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

                           INTERNATIONAL AND DOMESTIC
                           IMPLICATIONS OF DE-RISKING
    =======================================================================

                                    HEARING

                                   BEFORE THE

                     SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                              AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 26, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-105

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                       ______

                         U.S. GOVERNMENT PUBLISHING OFFICE

    31-494 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

                         Shannon McGahn, 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

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        June 26, 2018................................................     1
    Appendix:
        June 26, 2018................................................    33

                                   WITNESSES
                             Tuesday, June 26, 2018

    Clements, Michael E., Director, Financial Markets and Community
      Investment, Government Accountability Office...................     3
    Eckert, Hon. Sue E., Adjunct Senior Fellow, Center for a New
      American Security..............................................     5
    Haddad, Gabrielle, Chief Operating Officer, Sigma Ratings, Inc...     7
    Lewis, John, Senior Vice President, Corporate Affairs and General
      Counsel, United Nations Federal Credit Union on behalf of the
      National Association of Federally-Insured Credit Unions........     9
    Yearwood, Sally, Executive Director, Caribbean-Central American
      Action.........................................................    11

                                    APPENDIX

    Prepared statements:
        Clements, Michael E..........................................    34
        Eckert, Hon. Sue E...........................................    64
        Haddad, Gabrielle............................................    96
        Lewis, John..................................................   103
        Yearwood, Sally..............................................   114

                           INTERNATIONAL AND DOMESTIC
                           IMPLICATIONS OF DE-RISKING

                                  ----------

                             Tuesday, June 26, 2018

                         U.S. House of Representatives,
                         Subcommittee on Financial Institutions
                                           and Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:02 a.m., in
    room 2128, Rayburn House Office Building, Hon. Blaine
    Luetkemeyer [chairman of the subcommittee] presiding.
        Present: Representatives Luetkemeyer, Rothfus, Posey,
    Pittenger, Barr, Tipton, Williams, Love, Loudermilk, Kustoff,
    Tenney, Clay, Scott, Green, and Crist.
        Chairman Luetkemeyer. The committee will come to order.
    Without objection the chair is authorized to declare a recess
    of the committee at any time. This hearing is entitled,
    ``International and Domestic Implications of De-risking.''
        Before we begin I would like to thank the witnesses for
    appearing today, we appreciate your participation and look
    forward to the discussion.
        I now recognize myself for 5 minutes to deliver my opening
    statement.
        This subcommittee has spent significant time analyzing the
    impact of de-risking on consumers, businesses, and entire
    communities. As we have discussed, the overly punitive
    supervisory and examination tactics employed by Federal
    financial regulators that came in the wake of the financial
    crisis have had dramatic implications on the availability of
    financial products and services in all of our communities.
        What we have not discussed are the global implications of
    these regulations. Today we will not only explore de-risking's
    impact on U.S. financial institutions and their customers but
    also its impact on people and businesses around the world as
    well as our fight to combat illicit financial activity. Making
    relationships with so-called high-risk clients, they become
    cost prohibitive for financial institutions due, in large part,
    to heightened compliance expectations, and as a result many
    institutions have opted to terminate relationships.
        This decision has resulted in the elimination of the
    consumer and small business access to financial products and
    services, a decrease in the availability of money remittances,
    and reduced flow of humanitarian aid globally.
        To be clear, there are valid reasons for account
    terminations and the fight against illicit finance is one of
    the most important fights we wage; however, we would be better
    equipped to wage that fight if we had a modernized regulatory
    system.
        It is particularly true in the case of compliance with the
    Bank Secrecy Act and Anti-Money Laundering laws. The truth of
    the matter is that compliance with BSA/AML is so costly and the
    penalty is so steep, financial institutions would sooner rather
    end customer relationships than run the risk of running afoul
    of the regulators and law enforcement.
        The status quo doesn't foster a safer system and it doesn't
    necessarily help catch more bad actors; in fact, it is quite
    the opposite. Instead of fostering collaborative relationships
    between institutions and government, the modern BSA/AML
    framework, along with the other regulatory drivers of de-
    risking, push more people and more money into the shadows.
        So where do some of those de-bank customers go? According
    to data published last year by payment and compliance
    technology company Accuity, correspondent banking relationships
    with Chinese banks surged more than 3,300 percent, from 65 in
    2009 to 2,246 in 2016. There was a 25 percent drop in the
    number of correspondent relationships globally during the same
    time period.
        It is in the best interest of our financial services firms,
    our communities, law enforcement, and the Federal Government to
    monitor and maintain these global banking relationships. This
    hearing isn't only important to the people testifying today or
    to the financial institutions that do business internationally,
    it is important to any small nation that relies heavily on the
    U.S. dollar and the trading partners who sell U.S. goods there.
        It is important to poorer communities that are losing banks
    and credit unions because of the BSA/AML regime. It is
    important to a worker in Florida who can no longer send the
    money he earns to help his family in Haiti. This is an
    incredibly important topic.
        We have an excellent panel today and I want to thank each
    of them for taking time to testify and we look forward to your
    statements.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Scott excuse me, who is subbing for Mr. Clay, the Ranking
    Member of the subcommittee, for a 5-minute opening statement.
        Mr. Scott. Thank you very much Chairman Luetkemeyer for
    organizing today's hearing.
        And to each of our outstanding panelists for this
    testimony, we are looking forward to hearing from you.
        First of all, it is clear that the push by depository
    institutions' decisions to de-risk and discontinue account
    services for certain customers is having very significant,
    adverse consequences on a broad range of consumers, industries,
    and regions around the world.
        And in addition to the devastating regional impacts the de-
    risking of broad categories of customers' accounts, has also
    had an impact on key consumer groups that perform essential
    functions in our society. This includes nonprofit
    organizations, charities, embassies, and remittance providers
    among others; although the adverse effects of de-risking are
    clear, what is less apparent are the specific factors and the
    degree to which each factor is responsible for arriving at this
    trend.
        We look forward to the hearing, hopefully we can come up
    with some very good recommendations as to how we go forward.
    Thank you again to each of the panelists for being here.
        And I yield back the balance of my time.
        Chairman Luetkemeyer. The gentleman yields back.
        Today we welcome the testimony of Mr. Michael Clements,
    Director, Financial Markets and Community Investment, U.S.
    Government Accountability Office; the Honorable Sue Eckert,
    Adjunct Senior Fellow, Center for a New American Security; Ms.
    Gabrielle Haddad, Chief Operating Officer, Sigma Ratings, Inc.;
    Mr. John Lewis, Senior Vice President for Corporate Affairs and
    General Counsel, United Nations Federal Credit Union and on
    behalf of the National Association of Federally Insured Credit
    Unions; and Ms. Sally Yearwood, Executive Director of
    Caribbean-Central American Action (CCAA).
        Each of you will be recognized for 5 minutes to give an
    oral presentation or a testimony. Without objection each of the
    written statements will be made part of the record.
        Just two quick housekeeping things. Number one, we have
    votes called right around 3:30 to 4. We will see where we are
    with our witnesses' testimony and our questions but we may have
    to ask you to stay a little longer if we need to go vote and
    come back.
        In the meantime, the timing system on your microphones
    there are such that green means go, yellow means you have about
    a minute left, and red means your time is up and so you need to
    wrap it up very shortly.
        So, with that Mr. Clements you are recognized for 5
    minutes. Excuse me you are--

                      STATEMENT OF MICHAEL CLEMENTS

        Mr. Clements. Chairman Luetkemeyer.
        Chairman Luetkemeyer. Recognized for 5 minutes. I am sorry.
        Mr. Clements. Chairman Luetkemeyer, Mr. Scott, and other
    Members of the subcommittee, I am pleased to be here today to
    discuss our recent report, discussing de-risking by depository
    institutions and the implication for the southwest border
    region and money transmitters serving fragile countries.
        My statement today focuses on three key findings from our
    reports. As background, the Bank Secrecy Act serves an
    essential function, it helps to prevent money laundering,
    terrorism financing and other criminal activity.
        We define de-risking as the practice of depository
    institutions limiting services or ending relationships with
    customers in response to perceived regulatory concerns.
        Chairman Luetkemeyer. Mr. Clements, if you could move the
    microphone, just pull right in front of and just take a bite at
    it when you speak--
        Mr. Clements. OK.
        Chairman Luetkemeyer. Thank you.
        Mr. Clements. Our first key finding, the extent of and
    reasons for account terminations and bank closures in the
    southwest border region. We found that branch closures in the
    southwest border region were concentrated in a small number of
    communities. Five counties in Arizona, California, and New
    Mexico lost 10 percent or more of their branches. In some
    instances, those losses were concentrated in smaller
    communities. For example one California town lost five of its
    six branches.
        The loss of bank branches can have negative implications
    for business lending and ultimately employment in these
    communities. In many instances banks limit service or terminate
    accounts in response to legitimate BSA concerns. The southwest
    border region poses a high risk for money laundering because of
    the high volume of cash transactions, number of cross-border
    transactions, and number of foreign account holders.
        However, we also found evidence of de-risking, in
    particular 80 percent of southwest border banks reported
    limiting or not offering of accounts because the customer type
    drew heightened BSA regulatory oversight. Here the reason is
    perceived oversight, not the customer's action.
        Our second key finding, the challenges money transmitters
    face remitting funds to select fragile countries. We examined
    the experience of money transmitters serving four fragile
    countries: Haiti, Liberia, Nepal and Somalia. Remittances from
    the United States are an important source of funds for these
    countries. All 12 money transmitters we interviewed that served
    these countries report losing some accounts with banks. In the
    case of Somalia, two of four money transmitters report losing
    all access to bank accounts.
        Some banks acknowledge closing and denying accounts for
    money transmitters. These banks consider money transmitters
    high cost and also high-risk customers. In particular banks
    cite: One, high staff and technology cost associated with BSA-
    related activities; and two, the perceived risk of significant
    fines and penalties.
        Money transmitters that lose access to banking services
    often resort to nonbanking channels such as couriers physically
    transporting cash. For law enforcement, nonbanking channels
    provide less transparency and thereby hinder the ability to
    detect criminal activities.
        Finally, our third key finding, agencies' efforts to assess
    and respond to de-risking concerns. Treasury and Federal
    banking regulators have taken some steps in response to
    concerns about de-risking. The agencies have issued BSA
    guidance to banks. The agencies have also conducted
    retrospective reviews; these are a lookback to assess whether
    regulation should be retained, amended, or rescinded. However,
    we found the agencies' reviews have not fully addressed the
    factors that influence banks to de-risk.
        The agencies also recently began collecting data on
    international remittances from banks. However, we found
    Treasury does not have the data it needs to assess how the loss
    of banking services by these remitters will influence service
    to fragile countries.
        Given the problems we identified, we made several
    recommendations. We recommended that Treasury and the banking
    regulators conduct retrospective reviews that incorporate
    banks' regulatory concerns regarding BSA/AML compliance. We
    recommended that Treasury assess the extent to which remittance
    flows through nonbanking channels may hinder its ability to
    monitor criminal activity.
        Chairman Luetkemeyer, Mr. Scott, and other Members of the
    subcommittee, this completes my prepared statement. I would be
    pleased to respond to any questions you may have.
        [The prepared statement of Mr. Clements can be found on
    page 34 of the Appendix.]
        Chairman Luetkemeyer. Thank you. Mr. Clements yields back
    the balance of his time.
        Then we go to Ms. Eckert. You are recognized for 5 minutes.
    Welcome.

                         STATEMENT OF SUE ECKERT

        Ms. Eckert. Thank you. Chairman Luetkemeyer, Congressman
    Scott, and distinguished Members of the subcommittee, thank you
    for the opportunity to testify today on the international and
    domestic implications of de-risking.
        I applaud your efforts to call attention to the critically
    important phenomena of de-risking--something that is not well
    understood but which has profound impacts on some of the
    world's most vulnerable populations. The U.S. has a unique role
    to play in addressing de-risking globally as the dominance of
    the U.S. dollar and American regulatory policy set the stage
    for other countries.
        My comments today focus on the impact of de-risking on
    charities and nonprofit organizations and is based on the
    research that I conducted for the February 2017 report,
    Financial Access for U.S. Nonprofits. It was commissioned by
    the Charity & Security Network and supported by the Bill and
    Melinda Gates Foundation. While I am currently involved with
    the World Bank ACAMS (Association of Certified Anti-Money
    Laundering Specialists) process on financial access for NPOs
    (non-profit organizations), the views expressed today are my
    own.
        I spent a number of years on Capitol Hill as a staffer in
    the Executive branch as a regulator of dual-use exports and in
    the academic community but in all those years there is no issue
    that I dealt with that has more serious, real, and dire
    consequences for populations in need. These severe implications
    extend beyond NPOs and the groups that they serve; it also
    extends to U.S. security and foreign policy interest. So with
    my brief time I want to make a couple points.
        First, there is no question of the need for humanitarian
    and development assistance today, it is a profound need. The
    United Nations estimates that in 2018, more people than ever
    before will need assistance and protection, 136 million people.
    Conflict, protracted crises, and natural disasters continue to
    be the main drivers of need, which remains exceptionally high
    levels in countries such as Nigeria, South Sudan, the Syria
    region, and Yemen which are likely to remain the world's most
    serious humanitarian crises.
        To effectively respond to these humanitarian crises, funds
    must be able to move across borders in a timely and predictable
    fashion. Financial access for charities and NPOs, therefore,
    can literally mean life and death.
        Second, there is no question that de-risking or problems
    with financial access for NPOs is having a serious and
    widespread effect. The study from 2017, noted surprisingly that
    two-thirds of all U.S. NPOs were having financial access
    difficulties, perhaps more worrisome was the fact that in order
    to respond and get the aid to these places, 42 percent of NPOs
    were starting to carry cash because they could not get money
    through the financial system. We actually have more recent data
    that shows that the problem appears to be worsening.
        Third, the problem relates to concerns by financial
    institutions for the risk and cost associated with banking in
    the charitable sector. This derives from well-intended and
    important policies developed immediately after 9/11 by the FATF
    (Financial Action Task Force), whereby NPOs or charities, were
    considered particularly vulnerable to terrorist abuse.
        Based on more recent analysis, the evolving nature of the
    terrorist threat and actions that the charitable sector has
    taken, that perception is outdated and, in 2016, FATF changed
    its policies. However, the pervasive nature of the perception
    that charities are high risk persist; serious unintended
    consequences of these policies have resulted.
        Fourth, de-risking is a complex problem that entails a
    variety of interest: Financial integrity; national security and
    counterterrorism; foreign policy; and the provision of
    humanitarian and development assistance and it must be a shared
    responsibility. No one group, U.S. policymakers, U.S.
    regulators, financial institutions, or the nonprofit and
    charitable sector, can address these issues by themselves.
        Fifth, in terms of what kind of action should be taken,
    very briefly, raise awareness and promote a balanced approach;
    stakeholder dialog which the World Bank and ACAMS has promoted,
    has enhanced engagement among all parties. What is really
    interesting is how little these sectors know of each other.
        The second is to provide regulatory and policy guidance.
    The government needs to develop policy and regulatory guidance
    that provides clarity to banks and NPOs on the implementation
    of a risk-based approach; however, 2 years ago when FATF
    adopted the recommendation, changed the nature of how charities
    should be treated, nothing has happened subsequently. Banks
    have told us there is no question that they have to have
    something from the regulators in order to change their
    assessment of risk.
        Currently the World Bank and ACAMS initiative has produced
    recommendations that were jointly made by banks and nonprofits,
    which is pending before the regulatory agencies.
        Third, we need to explore incentives for financial
    institutions to bank NPOs. A menu of measures including the
    creation of safe harbor to incentivize banks to keep NPO
    accounts and encourage efforts to engage with NPOs should be
    developed.
        Finally, the creation of safe-payment channels. There are
    times when banks are not going to go any further and we need to
    consider those options.
        There are additional recommendations in my statement. Mr.
    Chairman, I look forward to discussing them.
        [The prepared statement of Ms. Eckert can be found on page
    64 of the Appendix.]
        Chairman Luetkemeyer. Thank you.
        Ms. Haddad, you are recognized for 5 minutes.

                      STATEMENT OF GABRIELLE HADDAD

        Ms. Haddad. Thank you. Chairman Luetkemeyer, Congressman
    Scott, and distinguished Members of the subcommittee, I am
    honored by your invitation to testify before you today.
        De-risking is a phenomenon that has had dramatic impacts on
    the international financial system over the last decade. De-
    risking has impacted the concentration of trade flows and
    cross-border payment activity which challenges financial
    stability and inclusion for affected markets.
        For the United States specifically, a decline in dollar-
    denominated transactions and flows through U.S. financial
    institutions has potential implications on commerce as well as
    the United States' competitive position.
        I am the Co-founder and Chief Operating Officer of Sigma
    Ratings, a company we founded to address de-risking by
    highlighting and incentivizing good corporate behavior
    globally. Today my testimony will focus on the drivers and
    international impacts of de-risking that resulted from the
    termination of correspondent banking relationships.
        Since founding Sigma Ratings, my team and I have met with
    financial institutions and regulators in dozens of countries
    across Europe, Latin America, the Middle East, and Africa to
    better understand the challenges of de-risking and determine
    how our solution can help solve them.
        We have learned that there are many drivers of de-risking
    including profitability and reputational risk concerns and
    these drivers may vary from country to country; however, fears
    of regulatory enforcement actions and fines as well as the cost
    associated with complying with anti-money laundering,
    counterterrorist financing, and sanctions regulations, are
    consistently highlighted as primary drivers of de-risking.
        Regulatory fines imposed since 2012 against global banks
    reached billions of dollars and have had a chilling effect on
    the robustness of global correspondent relationships. The
    magnitude of these fines has instilled fear in many global
    banks and resulted in the reassessment of those banks' risk
    appetites.
        Another driver is cost. Global banks are spending billions
    of dollars a year on compliance with some banks individually
    spending over a billion dollars themselves. Cost of due
    diligence and concerns about the compliance regimes of
    respondent banks are frequently mentioned as the main reasons
    for termination.
        While much of bank-spending is for critically important
    tasks, many costly compliance tasks are repetitive and viewed
    as mere check-the-box exercises by banks. This may distract
    institutions from the intended outcome of detecting real risk
    and ultimately identifying illicit activity. As a result of
    these fears and costs, many institutions determine that the
    costs and risks associated with maintaining certain
    relationships are no longer worth the revenue generated,
    leading to terminations.
        I would like to turn to the three key consequences of de-
    risking: Financial exclusion, decrease in transparency, and
    long-term effects.
        First, research demonstrates that de-risking has direct
    financial implications for individuals and businesses operating
    in these markets. In a World Bank report from November 2015,
    decreases in lending, international wire transfers, cash
    management services, and check-clearing were highlighted among
    some of the most significant impacts at the local level.
    Additionally, an IMF report from March 2017 indicates that
    small countries with low volumes of transactions experienced
    increased costs for remittance transfers which has a direct
    impact on end-users.
        Second, it has been cautioned by the World Bank, the
    Financial Action Task Force, and other groups, that de-risking
    may unintentionally drive financial transactions underground or
    into shadow markets. This makes detecting illicit activity much
    harder. It is well-documented that channels with a low
    likelihood of detecting illicit activities such as unregulated
    industries are the channels more frequently used by money
    launderers and terrorist groups for movement of funds. As
    regulated entities, banks have higher likelihood of detecting
    illicit activity.
        Third, de-risking has long-term effects that should not be
    ignored. We found in our research that many countries and
    institutions that were de-risked continue to struggle to find
    new relationships and for those who do, they are often subject
    to higher fees and increased due diligence by correspondents
    leading to higher costs of doing business.
        The loss of correspondent banking relationships can also
    create a long-term stigma, for example, rating agencies have
    started to consider loss of correspondent banking relationships
    as a factor for downgrading the rating of a financial
    institution.
        With de-risking and its drivers receiving much attention
    over the last few years, with public and private sector players
    have presented potential solutions, a sustainable solution,
    however, will require a change in the overall cost-benefit
    analysis for correspondents in high-risk markets.
        Some possible approaches are the following: First greater
    sharing of risk information to improve overall transparency and
    reduce due diligence costs. For a bank with thousands of
    relationships, due diligence practices, much of which are done
    manually today, are almost impossible to keep up with. Greater
    information sharing between both public and private sector
    improves information availability and transparency.
        Second, the compliance burden can be further reduced
    through the use of standardized, independent third-party
    assessments of potential respondents' risk and compliance
    practices. An independent assessment would serve as a baseline
    for a correspondent to enter into a relationship, thus reducing
    much of the up-front and on-going diligence processes.
        Furthermore, standardized assessments would allow for
    benchmarking across jurisdictions, for use by governments as
    well as financial institutions. This increased visibility and
    comparability would allow for better allocation of capacity-
    building resources.
        Finally, the use of technology to enable financial
    institutions to better understand their clients and manage
    their risk should be welcomed.
        Thank you for taking the time to hold this hearing and for
    allowing me to share my perspective on this important topic. I
    look forward to your questions.
        [The prepared statement of Ms. Haddad can be found on page
    96 of the Appendix.]
        Chairman Luetkemeyer. Thank you, Ms. Haddad.
        Mr. Lewis you are recognized for 5 minutes, hopefully it is
    within a 5-minute timeframe.

                         STATEMENT OF JOHN LEWIS

        Mr. Lewis. We will try.
        Chairman Luetkemeyer. We have a difficulty with 5 minutes
    today.
        Mr. Lewis. Good afternoon Chairman Luetkemeyer, Ranking
    Member Clay, and Members of the subcommittee.
        My name is John Lewis. And I am testifying today on behalf
    of NAFCU. I am the Senior Vice President of Corporate Affairs
    and General Counsel for the United Nations Federal Credit
    Union.
        NAFCU and its member credit unions have consistently
    recognized the importance of BSA and AML requirements in
    assisting in prevention of illicit activity. Credit unions are
    fierce supporters of efforts to combat criminal activity
    utilizing our financial systems. Credit unions work closely
    with examiners to ensure consistent application of BSA risk
    assessments. Still, the implementation of BSA requirements
    remains a burden for many credit unions especially in the post-
    financial crisis regulatory environment.
        Given credit union's field-of-membership limitations, it is
    important for credit unions to have potential to serve everyone
    in their field of membership whether individuals or legitimate
    businesses, some members may present heightened-risks which can
    mean increased compliance burdens, cost, and pressures on
    credit unions.
        Despite UNFCU's unique field-of-membership, we have been
    fortunate to have good relationships with our examiners who
    have worked with us in riskier areas. However, other credit
    unions report that while NCUA (National Credit Union
    Administration) doesn't directly prohibit them from serving
    certain types of members, they feel pressured by examiners to
    limit services.
        It is important to note that when a credit union is serving
    a higher-risk individual or business, they are very thorough in
    their evaluation recordkeeping. However, when examiners
    evaluate that relationship they can be very demanding of the
    credit union, this additional pressure and scrutiny from
    examiners can lead institutions to de-risk by limiting services
    for certain types of members.
        Sometimes the pressure to de-risk comes not from the
    regulators but from law enforcement. Although credit unions
    recognize the importance of sharing critical information with
    law enforcement, some report they have received unreasonably
    broad subpoenas asking for all information and correspondence
    related to any members in a certain type of business. The
    threat of over-broad investigatory demands makes credit unions
    hesitant to provide services to members that are targeted as
    higher risk.
        Credit unions can also be impacted by others making the
    decision to de-risk. At UNFCU, some of our members have
    international ties and some are located abroad, as a result we
    are presented with a unique set of risks for which we have
    learned to adapt.
        We have found that some of UNFCU's long-standing vendors
    have reevaluated their relationships with UNFCU even de-risked
    by ending the relationship due to the fact that we serve some
    higher-risk members. This loss of vendors has led to a
    significant disruption of services and increased costs to our
    members. Our unique membership coupled with our vendor
    relationships gives UNFCU a strong understanding of the
    challenges from both sides of the de-risking issue.
        Credit unions continue to work with FinCEN (Financial
    Crimes Enforcement Network) and other regulators to develop
    ways to provide services to higher-risk members without
    incurring compliance burdens and costs that are so onerous that
    de-risking becomes the only option.
        Some ideas for improvement include first, creating a safe
    harbor for the financial institution providing services to
    high-risk accounts if they meet certain requirements in
    scrutiny of those accounts.
        Second, ensuring the risk-based review requirements for
    financial institutions are understood by examiners.
        And third, not making the financial institution the de
    facto regulator of business. While it may make sense for the
    institution to verify registration licensing, they should not
    be forced to verify levels of compliance by the business.
        NAFCU also supports legislative proposals to address these
    issues. I outlined these in greater detail in my written
    statement but they include H.R. 6068, the Counter Terrorism and
    Illicit Finance Act which takes important steps to update and
    modernize the BSA/AML regime; H.R. 4545, the Financial
    Institutions Examination Fairness Reform Act, enacting this
    legislation would provide relief for financial institutions
    from perceived pressures from examiners; and finally H.R. 2706,
    the Financial Institution Customer Protection Act of 2017 that
    would ensure ``Operation Choke Point'' policies will not be
    used by regulators to prevent the provision of financial
    services to a member.
        An additional area where relief is needed is the Bureau's
    rule on international remittances. The rule has driven a number
    of credit unions out of the remittance business as the cost of
    compliance and risks associated with it are too great. We
    believe that the Bureau should use its exemption authority
    under Section 1022 of Dodd-Frank to provide relief to credit
    unions on the issue.
        In conclusion, NAFCU and its member credit unions recognize
    the importance of the BSA regime as well as the importance of
    regulator and law enforcement scrutiny of riskier businesses.
    Given UNFCU's field of membership, we serve as an example that
    it can be done, nonetheless heavy compliance costs, burdens,
    and pressures from regulators and law enforcement when dealing
    with high-risk members and businesses can lead many to de-risk
    and stop providing services to them.
        Congress can help by working with financial regulators and
    law enforcement to alleviate these burdens and pressures. NAFCU
    stands ready to work with you in this regard.
        Thank you for the opportunity to appear before you today. I
    welcome any questions you may have.
        [The prepared statement of Mr. Lewis can be found on page
    103 of the Appendix.]
        Chairman Luetkemeyer. Thank you, Mr. Lewis.
        Ms. Yearwood you are recognized for 5 minutes.

                       STATEMENT OF SALLY YEARWOOD

        Ms. Yearwood. Chairman Luetkemeyer, Ranking Member Clay,
    and Members of the subcommittee, thank you for the opportunity
    to appear before you today. As one of the most insidious
    threats to the Caribbean's economic sustainability, de-risking
    is destabilizing economies, threatening trade, and creating
    security concerns and it requires constructive solutions. I
    would like to begin with some examples.
        In 2015, on instruction from their U.S. correspondent
    banks, the two banks in the Cayman Islands that supported money
    transfer business, severed those relationships and the MTBs
    (money transfer businesses), which provide critical remittance
    services were forced to shut down. This led to moving cash in
    planes in order to make sure that the affected population had
    access to finance. Today only one MTB remains open.
        Tourism is one of the Caribbean's most important industries
    and generates significant demand for U.S. goods and services.
    About 4 years ago, a leading hotelier told me that they had
    received a letter from their longtime U.S. bank, it essentially
    said ``as of today we are no longer your bank.'' There was no
    valid explanation and no opportunity to address concerns. I
    spoke to that hotelier last week in preparation for this
    hearing to see how they had resolved the issue and was told
    that finding a new U.S. bank was extremely difficult and that
    they still feel that the situation is precarious. They did not
    want me to use their name, the hotel name, the name of the U.S.
    bank that they are now using, or disclose the country or
    countries where they operate.
        This last point underscores why getting a grip on the
    impact of de-risking can be so difficult. A legitimate business
    has lost its U.S. banking relationships regardless of whether
    or not there is any real risk present, has the stain of de-
    risking on them so they keep it quiet and try to replace the
    lost relationship. Bottom line it is like Fight Club, the first
    rule of being de-risked is, you don't talk about being de-
    risked.
        The toll has been highest on small- and medium-sized
    business where the costs of banking are becoming prohibitive.
    We have seen a rise in cash in informal economies in some
    jurisdictions and the operation of parallel foreign exchange
    markets. Even for long-established businesses banking has
    become burdensome. One U.S. company that operates in the
    Caribbean reports that a basic process like opening a new
    account that used to take 10 days or so, now can take up to 60
    days and require 10 times more paperwork.
        The Caribbean Association of Banks reports that nine
    members have no U.S. correspondent banks but have been on-
    boarded by third parties to manage these banking services and
    17 members have only one U.S. correspondent. At the same time,
    they report a 39-percent year-on-year increase in correspondent
    banking fees between 2014 and 2017, and the cost of compliance
    has increased approximately 66 percent.
        As relationships are lost with U.S. banks, they are being
    sought in Asia and the Middle East and if the United States
    doesn't work to address the challenges, countries may have no
    option but to build new relationships and prioritize trade with
    other countries.
        While de-risking is a motivation for the loss of banking
    relationships, the reality is that profitability plays a
    significant role as well. These are small economies in a global
    system and weighing perceived risk with profitability does not
    always work in the Caribbean's favor, even though the region
    has been working diligently to improve its risk profile.
        It is important to stress that no one is advocating for a
    removal of the rules. Today's world requires that we build
    systems that have the capacity to recognize and eliminate
    threats. But this should not be done in a way that forces
    legitimate actors out of the system and there are a number of
    ways to change the narrative.
        First, the U.S. Department of Treasury provides important
    assistance to the region. Resources could be made available to
    allow the Department to deepen its engagement there. Another
    idea related to Treasury is if larger banks are not going into
    the market because of the profit ratio, is there a scenario
    wherein community and minority banks are encouraged to serve
    the Caribbean using the platforms within large banks, with the
    large banks who make their platforms available receiving credit
    under the Community Reinvestment Act?
        Second, innovation has the capacity to level the playing
    field. This is happening in the Caribbean where we have seen
    the emergence of technology companies that are working to
    remove financial friction-points across the region. I also
    believe that some consideration should be given to the issue of
    proportionality, fines can reach billions of dollars. Taken in
    context, Belize, which has been particularly affected by de-
    risking, had a GDP of just under 1.8 billion in 2016 along with
    1.3 billion of external debt. If the application of the rules
    is weighted against small economies and their inherent
    vulnerabilities, how do we keep them viable?
        In conclusion, taken as a group, the countries of the
    Caribbean and Central America are the fifth largest buyer of
    United States non-oil exports and the U.S. consistently records
    a trade surplus. If access to banking is removed or becomes
    more costly and difficult, it is likely that this healthy
    relationship will begin to be eroded.
        Second, the countries of the Caribbean and Central America
    are the United States' third border. When the countries of the
    region experience instability, mass-migration is one risk, and
    in the absence of the U.S. actively working to help the region,
    the door is open to other partners who may be antithetical to
    the United States' security interests.
        CCAA is grateful that this subcommittee has provided this
    platform. Thank you, Mr. Chairman for the opportunity.
        [The prepared statement of Ms. Yearwood can be found on
    page 114 of the Appendix.]
        Chairman Luetkemeyer. Thank you, Ms. Yearwood.
        I appreciate everybody's comments.
        And with that we will begin the question part of our
    discussion today. And I will begin with my questions.
        Mr. Clements, you and all the witnesses today have
    described concerns about the problems of de-risking across the
    board with regards to how law enforcement and regulatory
    officials have come down on the people in the financial
    services industry.
        Is law enforcement aware that they are deterring actual
    profitable, well-intentioned business and if they are do they
    have some ideas on how to fix the problem so they don't deter
    normal activity or are they content with driving everybody out
    of the business altogether?
        Mr. Clements. In the two reports, we were not talking to
    law enforcement so I can't speak to the effect of whether law
    enforcement is aware of it. I think you bring up a relevant
    issue. In many instances it is not people telling, instructing
    banks, for example, to drop a customer, it is simply the effect
    of working through the examiners saying, this is a high-risk
    customer, and the next thing you know, it involves additional
    staff and additional resources; there is the risk of large
    fines that we have heard about and those things create an
    incentive for the bank to essentially drop service rather than
    have to deal with that potential risk.
        Chairman Luetkemeyer. Well it is very concerning because it
    is a manifestation, a morphing if you will of ``Operation Choke
    Point'' into other areas here from the standpoint of trying to
    intimidate the banks and then discontinuing financial services
    with customers who are legitimate customers or did a good job.
        You know, Mr. Clements, I believe you were the one that
    indicated and had some nice charts in your testimony that
    showed the counties along the border between the United States
    and Mexico are being dramatically impacted, where they are
    closing branches so they can't do any business so they can de-
    risk themselves of their problem. I guess my question is, have
    you seen the next county above them, are they starting to de-
    risk as well or are they starting to close financial service
    because, I would assume, that if you close the branch off next
    to the border, that people will start going to the next county
    over, is that happening as well, or starting to happen now?
        Mr. Clements. Our experience was just with the counties on
    the southwest border, it was certainly the case that one option
    that consumers have if they have lost their branch in that
    community is to go one community over and have to travel to
    that branch.
        The other options they have are mobile banking.
        Chairman Luetkemeyer. Mr. Lewis, you are a credit union,
    did you see that happening, you see them closing on the border
    and then moving to the next county over, to where you are
    starting to get some pressure to be able to close those next?
        Mr. Lewis. We, UNFCU are not seeing that, as we are not
    located on a border State. We know that there are credit unions
    that are under pressure and have had some issues with it.
    Certainly, I could get back to you and provide a written
    response to that in more detail if you like.
        Chairman Luetkemeyer. Thank you.
        I have another question here with regards to, there was an
    article from Reuters back on May 8, 2017, the headline is,
    ``Chinese banks payment networks surge as Western lenders cut
    ties,'' and there was a study to show this and it was, I quoted
    the numbers in my opening statement here and the last part of
    this says, ``the U.S. dollar dominates world trade but there is
    a trend toward a decline in the use of U.S. dollar and an
    increase in the use of the renminbi,'' which is the Chinese
    dollar if you will. Have you seen this going on, any of you,
    where we have seen that there is a risk to the U.S. dollar
    being the reserve currency, we are starting to trade in other
    currencies versus the dollar?
        Mr. Clements, you have seen evidence of that?
        Mr. Clements. We have no evidence of that.
        Chairman Luetkemeyer. Ms. Eckert?
        I know that you deal with a lot of charities around the
    world. It is terrible that even they are being hurt by this. I
    mean who wants to launder money through a charity but that's
    the ultimate slap of whatever, but can you comment on this?
        Ms. Eckert. On the question of reverting to alternative
    currencies, we did not see that--
        Chairman Luetkemeyer. OK.
        Ms. Eckert. But I would say that in terms of the law, the
    first point that you raised on law enforcement, I think it is a
    very interesting comment because law enforcement actually has
    been extremely concerned about the loss of traceability and
    transparency, that as these NPOs are de-risked they will either
    use cash, they will use MSBs, they will use alternative means.
        Chairman Luetkemeyer. OK. Ms. Haddad, I would like for you
    to comment and Ms. Yearwood as well on this question, have you
    seen any problems with this or there are concerns?
        Ms. Haddad. I haven't seen it directly but I have heard
    from people particularly in Africa, from banks there that when
    those banks were de-risked that some Chinese banks picked up
    the correspondent relationships that were previously held by
    U.S. correspondents.
        Chairman Luetkemeyer. Yes, the relationships, they are
    picking them up left and right like leaves on the--on the
    ground here.
        Ms. Yearwood, have you seen anything like that with the
    Caribbean banks that you are dealing with?
        Ms. Yearwood. I don't have any evidence of Caribbean banks
    getting Chinese accounts; however, what I have been told is
    that some Caribbean banks have tried to get Chinese accounts
    but not being able to get them because of the ongoing
    relationship to the U.S. dollar.
        Chairman Luetkemeyer. OK. Thank you very much. My time is
    up.
        With that we go the Ranking Member, Mr. Clay.
        Mr. Clay. Thank you so much, Mr. Chairman. I thank the
    panel of witnesses for being here.
        Let me start with Ms. Yearwood or Ms. Eckert or both of
    you, what would give financial institutions more comfort in
    serving remittance service providers especially those serving
    fragile nations, can you help us with that, whoever wants to
    go, Ms. Yearwood?
        Ms. Yearwood. Thank you, Ranking Member Clay.
        In my testimony I pointed to some of the things in terms of
    the assistance from the Treasury Department that could help
    give a certain amount of comfort to the people who are
    providing services in the region. That being said, the
    remittance side of the coin, I actually think Gabrielle Haddad
    may have some input because I think transparency and the
    ability to have traceability of where the money is going and
    coming from is key especially when you are moving very small
    amounts of money so--
        Mr. Clay. Right.
        Ms. Yearwood. I will defer to Ms. Eckert and then Gabrielle
    may have something to add.
        Mr. Clay. Go right ahead.
        Ms. Eckert. Thank you, Mr. Clay.
        I think that what banks are asking for as they relate to
    NPOs is they are asking for some clarity about regulatory
    expectations, what is expected of them and, in fact, to the
    point of the interviews that I conducted, I had banks who say
    that they can manage risk, that is what their business is;
    however, what they can't deal with, there is regulator-risk and
    that is examiners second-guessing them all the time in terms of
    what their assessments are under a risk-based approach.
        The other thing that the financial institutions want is
    they want more information to be able to make the best-informed
    decision so part of the process that we are engaged in is
    identifying what information financial institutions need from
    NPOs and getting NPOs comfortable providing that to banks so
    they can break down some of these perceptions that exist about
    each other.
        Mr. Clay. Thank you.
        Ms. Haddad, anything to add?
        Ms. Haddad. I would just add that I agree that the
    information-sharing is a huge challenge that banks face, both
    from money-service businesses and from respondent banks, in
    order for them to actually obtain the information that they
    need to make assessments of their relationships, is incredibly
    challenging and this is resulting in huge burdens and a real
    lack of clarity, as Ms. Eckert mentions, around what their
    regulatory expectations are.
        Mr. Clay. So, it is more of the uncertainty on the part of
    banks that they are hesitant to go forward?
        Ms. Haddad. That is what it appears to be, yes.
        Mr. Clay. I see.
        This question is for Mr. Clements and Ms. Eckert, what
    specific steps do you believe Congress or State governments can
    take to address the adverse consequences of de-risking
    remittance service providers?
        Mr. Clements. We have a variety of recommendations to the
    Federal agencies in terms of Treasury and the banking
    regulators to conduct retrospective reviews, actually looking
    at this issue of de-risking. The last round they simply looked
    at the currency transaction reports and the SAR filings but
    didn't get into the underlying cause of what is causing a bank
    to de-risk.
        The second thing we have asked Treasury to look on this
    issue of de-risking, is remittances, the movement then of funds
    out of the banking system to non-banking channels, how does
    that affect Treasury's ability to actually monitor criminal
    activity. Those are a couple of things we have looked at. We
    have also recommended in the past, efforts among the bank
    regulators to reduce the burdens associated with these
    activities.
        Mr. Clay. I see.
        Ms. Eckert, anything to add?
        Ms. Eckert. Yes. I think first and foremost again is some
    clarity from the regulators about what is expected and here in
    particular the bank examination manual, the standard changed
    for NPOs, in June 2016 yet there is nothing reflected other
    than statements by officials which are helpful but the bank has
    nothing to rely on in terms of how they assess risk associated
    with NPOs.
        Currently it is an outdated assessment but banks have
    nothing to hold on to. if you will. and to help them make the
    appropriate risk assessment, the clarity, the regulatory
    guidance; I think another thing is to recognize the importance
    of humanitarian assistance--
        Mr. Clay. Yes.
        Ms. Eckert. Emphasizing that humanitarian and development
    assistance are important U.S. objectives, they are important
    for foreign policy, they are important for countering violent
    extremism and promoting the kind of values in certain of these
    higher-risk areas to rely on U.S. support.
        And the other is to consider incentives, what can we do
    that will actually encourage banks to take the additional step
    to bank NPOs.
        Mr. Clay. And I see the Chairman won't let me go over my 5
    minutes so I yield back.
        Thank you for your response.
        Chairman Luetkemeyer. The gentleman yields back.
        In fact, he went over 5 minutes significantly but that is
    OK, we are not counting today, are we.
        With that we go to the Vice Chairman of the committee, Mr.
    Rothfus from Pennsylvania, you are recognized for 5 minutes.
        Mr. Rothfus. Thank you, Mr. Chairman.
        Ms. Yearwood, as you know, many poor and unstable countries
    rely heavily on the flow of remittances from the United States.
    Haiti for instance received $1.3 billion in remittances in 2015
    and its GDP is only about 8 billion. What are the potential
    impacts of a loss of remittances due to regulatory pressures on
    U.S. institutions for countries like Haiti, Somalia, and Nepal?
        Ms. Yearwood. I think it is impossible to overstate how
    important remittances are to Haiti. I don't have the precise
    numbers on me but it is a significant portion of their GDP that
    is through remittances.
        Going back to one of the statements earlier, what you will
    begin to see is not just a drop in remittances but an increase
    in money moving through unofficial channels, money that cannot
    be regulated so it puts pressure on the system, it puts
    pressure on securing the network and of course there are
    questions whether the money will get to the people that it is
    supposed to get to, will the money be diverted on the way, and
    will it get to people that it is definitely not supposed to get
    to.
        I spent 10 years in Haiti and so I know first-hand that
    remittances are a significant part of what drives the economy.
    At this point, if it were to go away I think there would have
    to be serious consideration about how the U.S. engage Haiti in
    other ways to improve trade and other areas that aren't
    necessarily subject to this hearing but the remittance channels
    right now need to be kept open and alive.
        And I am sure that Haiti's banking system is very much
    under stress because of this issue. I believe they have maybe
    one, maybe two U.S. correspondent banks right now and so if it
    remains fragile it could go south.
        Mr. Rothfus. With respect to the risks of going to
    unofficial channels and maybe remittances not being made at
    all, among the risks there would be any security or political
    stability risks?
        Ms. Yearwood. Oh, absolutely.
        Mr. Rothfus. In what sense?
        Ms. Yearwood. Again if--remittances make up such a large
    portion of the GDP, I wish I had brought the number but I will
    get that to you, they make up such a significant portion of the
    GDP. We are talking about a country that has high unemployment,
    low education, if people aren't able to pay for school fees,
    for school books, for health, for food, political stability is
    absolutely threatened and of course that has implications as we
    saw back in the 1990's on migration.
        Mr. Rothfus. And in 2015 there was a paper from Oxfam, the
    Oxfam Global Center on Cooperative Security suggested that de-
    risking practices will likely result in the further isolation
    of vulnerable communities particularly women from the financial
    sector and may have wide-ranging humanitarian, economic, and
    security implications. Would you agree with that, Ms. Yearwood?
        Ms. Yearwood. A hundred percent.
        Mr. Rothfus. Let us see, yes, there we go, Ms. Haddad, the
    GAO (Government Accountability Office) found that several money
    transmitters including all of the Somali money transmitters
    reported that they were using non-banking channels to transfer
    funds, in some cases the money transmitter was forced to
    conduct operations in cash. What are some of the risks
    associated with pushing--activities out of the formal channels.
        Ms. Haddad. I would say that there are a number of risks
    with that happening because as it goes outside of the channels
    you can't monitor it anymore, you don't know where the money is
    flowing, you don't know who is transacting business--
        Mr. Rothfus. But do you believe that the regulators would
    have appropriately weighed the risks of this activity leaving
    regulated markets?
        Ms. Haddad. Do you believe that they have?
        Mr. Rothfus. Would you believe that the regulators have
    weighed those risks of pushing remittances out--
        Ms. Haddad. --I am not sure. I believe that a lot of these
    are unintended consequences of these regulations. I don't think
    that it was intentional or even--
        Mr. Rothfus. Would they be considering that, do you think?
        Ms. Haddad. I don't know, I would hope so. I don't know.
        Mr. Rothfus. Mr. Lewis in your testimony you expressed
    support for facilitating BSA/AML innovation by financial
    institutions, how can emerging technologies help to address the
    problems caused by indiscriminate de-risking?
        Mr. Lewis. Well, thank you for the question. Certainly,
    technology helps because much of it's about monitoring and
    crunching the numbers on the accounts it is tying certain
    transactions to other transactions, accumulating those
    transactions together so I do believe technology will help and
    has helped and will continue to with BSA.
        The one thing with technology is we want to make sure that
    all the technology and all the FinTech companies are regulated
    equally and it is a clean playing field, if you will.
        Mr. Rothfus. I yield back.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that we go to the distinguished gentleman from
    Georgia, Mr. Scott, is recognized for 5 minutes.
        Mr. Scott. Thank you very much Chairman Luetkemeyer for
    holding this hearing. And I also want to thank you Chairman
    Luetkemeyer for your leadership on the ``Operation Choke
    Point'' legislation, H.R. 2706, which we passed out the
    committee, got through the House. But I will remind everyone
    that it was Mr. Luetkemeyer and I who were working on this bill
    when it wasn't generating as much support and it wasn't a
    popular thing to talk about back then, especially for some of
    my Democratic friends, but we have grown with this legislation,
    it has passed, it is over in the Senate now and we hope that we
    can get it through.
        But our bill gets at the fundamental purpose of what we are
    discussing today and that is there are real side effects that
    have a real impact on our economy when the regulatory pressure
    we apply on our financial system is too strong and our ``Choke
    Point'' legislation would prevent Federal banking agencies from
    ordering a bank to terminate a customer's account without a
    material reason and that reason could not be based solely on
    reputation risk.
        Now Ms. Haddad, how are you? In your testimony, you
    provided an interesting recommendation for a way forward on how
    to deal with the de-risking trend we have seen lately and your
    recommendation caught my attention and it was, I quote, you
    say, ``use of technology to lure AML/CFT (Combating the
    Financing of Terrorism) compliant costs without the fear of
    regulatory backlash,'' that is at the core of why we are here
    and I am the Co-chair of the FinTech Caucus here in the House
    and I share your enthusiasm about using innovative technologies
    to solve many of the problems we have in today's financial
    system.
        And you say in your testimony that we should establish
    channels for regulatory approval and support of innovation.
    Tell me, are you envisioning a sort of sandbox approach to
    regulation?
        Ms. Haddad. Thank you for your question. I think that a
    sandbox approach is a very good one. I think that it is one
    that could be beneficial. We are a young FinTech company
    ourselves and we are in regular conversation with regulators
    because that is something that we have sought out on our own
    but getting that type of engagement is quite challenging and
    particularly working with banks and having them become
    comfortable, trying out your technology and being able to see
    how it benefits their business is a real challenge without some
    sort of safeguard in place from regulators.
        Mr. Scott. And as you know, and I am sure as the committee
    knows there has to be a delicate balance between allowing
    innovation while also at the same time making sure our
    regulators stand firm on compliance and enforcement.
        And so, Mr. Lewis, I would be interested to hear how you
    feel about the approach and recommendation that Ms Haddad is
    offering?
        Mr. Lewis. Thank you. I appreciate it. I think that any way
    technology can benefit, we should be looking at it. One of the
    problems we run into with technology and new technology is that
    technology is expensive, it is very resource-intensive. Our
    systems at our credit union and many credit unions are
    extremely complex, creating in the interfaces between the
    systems and the new technology, testing the new technology,
    demonstrating that to regulators, can be expensive and
    resource-intensive so we certainly are always willing to and
    very interested in looking at new technologies.
        We use technology to operate our credit union on a daily
    basis, some is home-grown and some was bought from vendors but
    it is not so easy always just to test out a technology because
    of the entry costs for us.
        Mr. Scott. And tell me about that cost, you say it is very
    expensive but give us an idea, give us what you are talking
    about, why do you say that?
        Mr. Lewis. Well I can give you one example on the
    remittance side, when the remittance regulation came into
    effect, there were requirements for disclosures and we had to
    use outside third-party in order to create these remittances,
    to originate the remittances because we weren't able do it
    ourselves. In order for us to create that interface with this
    outside third-party, UNFCU spent over $1 million to create that
    single interface with this outside entity and it took about 3
    months of time.
        Mr. Scott. Well thank you.
        And Ms. Haddad, do you concur with that?
        Ms. Haddad. I mean engineering costs, costs of developing
    technology is incredibly high--
        Mr. Scott. Yes.
        Ms. Haddad. --and banks are trying to do this internally
    and they are incurring a lot of costs internally. As an
    external company that is trying to work with banks, I
    understand the costs, the costs are significant and it is
    helpful to be able to work with third-party companies to reduce
    the cost that the banks themselves have to face in leveraging
    these technologies.
        Mr. Scott. Well thank you both.
        Thank you, Mr. Chairman.
        Chairman Luetkemeyer. The gentleman's time has expired.
        I too want to thank Mr. Scott though for his leadership and
    tenacity working with us on ``Operation Choke Point.'' We were
    the lone voices in the wilderness for a long time and now we
    can see the effects, even at the international level, of some
    of these policies and actions that we have taken, so I thank
    him again.
        With that we go to the gentleman from Colorado, the
    distinguished gentleman, Mr. Tipton is recognized for 5
    minutes.
        Mr. Tipton. Thank you, Mr. Chairman.
        I thank the panel for taking the time to be here.
        Mr. Lewis, if I could start with you, we would have had a
    comment from Ms. Yearwood, I think saying some of the
    compliance costs had gone up 66 percent and you just cited a
    billion dollars of investment that had to be made, some of that
    seems to be coupled back with what Ms. Eckert was talking about
    when she had made the comment that banks have nothing to hold
    on to in terms of having some real guidance.
        Does that feed on itself not having some certainty in terms
    of what you are going to have to be dealing with in terms of
    de-risking, what you need to be looking for? I found it a
    little concerning when you were citing that you will have some
    of the law enforcement agencies that will come in and ask for a
    broad swath rather than an individual account, that they would
    like to be able to look into, which speaks to the chairman and
    Mr. Scott's words in regards to ``Operation Choke Point'' so
    are those issues, when we mold them together, is that creating
    real complexity for you?
        And you had cited a few bills in your testimony that we are
    working on out of this committee, would you expand on how those
    might be helpful as well?
        Mr. Lewis. Well first, thank you very much for the
    question. I would say that, yes, those things in combination
    provide complexity for us. If they comply, it is cost, it is
    resources, and it is the uncertainty. In essence, we are
    talking about risk here and risk is uncertainty and for an
    institution like ourselves, if we have some certainty then we
    are able to evaluate the risk and mitigate against that risk;
    it is the uncertainty that causes the problems with us and in
    our industry.
        So, anything that the regulators, Congress, the Bureau, can
    provide some certainty on is beneficial.
        I think some of the bills that we were talking about here
    certainly--relief on 6068 which is the BSA/AML bill, that will
    certainly help us, maybe not with uncertainly but it will
    reduce some of the burdens as some of the caps will be raised
    on what we would need to report; 4545, Financial Institutions
    Examination Fairness, again this would provide institutions
    with the ability to challenge or to go to the next level if
    they have problems with the regulator or examiner.
        So, I think and certainly ``Operation Choke Point'' would
    help because theoretically that would reduce the regulatory
    burden on credit unions and financial institutions.
        Mr. Tipton. Great. Thank you for that. You might want to
    speak to this as well but I would like to be able to talk to
    Mr. Clements a little bit in regards to some of your testimony.
        I happen to live in an area southwest Colorado, we have a
    lot of high-intensity drug-trafficking designation areas, five
    counties, southwest Colorado, are these areas more prone
    probably to be suspect for de-risking by banks as we move off
    of the borders that you had noted in some of your charts and
    start to move up in States as far north as Colorado?
        Mr. Clements. We conducted an econometric model as part of
    our report and in that case it was nationwide so we weren't
    just limited to the southwest border States. To your point,
    some of the variables we did look at were the high-intensity
    drug-trafficking areas (HIDTA), and high-intensity financial
    crimes areas. In both those types of locations if the county
    was designated, it had a greater likelihood of losing a branch
    the following year, so those are certainly factors in the
    declining number of branches in communities not just along the
    southwest border but nationwide.
        Mr. Tipton. Good. Do you have some examples of some
    misplaced assumptions of high risk because of the HIDTA
    designation for some businesses?
        Mr. Clements. We looked at a variety of classes of
    customers that stakeholders had told us were at greater risk of
    money laundering, those would be cash-intensive small
    businesses, money services business, and also domestic
    businesses that have a lot of cross-border transactions. Those
    would be the ones that they told us would be related to money
    laundering, not exactly a particular business. You could have a
    business that is completely legitimate operating in that space
    but money launderers, their transactions tend to mirror the
    type of transactions that you would see businesses in those
    spaces engaged in.
        Mr. Tipton. And so probably the extension would be natural,
    and Mr. Lewis you might want to speak to some of this as well,
    do the banks de-risk because of that HIDTA designation simply
    for the fear that they are going to be out of compliance and
    have a challenge with that?
        Mr. Lewis. Well certainly, we haven't experienced that
    directly but I know many of our credit unions have, and what it
    comes down to is it comes down to the intensity of scrutiny
    both from the regulator and law enforcement, so it may not be a
    directive to de-risk but in essence it is an indirect effect of
    the intense scrutiny either by a regulator and/or by law
    enforcement with regards to these businesses.
        Mr. Tipton. Right. Hey my time is expired. Mr. Chairman I
    yield back.
        Chairman Luetkemeyer. The gentleman's time has expired.
        With that we go to the gentleman from Georgia, Mr.
    Loudermilk, you are recognized for 5 minutes.
        Mr. Loudermilk. Well thank you Mr. Chairman.
        And thank everyone on the panel for being here.
        Ms. Haddad in your testimony you talked about how de-
    risking reduces transparency by redirecting money to
    unregulated channels, can you elaborate a little bit on how
    that happens?
        Ms. Haddad. Sure, I would like to highlight something that
    happened actually just last month with a bank in Argentina,
    this Bank chose to drop SWIFT in favor of a strategic
    partnership with BIDEX, which is an unregulated crypto-exchange
    firm and they are now using this crypto-exchange firm to settle
    their international payments and the CEO noted for the reason
    cost, and said that the cost of having an intermediary was too
    high.
        And I bring up that example because we speak a lot about
    other unregulated industries like Hawala and unregulated money
    service businesses as well as movement of large amounts of cash
    cross-border, which are things that happen but I wanted to
    highlight that because I think that this is critical today with
    the change in the payment landscape, with the rise of crypto
    exchanges, with the rise of alternative payments that this is
    what is happening now that these alternative providers are now
    gaining traction and banks are no longer a part of the system.
        Mr. Loudermilk. So, I know that we have been dealing a lot
    with the cryptocurrencies here in the U.S. with the Blockchain
    technology which I think when you divest the cryptocurrency
    from Blockchain, Blockchain's an interesting technology but it
    also gives some challenges to law enforcement so what you are
    saying is because of de-risking, we are forcing some businesses
    into these somewhat underground networks that make it harder
    for us to track and trace.
        Ms. Haddad. Exactly there are no alternatives for the
    payments to flow or for money to flow if they can't access
    either a remittance firm--
        Mr. Tipton. Yes.
        Ms. Haddad. A regulated remittance firm or a bank and that
    is why we are seeing the rise of these alternative systems.
        Mr. Loudermilk. So, we are really being counterproductive,
    well through this de-risking is creating more risk.
        Ms. Haddad. It is possible. It is possible. I believe that
    there actually have been some studies that have shown that that
    when the de-risking has occurred that money laundering has
    increased, I don't have those exact numbers, I could get them
    for you but there have been some instances that I have read in
    the past where that has happened.
        Mr. Loudermilk. OK. Thank you. That was a very interesting
    antidote.
        Mr. Lewis, I want to talk a little bit about the Suspicious
    Activity Reports (SARs), can those contribute to the problem of
    de-risking because the SARs are such a compliance burden
    especially on smaller institutions.
        Mr. Lewis. Yes. Thank you for the question. Certainly SARs
    BSA/AML requirements create a lot of constraints for smaller
    finance institutions and even for institutions like ourselves.
    People talk about the volume of SARs, which is certainly
    something that we need to look at but also, what we have to
    understand is that behind each SAR there is a tremendous amount
    of research and investigation and decisioning that goes into
    it.
        We take SAR filing very seriously and while we are told by
    the regulators, ``don't file too many SARs, we don't want
    defensive SARs,'' we are also told by the regulators, ``make
    sure you file the right SARs,'' and so for us to strike that
    balance to the institution, it takes a lot of research, a lot
    of investigation to do it.
        We certainly support 6068 by raising the limit of the SARs,
    modernizing BSA, as that in and of itself would eliminate the
    need to file at least some SARs which would provide some relief
    for us and certainly for some smaller financial institutions.
        Mr. Loudermilk. Well besides raising that limit for the
    SARs, is there anything else that you would recommend that we
    can do to reduce that burden?
        Mr. Lewis. Well certainly more guidance and certainty would
    help out as well. A lot of the consternation we have is should
    we file the SAR, shouldn't we file the SAR, under what
    circumstance should we, under what circumstances we couldn't.
        Now we do receive some guidance from the regulators but
    even more guidance or maybe some possible safe harbor, don't
    know how that would work as I sit here but something that would
    give us an opportunity for more certainty with what we are
    doing.
        Mr. Loudermilk. OK. Thank you.
        Mr. Chairman, I yield back.
        Chairman Luetkemeyer. The gentleman yields back.
        With that we go to the gentleman from Texas, Mr. Williams,
    is recognized for 5 minutes.
        Mr. Williams. Thank you, Mr. Chairman.
        Risk management is one of the most important functions that
    a financial institution performs. As a business owner myself I
    can relate to the fact that compliance challenges especially
    the excessive growth of Federal regulations over the past 10
    years, it has been hard. De-risking forces an institution to
    perform the cost-benefit analysis of doing business with a
    customer. ``Operation Choke Point'' is one of those many
    examples of Executive-overreach from the previous
    Administration.
        While this Administration has taken deliberate action to
    curb efforts like ``Operation Choke Point,'' we must be
    vigilant for future occurrences and this isn't theoretical, it
    is reality.
        I know firsthand how this occurs because I have experienced
    ``Operation Choke Point.'' Now while I understand the
    importance of risk management, it is important not to view
    whole industries as potentially high-risk groups, apply a
    single standard to industries in different States with
    different business owners and values is inconsistent in my
    belief.
        So, Mr. Lewis, first question, how would you categorize the
    working relationship between State banking supervisors, Federal
    regulators, and industry stakeholders when it comes to
    discussion of de-risking.
        Mr. Lewis. Thank you for the question. From our experience
    I think there is some unevenness that echoes on. We are a
    federally chartered credit union so we don't have much direct
    contact with the State regulators so NCUA is our examiner and
    regulator. We do, however, through law enforcement, we will
    receive subpoenas and we will receive others and a lot of times
    there's not coordination between those various areas of law
    enforcement with regards to the subpoenas.
        Mr. Williams. OK. Next question also Mr. Lewis. I
    introduced H.R. 3626, the Bank Service Company Examination
    Coordination Act, this Bill would enhance State and Federal
    regulators' ability to coordinate examinations and share
    information on bank's technology vendors in an effective an
    efficient manner.
        So, my question would be, can you touch on the benefits to
    authorizing State regulators to examine third-party TSPs
    (technology service providers) and how that could avoid
    duplicative examinations and reduce regulatory burden on an
    institution?
        Mr. Lewis. Yes. Again, thank you for the question. We
    again, we are a federally chartered credit union; I personally
    don't have a lot of experience with State credit unions or
    regulators. What I can say is we welcome the opportunity to
    follow up with you in writing with that question, also we can
    provide a good and thorough answer.
        Mr. Williams. OK, thanks.
        Mr. Clements, the Justice Department recently announced the
    end of ``Operation Choke Point,'' are you aware of any account
    termination notices since that announcement?
        Mr. Clements. Not aware of any. We haven't conducted work
    on that point.
        Mr. Williams. OK, thank you.
        I might ask if anybody else--so the question I talked to
    Mr. Lewis--again I repeat if anybody wants to answer it, can
    you touch on the benefits to authorizing State regulators to
    examine third-party TSPs and how that could avoid duplicative
    examinations and reduce regulatory burden on an institution,
    anybody would like to answer that?
        Yes ma'am?
        Ms. Eckert. Congressman, I would just note that the
    question of State regulators has become an important issue
    because there are growing fines. For example, the New York,
    Department of Financial Services has had significant fines on
    numerous banks and I think that because they are looking at it
    from a different perspective it has become a very significant
    issue in compatibility perhaps of how some of the regulators
    are actually looking at it.
        The other question is examiners and the disconnect either
    at the State level but in particular at the Federal level, the
    disconnect between what policy is and what is going on at the
    examination level; the examiners are sitting with the banks,
    day-in and day-out. I had a situation where one financial
    institution said their examiner asked them, ``do you know your
    customers' customer?'' And when the Bank said, ``well according
    to the 2006 guidance we don't need to know our customers'
    customer,'' the examiner didn't even know that there was August
    2016 guidance.
        So, I think that there's an important you know, compounding
    effect of State regulations on top of the Federal ones.
        Mr. Williams. OK, thank you.
        In my remaining time I might ask all of you, getting back
    to ``Operation Choke Point,'' do any of you know, that if
    account termination notices have been sent out or anything or
    how that is going to happen, ``Choke Point''?
        OK, very good.
        I yield the rest of my time back, Mr. Chairman.
        Chairman Luetkemeyer. The gentleman's time is yielded back.
        With that we go to the gentleman from Tennessee, Mr.
    Kustoff, is recognized for 5 minutes.
        Mr. Kustoff. Thank you, Mr. Chairman.
        Thanks to the witnesses for appearing this afternoon.
        Mr. Lewis, if I could, I could go a little bit broad and
    talk about, going back to the 2008 financial crisis and the
    enactment of Dodd-Frank, we have seen Financial Service
    regulators expand their powers significantly, I think we can
    all agree to that.
        With the heightened regulatory requirements, coupled with
    the prospect of financial entities receiving fines for
    potential violations, we have seen the significant decrease of
    products that many community banks and credit unions now offer.
    I think a lot of times you see consumers look elsewhere to find
    where they can have their services met, their needs met. Some
    leave the financial system entirely, if I could ask two
    questions.
        One is can you discuss the consequences to driving those
    customers out of the financial system, that is the first
    question?
        And then the second question is, toward that end, where do
    those people typically go when they no longer have access to
    financial products that a credit union or a community bank
    would offer?
        Mr. Lewis. Well thank you very much for the question.
        I would like to add that, in addition to my role with UNFCU
    and with NAFCU, I also recently was the Vice Chairman of a
    community development credit union in New York with less than
    $1 million in assets so I have experience in both the large
    side and the small side.
        And with that community development credit union, unbanked
    and underbanked is a major problem in the community for various
    reasons, so if these folks leave the standard banking channels,
    they lose the opportunity for credit, they lose the opportunity
    for credit reporting, they end up in areas where it could be
    check-cashers or places where they are paying a huge amount of
    fees in order for them to be able to cash their checks; they
    don't have access to standard insurance products.
        So, any time anyone's pushed out of the traditional banking
    industry they are generally not going to a better place,
    certainly we know that from the credit union's perspective;
    credit unions as financial cooperatives owned by the members,
    the reason for being is to serve the members so we are always
    looking to serve those in our field of membership and we will
    continue to do so, but we think that anyone who leaves the
    system is not going to a better place.
        Mr. Kustoff. Thank you very much for your answer.
        Mr. Clements, if I could, we have talked about the problems
    along the southwest border and in February of this year, a
    report was issued by the GAO that examined de-risking along the
    southwest border. The three factors I think you have identified
    are unique to account closings at financial institutions in the
    region. Specifically, I think you noted that these accounts are
    generally cash-heavy, they involve foreign account holders, and
    those transactions cross or transcend country boundaries.
        Can you explain why these findings are unique to the
    southwest border and what are the characteristics that have
    been important drivers if you will behind the branch closures
    in the region?
        Mr. Clements. Correct. Those were the factors we had cited,
    one: The large number of cash transactions. Just to give you an
    indication, the currency transactions, 30 percent more currency
    transaction reports filed by banks in the southwest border
    region. Compared to comparable counties. There is the issue of
    a lack of transparency if you have a lot of cash transactions.
        Then also the issue of the cross-border transactions. The
    concern there is that a transaction crossing the border can
    look very much like money-laundering even if it is a completely
    legitimate transaction.
        We spoke with a farmer in Nogales, Arizona, and she had
    operations in Arizona and Mexico and she needed to move moneys,
    wire moneys from her Mexican operation up to a U.S. bank and
    after a while the bank told her, this is too much risk for us
    having these transactions going back and forth.
        And then again last the issue of the foreign account
    holders is just a problem with being able to identify that
    customer and to meet the customer identification program
    requirements under BSA/AML.
        Mr. Kustoff. Thank you very much.
        And I yield back the balance of my time.
        Chairman Luetkemeyer. The gentleman yield's back.
        With that we go to the gentlelady from New York, Ms.
    Tenney, is recognized for 5 minutes.
        Ms. Tenney. Thank you, Mr. Chairman.
        And thank you to the panel for appearing today. I really
    appreciate you being here and obviously de-risking has become
    somewhat notorious especially in a community like mine but
    under the Obama Administration, ``Operation Choke Point''
    attempted to cutoff financing for ammunition and gun
    manufacturers like Remington Arms, which was founded in my
    district over 200 years ago and a new industry, a new
    competitor in that market called Oriskany Arms and so we know,
    we have experienced some of that in our own area.
        But I would like to look at a couple of other things,
    angles that de-risking and the links to the closure of a lot of
    branches, small businesses or small banks and community banks
    and also credit unions in my region which really dominate where
    I live, in my district, and the implication on our very large
    immigrant and refugee populations, many of these people would
    like to send their money back to their home countries and do it
    in a safe way but under de-risking of course, they have been
    pulled from a reliable and a safe way to send that money over.
        One of the issues is by pulling that out and there was a
    study and the Government Accountability Office came up with
    some numbers that the banks are now just terminating those
    accounts and now they are not able to do this so they are
    forced to go into other means.
        I was wondering if you could comment, and I would just ask
    everyone across the board, generally on what is being done or
    what we can do on our side to try to deal with this de-risking
    phenomenon and how we help people who are in that situation?
    And maybe we could just go right through from Mr. Clements on
    down, and I want to just save 1-minute left because I have a
    question for Ms. Eckert at the end, having to do with New York
    State.
        Mr. Clements. We have a variety of recommendations to the
    agencies to address de-risking including FinCEN and the banking
    regulators--
        Ms. Tenney. Yes.
        Mr. Clements. Conducting retrospective reviews to really
    get at what are the underlying causes of de-risking rather than
    simply focusing on more superficial level of concerns.
        And then second, getting to your point of the remittances,
    we have asked Treasury to look at if de-risking is causing
    banks to cancel these accounts, therefore the remitters have to
    move to nonbanking channels, what is the implication of that
    for security, what is the implication for consumers being--
        Ms. Tenney. Yes.
        Mr. Clements. Able to get the types of services they need.
        Ms. Tenney. And as we go down the line, let me just also
    add that I am in an area where we don't have as much
    connectivity in terms of broadband, in terms of being able to
    get on the Internet and we have a lot of a refugee population
    and a lot of our seniors don't have access either so maybe you
    could address that while we are saying how do we provide this
    service back to a bank where they are not going to be subjected
    to, in this case obviously from New York, excessive regulation
    coming on the New York side?
        Mr. Clements. The concern with--
        Ms. Tenney. Yes.
        Mr. Clements. If a bank branch closes that obviously limits
    the number of options for the consumer. I was going to say one
    of the options would be mobile banking or online banking but
    that is not an option and--
        Ms. Tenney. Not always, yes.
        Mr. Clements. A senior person is either forced to find
    another bank if there is one in that area. Or drive 45 minutes
    to 1 hour, one way to get to another institution.
        Ms. Tenney. Thank you.
        Ms. Eckert and you know, while you are at it, quickly just
    comment on the New York State regulatory regime in this space
    if you could, please? You alluded to it earlier so it got my
    interest on that.
        Ms. Eckert. I think it is important, so what happens when
    these communities are de-risked, in the case of nonprofits and
    charities, their mission is to provide humanitarian development
    assistance so they don't really have the option of saying, well
    we are not going to do it and only I think 3 percent of the
    cases, what we surveyed, did they cancel the program.
        What they have done is to find the other alternatives
    around, which is carrying cash, it is using unregulated money
    remitters. And all of those things come at a cost for charities
    in particular working in conflict zones, those come at a
    personal cost in terms of safety, carrying large bags of cash
    is enormously, inherently, dangerous for their staff and for
    their beneficiaries but more than that it drives these things
    underground which means that they are not traceable and that
    they are not transparent to regulators.
        The charities prefer to use the banking system, in fact
    some of them aren't even comfortable with money service
    businesses as much but there is no alternative.
        Ms. Tenney. Do you find that the New York State government
    has been effectively making it more difficult for a lot of
    these people to have access or a lot of the charities that you
    are referring to not-for-profits having access to a way to be
    able to avoid having to carry around cash and to be putting
    themselves at risk?
        Ms. Eckert. I don't have--
        Ms. Tenney. Quickly, I am running out of time.
        Ms. Eckert. I don't have direct information with regard to
    the New York system but what I will tell you is that the
    personal liability now the individual compliance officers,
    those things all contribute to what financial institutions have
    to decide, which is, it is just not cost-effective for us to
    bank these charities.
        Ms. Tenney. Thank you very much to the panel, I am out of
    time, thank you.
        Chairman Luetkemeyer. The gentlelady's time has expired.
        With that we go to the gentleman from Kentucky, Mr. Barr
    who is Chairman of our Monetary Policy Committee--
        Mr. Barr. Thank you, Mr. Chairman--
        Chairman Luetkemeyer. You are recognized for 5 minutes.
        Mr. Barr. Thanks for holding this important hearing.
        And I wanted to start with Mr. Lewis and touch on some
    testimony that you offered earlier about the need to modernize
    SARs and these Suspicious Activity Reports under the Bank
    Secrecy Act and the--and your call for a greater guidance and
    certainty from the regulators may be a safe harbor.
        What percentage of SARs would you say if you have an
    estimate, would actually justify further scrutiny or
    investigation by regulators or officials investigating genuine
    cases of terror-financing or money-laundering?
        Mr. Lewis. I would say on the terrorist-financing side, a
    very, very, very small percentage.
        On the money-laundering side, I couldn't quote a
    percentage. I would say that there's some but many of the SARs
    that we file, while I think they are legitimate SARs under the
    guidance are probably not indicative of any sort of illegal
    activity, remember SARs is suspicious activity, it is not
    necessarily an illegal activity.
        Mr. Barr. Right. And that is the difficult balance that we
    have to, as policymakers, we have to figure out how to strike
    that balance.
        If we were to create a safe harbor or if the regulators
    were to create a safe harbor, well how would we know we are not
    missing something?
        Mr. Lewis. Well I think that is always the balance. We are
    never going to be sure we are not missing something but there's
    going to be a balance of the effort and what the utility of it
    is, is that I couldn't sit here today and chart that out for us
    but certainly I think it is worthy of a robust discussion and
    we would welcome the opportunity to discuss that further.
        Mr. Barr. Thanks, and I will move on but I would invite
    further feedback from any of the witnesses about what a safe
    harbor would look like, so as to ease compliance burdens while
    at the same time not missing any critical information for law
    enforcement.
        Ms. Haddad, from your testimony it sounds like you believe
    there is obviously a complicated set of factors that have led
    global banks to de-risk and stop offering some or all services
    in a particular region due to non-credit risk.
        In your mind what is the number one reason why these banks
    are de-risking?
        Or if there's more than one factor, you can offer that as
    well?
        Ms. Haddad. I do think that it is difficult to pin-point
    the number one because they are all interrelated so
    profitability concerns is related to increased costs of
    compliance and so all of the factors end up being related to
    one another.
        But I do think that one of the biggest challenges is around
    balancing the cost of compliance with the revenue potential of
    a particular relationship.
        Mr. Barr. And I am sure you have already touched on this
    but can you amplify your testimony on what role new technology
    and third-party providers of independent standardized
    assessments of respondent banks compliance with global
    standards might have on de-risking?
        Ms. Haddad. Sure. Today there does not exist a global
    benchmark. It is frankly what we are creating at Sigma Ratings
    and the relevance of this is that if there is a global standard
    and there is one tool that is used to conduct initial due
    diligence that provides a baseline for correspondents to
    actually look at their respondent relationships, this
    standardization will allow them to have a starting point from
    which they can then do additional due diligence.
        So today the way that it works is that these respondent
    banks have a number of correspondent banking relationships
    sometimes you know, 10 to 20 correspondent banking
    relationships and they are required to provide the same
    information to each of those, over and over and over again and
    then each of the global banks or the regional banks are then
    required to review all of that information individually and
    provide their own risk assessment.
        If there is a standardized approach that provides a
    baseline risk assessment on all of the respondent banks or
    potential respondent banks, then each of those global
    correspondents can start from that point and then do additional
    due diligence on top of it. It would reduce the redundancies
    that are happening across the entire system and it would also
    allow for banks to focus their time and energy and money on
    real risk.
        Mr. Barr. And in my time remaining, back to my question to
    Mr. Lewis, what would a safe harbor on SARs look like, how
    might this platform that you are creating limit the number of
    superfluous or unnecessary SARs?
        Mr. Lewis. Thank you. I think what Ms. Haddad's company has
    done is excellent. I think it is a great start and it is a
    direction and any information is good information, the question
    of course is how expensive the utility but certainly I think
    any information is good information for us to have but how much
    is that information going to cost us.
        Chairman Luetkemeyer. The gentleman's time--
        Mr. Barr. My time has expired.
        Chairman Luetkemeyer. --has expired.
        Votes have been called but we have two witnesses or two
    questioners yet.
        So, Mr. Green from Texas is recognized for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman.
        I thank the Ranking Member as well.
        And I also thank the witnesses for being here today to
    discuss de-risking, which is another way of saying closing
    accounts, and these accounts are being closed to avoid legal
    liability. And by the way, there's nothing wrong with avoiding
    liability. I think that it is perfectly appropriate that you
    avoid liability if you can.
        The question that I have has to do with the NGOs that are
    trying to be of help and that are finding themselves without
    the means by which they can transfer large sums of money to
    people who are in need of the help. That is doing good but
    running into obstacles that are just not appropriate sometimes.
        So, my first question is to what extent does this problem
    exist? I have talked to at least two NGOs, there may be many
    more, there may be just a few but to what extent does the
    problem exist as it relates to NGOs, these are nongovernmental
    organizations?
        Ms. Eckert. Congressman, as a colleague of mine has said,
    we have been admiring the problem, we know that there is a
    problem. Two-thirds of all U.S. charities, NPOs are facing
    financial access difficulties and that has a very serious
    impact on their ability to be able to transfer funds for
    humanitarian and development assistance.
        Part of the problem is that it is not just closing of
    accounts and that is one of the reasons why going beyond de-
    risking, the term, we talk about financial access because in
    the case of nonprofit organizations, delay and denial of wire
    transfers are actually a very serious problem; when it takes 6
    months to provide fuel for a hospital in Syria, the situation
    is obviated; when it takes so much time to actually get the
    bank to provide permission for the wire transfer, the
    assistance is thwarted and in that regard the utility, the
    technologies, that we have been talking about.
        KYC Utilities can actually provide a significant path
    forward and that is because of the repeated requests for
    information, the same charity gets repeated quest--requests
    from the same Bank for the information. If we are able to
    create a utility where all of the NPO information resides,
    financial institutions can actually rely, go there, get all of
    the information about their internal compliance, their due
    diligence procedures, and that is a repository or KYC Utility
    for nonprofits is something that the World Bank and ACAMS
    processes is exploring.
        Mr. Green. It is ironic that you would mention the example
    that you did because that is exactly what was called to my
    attention about the delay that it was taking, what was thought
    to be an inordinate amount of time, an unusual amount of time
    to do something that was thought to be relatively simple so but
    again I understand that it is happening but is it happening to
    a large number of entities, 10 percent, 50 percent, 20 and just
    a guesstimate?
        Ms. Eckert. The study that was conducted and released last
    year found two-thirds of all U.S. charities, NPOs, are
    experiencing these problems.
        Mr. Green. Two-thirds?
        Ms. Eckert. Two-thirds and that was surprising.
        Mr. Green. OK.
        Ms. Eckert. It was extremely surprising and I would just
    say with regard to the problems that are experienced, account
    closures represented only 6 percent, refusal to open accounts
    was about almost 10 percent but the transfers delayed was 37
    percent of the charities that were actually surveyed so that
    kind of delay, fee increases, et cetera are really posing very
    serious problems for the provision of important humanitarian
    and development assistance.
        Mr. Green. Ms. Yearwood, do you have any additional
    comments on this?
        Ms. Yearwood. The only comment I would like to add is that
    this isn't only a problem for charities. I can cite at least
    one Caribbean government that could not get a bank account for
    their embassy here in the United States and so this doesn't
    only have implications for charity, it has implications for
    diplomacy.
        Mr. Green. Well thank you very much.
        Mr. Chairman, thank you for the time. I do have another
    question but I think it might go well beyond my 12 seconds, so
    thank you very much.
        I yield back.
        Chairman Luetkemeyer. The gentleman yield's back his time.
        With that we go to the gentleman from North Carolina, Mr.
    Pittenger is Vice Chairman of the Terrorism Financing
    Committee, you are recognized for 5 minutes.
        Mr. Pittenger. Thank you, Mr. Chairman.
        Really appreciate each of you being here today. I know you
    made a great effort to do that and your knowledge is very much
    appreciated. I would like to just address to a greater extent,
    further discussion, issues related to the cumulative effects of
    the AML/CFT and risk management compliance on the financial
    service industry.
        Just Mr. Lewis, if you could please, just give me some
    effect, impact of the account of these terminations by this de-
    risking?
        Mr. Lewis. Thank you very much for the question.
        I think from my perspective UNFCU, we have one very, very
    significant example of this and we have several but that would
    be with regards to international remittances through Dodd-Frank
    and through the Bureau's ruling and rules; we had to basically
    change our entire remittance business. We were able to
    originate remittances ourselves for our members but then
    certain requirements came in to be with regards to disclosures.
        One disclosure was all the fees that would be taken out,
    the problem is we don't control that transfer so if there's a
    transfer going to Asia it may go through a correspondent bank
    in Europe and then through a correspondent bank in Asia and
    they may take fees out of that so what we had to do is because
    we couldn't do that, we had to go to a third party to do that
    and what that ended up doing is it ended up increasing the
    expenses for our members because we had to go to the third
    party.
        In addition to that, it ended up consolidating the industry
    because what you had was many credit unions have gotten out of
    the business of remittances, obviously simply can't afford the
    technology and they can't track it as well so you have this
    consolidation which increases fees and costs and then on top of
    that, as I was saying earlier, on our technology side in order
    to do that, it was a million dollars.
        So that is just one small example of what we endured with
    regards to one specific type of regulation and I know the
    credit unions across the board are experiencing similar
    situations.
        We as credit unions don't really fire customers, we don't
    have that luxury if you will to do that. The best we can do
    because we can't terminate an account without a very, very long
    process so the best we can do is restrict services but it is a
    real issue and a real problem for credit unions.
        Mr. Pittenger. Thank you, sir.
        Sure, Ms. Eckert?
        Ms. Eckert. Mr. Pittenger in terms of additional monitoring
    compliance costs of AML/CFT regulations, some have placed it at
    $4 billion annually, one bank reported that over 4,000
    additional compliance staff--
        Mr. Pittenger. Yes.
        Ms. Eckert. --in 1 year were hired at a cost of a billion
    dollars. In 2016, the Association for Certified Anti-Money
    Laundering Specialists surveyed their members and found that
    three-fifths of the respondents cited enhanced regulatory
    expectations as the greatest AML compliance challenge.
        So, these are real costs. No one is saying that it is
    solely due to that but it is among the most frequently cited
    causes of de-risking or financial access difficulties.
        Mr. Pittenger. Thank you.
        Ms. Eckert, let me address the issues related to law
    enforcement and national security agencies and their ability to
    track financial activities and potential criminals, does de-
    risking make it harder for them to do that?
        Ms. Eckert. I would say absolutely, sir, because as
    charities and other de-risked communities have to find
    alternatives, they go to unregulated money remitters, they go
    to Hawalas, they go to places where they are not transparent or
    traceable and that is contrary to what our money laundering and
    terrorist financing regime is all about, and that is
    responsibility of financial institutions and others and
    traceability and transparency so I think that the negative
    implications for counter-terrorist initiatives and security
    overall are quite significant.
        Mr. Pittenger. Thank you very much.
        Mr. Clements, I would like to ask you if you would just
    speak to the specifics of what impact communities face when
    banks as well as bank branches close up and move away due to
    de-risking?
        Mr. Clements. There were a variety of challenges for the
    community. Just for the consumer angle, the consumers are going
    to lose that access to the service. On a broader economic
    scale, you are going to have less business lending which then
    will ultimately flow down into lower employment, lower wages
    would be some examples.
        Mr. Pittenger. Thank you. Can I ask another question? I
    don't have enough time.
        Thank you.
        Chairman Luetkemeyer. The gentleman yield's back.
        With that I want to thank the witnesses for being here
    today. I would love to follow up a little bit more here but we
    have to rush-off to a vote.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        With that this hearing is adjourned.
        [Whereupon, at 3:39 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 June 26, 2018

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