, or artificial intelligence, is 
huge for AML and CFT. But--and this is to all the witnesses--
are there any technologies or advanced programs--or maybe it is 
even this utility that you mentioned--outside of AI that could 
be added to financial institutions' AML/CFT compliance program 
that would enhance the detection capabilities of that 
institution?
    Mr. Fox. Mr. Budd, thank you for that question. I think the 
answer is yes. In fact, I know it is yes.
    The key thing to remember about some of these advanced 
technologies and what we have learned after piloting a number 
of them is that you have to have experts right along with them, 
right? You can't just--back to Mr. Scott's point earlier about 
fintech. Fintech is great, but you have to have the AML 
expertise along with fintech in order to be able to make this 
stuff come alive.
    We think the biggest challenge for us presently to innovate 
is, frankly, that the amount of verification and process we 
have to go through to validate what we are doing on a step-by-
step basis under the current regulatory guidance--which was 
designed, by the way, for large, complex economic models, not 
BSA/AML--has really, really hampered us.
    So I can tell you, for example, in just adjusting our 
current thresholds in the innovation that we have done today, 
we used to be able to do that in a matter of weeks. Today, that 
takes 9 months to a year because of the process of having to go 
through and prove the negative, if you will, that everything is 
working perfectly.
    I think there is a balance there that has to be drawn in 
order to be able to--well, let me put it this way: It is very, 
very hard to innovate in a context like that.
    Mr. Budd. Good. Thank you, Mr. Fox.
    Anybody else on the panel?
    Mr. Byrne. Congressman, the thing that we have talked a 
little bit about but not enough, in my opinion, is the 
regulators in this space. I think a lot of the problem in terms 
of burden and challenge has been the moving goalposts.
    So, to Bill's point, with technology, a lot of times, you 
will get second- and third-guessed by the regulators when you 
want to make a change. They talk a good game about wanting to 
support innovation. We need to call them out on that. They need 
to actually be in these institutions and working with the 
institutions. And I can tell you, at least anecdotally, it 
doesn't happen as often as it should.
    So I think a lot of what happens in the BSA space is banks 
not understanding what the rules are, and rules are being made 
up, in terms of different exams, you have different 
requirements. So I think in technology, specifically, this 
would be a good place for this committee and other 
subcommittees to push the regulators to say and do what they 
have expressed in other hearings. But this is a real problem.
    Mr. Budd. Thank you.
    And I believe my time has expired, and I will yield back.
    Chairman Pearce. The gentleman yields back.
    And the Chair now recognizes the gentleman from Georgia, 
Mr. Loudermilk, for 5 minutes.
    Mr. Loudermilk. Well, thank you, Mr. Chairman. Thank you 
for this hearing. And I appreciate the panelists being here.
    Mr. Bley, I wanted to dig a little deeper into a subject 
that many have talked about here, the Bank Secrecy Act, 
especially the currency transaction reporting.
    Back when I had a real life before I came here, I owned a 
small IT business. And because of the unbelievable complexity 
of our tax laws, I was unwilling to handle my own payroll, 
because I figured it would be better to pay somebody else to be 
responsible than go to jail myself, right? So, fortunately, now 
we are, hopefully, addressing the complexity through our tax 
reform.
    But during that time period, the way we processed our 
payroll, which was twice a month, is I would actually do a wire 
transfer to the payroll processing company, which always 
exceeded $10,000. Quite often, I was also purchasing equipment 
that I didn't have an account with or credit with an equipment 
manufacturer, and so sometimes we were wire-transferring 
$20,000 or $30,000 to buy a piece of network equipment.
    The point being is I generated a lot of transfers of cash 
in the normal operation of business. And since 1970--and it was 
set at $10,000--we haven't adjusted that. And we began looking 
at this early on in the year. And, of course, if you look at 
the rate of inflation, we should be at about $60,000 today, 
which I have been strongly advocating for. However, I 
understand we need to strike a balance between what is a 
reasonable amount to not overburden our financial institutions 
and what doesn't handcuff law enforcement. And I understand 
that the Chairman's bill has that set at $30,000.
    Now, I spoke with some of the community banks in my 
district, and they really support this approach, especially the 
$30,000 level. So I think I am going to be able to be OK with 
that. One of them said that 78 percent of their cash 
transactions are below $30,000. Another said 92 percent of 
their cash transactions are below $30,000. A third, a community 
banker in Georgia, said they had 21 employees devoted solely to 
BSA compliance--21. That is a lot for a small community bank. 
They file 67 CTRs a day, but they almost never receive requests 
for information from law enforcement based on a CTR.
    So my question for you is, do you think that this $30,000 
does strike that balance, to give regulatory relief and provide 
the law enforcement the tools they need?
    Mr. Bley. We believe it does. We don't get the information 
back to know how useful it is, so it is very difficult for us 
to put a hard statement on that. But what we think is important 
is, whatever number we choose here, it has to be accompanied 
with logical adjustments to the way in which this process 
works.
    One of the facts that we learned from midsize banks is it 
takes over 4 hours to file a SAR, to create the work, on each 
individual one, with 150 a month in one small bank. The amount 
of time to deliver the information is so difficult, is so time-
consuming. And moving to a structured and maybe even fully 
automated approach for delivering data, rather than free text 
format and a story about the local company that is moving money 
totally legitimately, would really be a benefit.
    So I think most important is--$30,000, $25,000, they all 
seem like very reasonable numbers in today's dollars, but most 
important is that the program efficiency and effectiveness 
accompanies that. And there is a difference between the larger 
dollar and the smaller dollar.
    Mr. Loudermilk. What are the typical transactions we see 
that are below $30,000?
    Mr. Bley. They are essentially the same types of 
transactions, but they could be ice cream parlors that are open 
in the summertime moving money back and forth between 
branches--
    Mr. Loudermilk. Similar things I experienced in my 
business.
    Mr. Bley. It is all the same kind of local businesses that 
are wondering why this is a question for them.
    Mr. Loudermilk. Another area that I have really been 
focused on here is when it comes to a cybersecurity concern, 
which is of grave concern right now. And when I was in the 
military, I worked in intelligence, and we lived by an adage, 
which is: You don't have to secure what you don't have.
    Would this actually lessen the amount of data that banks 
are keeping on customers, reducing their risk in the cyber--and 
even passing on to the Federal Government, which is, of course, 
a grave cybersecurity risk, in my opinion.
    Mr. Bley. It may reduce the number of detailed 
investigations, but all the data is still there. The systems 
are still there, and it is delivering alerts. It is just a 
difference of how much time is spent on the lower value added 
information. And the goal of all of us is to focus the maximum 
attention on the things that matter most. But under the current 
program, we spend the same amount of time on everything.
    Mr. Davidson. Thank you, Mr. Chairman. I yield back
    Chairman Pearce. The Chair now recognizes the gentleman 
from Arkansas, Mr. Hill, for 5 minutes.
    Mr. Hill. I thank the Chairman. I thank the Ranking Member 
for this good hearing. And it is good to see that the committee 
is considering a complete rewrite of our bank secrecy and money 
laundering. We don't want to rush into it since 1970. So it is 
good that we are taking it up now. And Mrs. Maloney had her 
decade of work on the topic, which I appreciate. And going on 3 
years, I feel her pain three times over, I guess.
    I want to go back to my favorite subject with Mr. Poncy and 
Mr. Fox, already know what it is, which is my feelings on the 
beneficial ownership provisions in this bill. I am not a fan of 
yet this different approach. And I understand and I appreciate 
the efforts to move away from the financial institution burden 
and try to, again, streamline it and take a different approach, 
but I still find it concerning. I just want to have some dialog 
on that. And since I am toward the end of the questioning, you 
are well rehearsed on it.
    I still say the same comment I made about the Treasury's 
rulemaking that is proposed, which is 25 percent standard, as a 
former banker for 30 years, is too high. It is ridiculous. If I 
am going to now structure a transaction to avoid you, it will 
be under 25 percent. Thanks for telling me what the road map 
is.
    I think this definition is better in the sense that it has 
this broader definitional context on control, and yet that then 
becomes hard to measure and hard to define and makes the 
definition more murky, which I share the concerns, I think Mr. 
Perlmutter mentioned at the top of the hearing, that it is 
overly broad, hard to get our arms around. And it also has 
these new exceptions, nominee, custodian, agent exception. And 
yet, of course, that is the prime way that people use to 
structure an LLC to avoid detection, is through an agent 
process. And yet you do catch them, maybe with substantial 
control, but that, again, adds a lot of burden to the process.
    And then you have this exception on if they have an 
operating premise, a physical office in the United States, they 
are excepted. So now we will just quickly form--buy a pizza 
company and run everything through the LLC with this, quote, 
``physical presence'' exception.
    So I just want to challenge our creative process on this. I 
do like the idea of the filing concept and the sharing of the 
data, and I want to go back to my idea again. We are smarter. 
We have to be able to figure this out. We have all this data on 
the 1065 that every entity in this country files, and we ought 
to figure out a way to use the existing tax filing as a way to 
meet this test.
    So I would ask everybody, would you--if my filing, my 1065 
with FinCEN, would that comply with this information? Forget 
the definition for the moment. Would you find that an adequate 
disclosure?
    Mr. Poncy, you are the great author on this, so I yield.
    Mr. Poncy. Congressman Hill, you are being too kind. Look, 
you have been one of the most provocative thinkers on this. And 
you made, when I was at Treasury, you made us better, and I 
really appreciated it.
    I can tell you what I was trying to say to Congressman 
Davidson about the rulemaking process, for exactly the points 
that you have raised, a lot of this requires the type of dialog 
and the type of expertise that a rulemaking is designed to do, 
right? And so--and the flexibility that that affords and the 
ability to make adjustments that do not require congressional 
legislation is critical. So delegation of some authority to 
Treasury is going to be key, whether on CDD, which we have 
done, or whether it is on company information, as the 
legislation proposes. That delegation is a starting point.
    Second, when you look at definitions of beneficial 
ownership, for exactly the reasons that you have explained, we 
have this challenge of clarity versus structuring around that 
clarity. And one of the key issues in that 6-year rulemaking 
process that may attend how this definition ultimately is 
formed with the notion of 25 percent is a floor, not a ceiling. 
There are higher risk scenarios where financial institutions 
will be expected to go below it, and they do. FATCA is a good 
example. So 10 percent floor on FATCA. That is a whole separate 
conversation, but it is a floor. It is not a ceiling.
    Second, no matter what the ownership is, you always get a 
controlling officer for precisely the reason of you can 
structure under any threshold. So law enforcement was very 
clear in saying, not just in the United States but globally, we 
want to make sure that there's a natural person at the end of 
the investigation that we can squeeze and say, ``You need to 
start answering questions.'' The rulemaking from Treasury is 
designed to do exactly that. It is not necessarily--
    Mr. Hill. Let me reclaim my time because I want to cover--
and Mr. Chairman, Mrs. Maloney had 1 minute 25 over. May I 
continue?
    Mr. Perlmutter. Ask Mr. Tipton. You are delaying him.
    Chairman Pearce. Yes, go ahead.
    Mr. Hill. Thank you for that. So I hear you on that. But I 
also want to get one other topic in here, which is the issue of 
the impact on our secretaries of States on all these 
exceptions. I know there is a 2-year period for implementation 
here which isn't satisfactory to Ms. Ostfeld for very good 
reasons, I think. But, this is shifting burden also to our 
secretaries of State, our forms in Arkansas, we don't take into 
account all these exceptions; there is no place for that. And I 
would really urge you, as you work with our staff, to think 
through, how can we take the existing data that we have in a 
secure format that is already machine-readable, to use the IT 
term, in the 1065 form, where we have K-1's, we know the 
ownership, we know the name, we have a responsible person, we 
have a tax filer, we don't have an agent, we have principals, 
and find a way to let FinCEN access that data.
    And thank you, Mr. Chairman. I yield back.
    Chairman Pearce. The gentleman yields back.
    The Chair now recognizes Mr. Tipton, from Colorado, for 5 
minutes.
    Mr. Tipton. Thank you, Mr. Chairman.
    And I thank the panel. I guess maybe everything has been 
asked but not by the same person each time. So I do appreciate 
the comments that you have made.
    This has been, I think, a very interesting conversation. I 
come from a rural district, and a lot of the issues that we 
face are faced by our community banks. And we have had 
testimony from Chair Yellen on down in terms of some of the 
impact, in terms of actual compliance.
    I think we also face, in rural areas like mine, the real 
issue that we are having actually with illicit finance going 
on, with drug trafficking, cartel activity that is going on. 
Certainly want to be able to address it but also to be 
respectful of the burden that is put on our financial 
institutions.
    Mr. Bley, in your testimony, you have spoken to the CDD 
Rule, which is going to be coming effective, I think, in May of 
this coming year. Would you speak to how that is going to have 
some real impact on some of our smaller community banks? I am 
very cognizant--a small rural bank in my town, just visited 
with the president of it, and he said: ``Hey, good news, we 
have made three hires. Bad news, they are all compliance.'' And 
it is not to certainly diminish the importance of this issue. 
My home county is one that they are now looking to be able to 
designate. And we are trying to encourage this just from a law 
enforcement standpoint, high drug trafficking area; it is a 
corridor, moving through. But can you speak to the proposed 
rule and then maybe section 9 of the draft bill to be able to 
get your thoughts on it?
    Mr. Bley. I think that, when you think of it from a 
community bank's perspective, it really points to the 
challenges of the current model because it really applies the 
cost and the burden on everybody exactly the same way, on every 
institution the same way. All want to collect whatever 
information is necessary, and they will do it. But the reality 
is they are going to be asking questions of their customers, 
not only on day 1 in opening an account--their customers will 
be new process; those customers will be asked at any 
institution that they are going to, and then they will be need 
to be asked and refreshed and constantly updated throughout the 
course of time. And then that will support the investigation 
analysis down the road, where needed.
    And the idea of a centralized structure basically 
eliminates the burden on the individual smaller institutions 
and levels the playing field, allows everybody to have the 
right information available at all times. And so it is just a 
better model. It affects the smaller institutions more than the 
bigger ones.
    Mr. Tipton. Mr. Fox, do you have any comments on that?
    Mr. Fox. Yes, sir, Congressman. Thank you. I have a lot to 
say, I guess. I think you are right. One of the things The 
Clearing House supports is the notion that a Treasury study on 
the BSA writ large and how it is actually being implemented, 
part of that is, Does it really make sense to treat community 
banks in the same way that you would treat a gatekeeping bank 
like Bank of America? And, today, while the regulatory efforts 
are different--certainly I can probably attest to that--it is 
not--in a lot of the ways, the same rules apply, right? And so 
we ought to think about that. We ought to really think freshly 
about this: Do these things have to be filed on forms, whether 
they are electronic forms or not? Can we just get data? It is a 
lot easier for banks to do that sort of thing.
    I think on the beneficial ownership, I really agree with 
Mr. Hill. Look, we all agree--or at least, I think most agree--
that this information is really important for law enforcement 
purposes. We think that this is how organized crime and 
transnational crime organizations game the system and even 
State actors, I think, probably game the system through these 
entities.
    So it seems to me that the best way to do that is we 
already have a structure that is working in the Code. The 
problem is we can't share it with anybody because of the Code 
provisions that prohibit sharing tax information. So could that 
go to FinCEN? Actually, the Treasury rule, while we supported 
it, when it was going--and we are happy to comply with it and 
get the information we have to get--the reality is that we 
actually are chasing the innocent a bit here because, to be 
honest with you, if I am a criminal, there is no way I am going 
to have an ownership structure that is going to get caught in 
that net.
    So we really have to kind of rethink this a little bit, I 
think. And I think one way to do it is to make that repository 
at the Treasury or FinCEN so that law enforcement can access 
that data. By the way, law enforcement can't get at this data 
without a subpoena right now. I can't just give this beneficial 
ownership data to law enforcement wholesale. That is customer 
information that Gramm-Leach-Bliley protects, and there is no 
Bank Secrecy Act exemption for that, unless it is suspicious or 
law enforcement has a subpoena to get it.
    So we think there is a lot of thinking that could go on in 
that where you could probably weave a way to take some of that 
burden off and actually make this a lot more efficient and for 
not only the banks or the financial institutions, not only the 
community banks, but for the entire panoply across the entire 
regime, which is in, 2017, is what you want, right? Think about 
it: We are filing narrative reports on terrorism. It doesn't 
make sense.
    I think you really need to think about how the regime 
itself is set up and how it is working, right? And that, I know 
that The Clearing House is, stands ready, and Bank of America 
stands ready to do anything we can to work with the staff to do 
that.
    Chairman Pearce. The gentleman's time has expired.
    I would like to thank all of our witnesses for your 
testimony today. You have been very gracious with your time and 
with your answers. We thank you for that.
    Miss Poncy, I hope that you have gotten sufficient 
information for your article today, so thank you for joining us 
today.
    Without objection, all members will have 5 legislative days 
within which to submit additional written questions for the 
witnesses to the Chair, which will be forwarded to the 
witnesses for their response. I will ask our witnesses to 
please respond as promptly as you are able.
    This hearing is adjourned.
    [Whereupon, at 4:40 p.m., the subcommittees were 
adjourned.]

                            A P P E N D I X



                           November 29, 2017
                           
                           
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