[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.]




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                             June 26, 2018


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