[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                   PROMOTING CORPORATE TRANSPARENCY:
                    EXAMINING LEGISLATIVE PROPOSALS
                  TO DETECT AND DETER FINANCIAL CRIME

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

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                     INTERNATIONAL DEVELOPMENT AND
                            MONETARY POLICY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 13, 2019

                               __________

       Printed for the use of the Committee on Financial Services
       
                            Serial No. 116-9
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT] 

                                __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
36-559 PDF                  WASHINGTON : 2019                     
          
--------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].                   
   




                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             PETER T. KING, New York
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                ANDY BARR, Kentucky
JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
DENNY HECK, Washington               ROGER WILLIAMS, Texas
JUAN VARGAS, California              FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
KATIE PORTER, California             TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah                    JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
           Subcommittee on National Security, International 
                    Development and Monetary Policy

                  EMANUEL CLEAVER, Missouri, Chairman

ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio, Ranking 
JIM A. HIMES, Connecticut                Member
DENNY HECK, Washington               PETER T. KING, New York
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
JUAN VARGAS, California              ROGER WILLIAMS, Texas
JOSH GOTTHEIMER, New Jersey          FRENCH HILL, Arkansas
MICHAEL SAN NICOLAS, Guam            TOM EMMER, Minnesota
BEN McADAMS, Utah                    ANTHONY GONZALEZ, Ohio
JENNIFER WEXTON, Virginia            JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia, Vice 
TULSI GABBARD, Hawaii                    Ranking Member
JESUS ``CHUY'' GARCIA, Illinois
                           
                           
                           C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 13, 2019...............................................     1
Appendix:
    March 13, 2019...............................................    35

                               WITNESSES
                       Wednesday, March 13, 2019

Cohen, Jacob, former Director, Office of Stakeholder Engagement, 
  Financial Crime Enforcement Network (FinCEN)...................     5
Lormel, Dennis M., President & CEO, DML Associates, LLC..........     8
Sharma, Amit, Founder and CEO, FinClusive........................     9
Shiffman, Gary M., CEO, Giant Oak, Inc...........................    11

                                APPENDIX

Prepared statements:
    Cohen, Jacob.................................................    36
    Lormel, Dennis M.............................................    42
    Sharma, Amit.................................................    52
    Shiffman, Gary...............................................    61

              Additional Material Submitted for the Record

Cleaver, Hon. Emanuel:
    Written statement of the American Gaming Association.........    64
    Written statement of the Credit Union National Association...    66
    Written statement of the FACT Coalition......................    67
    Written statement of the Jubilee USA Network.................    68
    Written statement of the National Fraternal Order of Police..    69
    Written statement of various undersigned trade associations..    71
    Written statement of the National Association of Federally-
      Insured Credit Unions......................................    75
    New York Times article entitled, ``2 Former Goldman 
      Executives Barred From Banking Indusry After Malaysia Fraud 
      Scandal,'' dated March 12, 2019............................    77
Garcia, Hon. Jesus ``Chuy'':
    Fair Share Education Fund report entitled, ``Anonymity 
      Overdose; Ten cases that connect opioid trafficking and 
      related money laundering to anonymous shell companies,'' 
      dated August 2016..........................................    80
Lynch, Hon. Stephen:
    Written statement of the FACT Coalition......................   100
    Washington Post editorial entitled, ``Putin and other 
      authoritarians' corruption is a weapon--and a weakness,'' 
      dated March 8, 2019........................................   101
Perlmutter, Hon. Ed:
    Letter to Bob Carlson, President, American Bar Association, 
      from various lawyers with expertise in the field of 
      business and human rights, dated March 11, 2019............   103

 
                   PROMOTING CORPORATE TRANSPARENCY:
                    EXAMINING LEGISLATIVE PROPOSALS
                  TO DETECT AND DETER FINANCIAL CRIME

                              ----------                              


                       Wednesday, March 13, 2019

             U.S. House of Representatives,
                 Subcommittee on National Security,
                          International Development
                               and Monetary Policy,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:09 p.m., in 
room 2128, Rayburn House Office Building, Hon. Emanuel Cleaver 
[chairman of the subcommittee] presiding.
    Members present: Representatives Cleaver, Perlmutter, Heck, 
Sherman, Vargas, Gottheimer, Wexton, Lynch, Garcia; Stivers, 
Williams, Hill, Gonzalez, Rose, and Riggleman.
    Ex officio present: Representatives Waters and McHenry.
    Also present: Representatives Maloney and Luetkemeyer.
    Chairman Cleaver. The Subcommittee on National Security, 
International Development and Monetary Policy will come to 
order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of this subcommittee are authorized to 
participate in today's hearing.
    Today's hearing is entitled, ``Promoting Corporate 
Transparency: Examining Legislative Proposals to Detect and 
Deter Financial Crime.''
    I now recognize myself for 3 minutes to give an opening 
statement.
    I would like to thank Chairwoman Waters for creating this 
new Subcommittee on National Security, International 
Development and Monetary Policy. These are some of the most 
pressing issues facing our country and the world, and I am 
excited for the opportunity this Congress presents to confront 
them head on. Many of the matters that are likely to come 
before this subcommittee have historically enjoyed bipartisan 
support. They go to the very heart of our most profound 
responsibilities as Members of Congress: preserving America's 
national security, and the United States' global position as an 
international leader in free and fair markets.
    I am convinced that there is no better issue to start our 
subcommittee's work than a discussion of policies to detect and 
deter these financial crimes.
    Since the last major anti-money laundering reforms in 2001, 
the national security threats that face our country have 
evolved profoundly. Cyber and technological attacks have risen 
to the very top of our most recent worldwide threat assessment 
as a paramount national security risk. Underground online 
trafficking now allows for simplified avenues to transport 
illicit materials across the nation and around the globe.
    While the bill that we are dealing with today will close a 
number of loopholes that have allowed for financial crimes to 
be committed, it will also pull us into the 21st Century by 
positioning the U.S. to face tomorrow's challenges. An 
innovation council will be created from this bill, represented 
by directors from each innovation lab, who will coordinate on 
active Bank Secrecy Act compliance. It is imperative that we 
modernize our efforts to combat financial crimes because our 
adversaries will continue to modernize theirs. And this 
proposal is an important step, even though it is our first 
step.
    With that, I will also be sending a letter to the 
Treasury's Financial Crimes Enforcement Network (FinCEN) this 
week to discuss how Fintech is being deployed to confront 
illicit finance. I am also happy to see that the committee will 
be considering Congresswoman Maloney's bill, which I know she 
and her team have worked very long and hard on. The 
straightforward bill provides needed transparency by requiring 
companies in the United States to disclose the financial 
beneficiary in order to prevent criminals and wrongdoers from 
exploiting their status as a company for criminal gain.
    I am also pleased that we will be considering Congressman 
Lynch's Kleptocracy Asset Recovery Rewards Act. This bill 
establishes in the Treasury Department, a Kleptocracy Asset 
Recovery Rewards Program, which may provide rewards to 
individuals providing information leading to the restraining, 
seizure, forfeiture, and reparations of stolen assets linked to 
foreign government corruption.
    These are all very important proposals, and I am eager to 
hear from our witnesses on their perspectives and insight.
    I will now recognize the ranking member of the 
subcommittee, Mr. Stivers, for such time as he may consume.
    Mr. Stivers. Thank you, Mr. Chairman. It is an honor to 
serve with you as the lead Republican on the National Security, 
International Development and Monetary Policy Subcommittee. And 
I want to commend you for your work on anti-money laundering. 
The draft we have today, I think, is important, and an 
important conversation to have.
    Some of the provisions that you have included originate 
from bipartisan bills from the last Congress, and I appreciate 
that bipartisan approach. I also agree that we must modernize 
our approach to anti-money laundering and the Bank Secrecy Act.
    I also want to applaud Congresswoman Maloney for her 
dedication over the years in combating the use of shell 
companies by criminals, terrorists, and rogue nations, and 
commend my colleagues, Steve Lynch and Ted Budd for their work 
on the Kleptocracy Asset Recovery Rewards Act.
    We are fortunate to serve on this subcommittee, because the 
jurisdiction that we cover is frequently very bipartisan, which 
I think will make our work easier. But there are a lot of hard 
things that we have to do. And I know that everyone on this 
subcommittee is dedicated to preventing criminals and 
terrorists from accessing our financial network and financial 
system. While we may disagree about the best way to accomplish 
these things, we all want to keep money out of the hands of 
those who would cause us harm.
    The two benchmarks I will use when I evaluate bills before 
today's committee are: number one, will the legislation be 
effective at accomplishing its stated goals; and number two, 
will these bills be the most efficient means to accomplish 
their objective? Or do some of the provisions impose 
unnecessary burdens that can be improved?
    As we try to answer those questions, we should also be 
careful to ensure our actions don't result in unintended 
consequences. The provision of the anti-money laundering draft 
speaks to this point. The provision which I support directs 
Treasury to conduct a study on de-risking. This is a practice 
of financial institutions closing accounts they deem high risk. 
Some of these accounts are genuinely suspicious and are 
rightfully terminated. Others belong to people who arguably are 
at the greatest need for access to our financial system such as 
legitimate international charities responding to humanitarian 
crises.
    Here, timely financial access to payment for medical 
equipment or supplies can have lifesaving consequences. So I 
think it is important that we look at this practice. This de-
risking is undeniably a result of our well-intended but 
sometimes current laws and policies. As we examine our bills 
under consideration today, I want to be mindful to avoid these 
mistakes in the future.
    Thank you to the witnesses for being here today. I am 
looking forward to hearing your testimony today. And I want to 
thank the chairman for having this hearing.
    And I would like to yield 1 minute to the vice ranking 
member of the subcommittee, Mr. Riggleman.
    Mr. Riggleman. Thank you, Chairman Cleaver, for calling 
this important hearing today.
    BSA/AML laws and regulations serve as the legal framework 
to help our financial institutions safeguard the financial 
system. From its origins in the 1970 Bank Secrecy Act, BSA/AML 
has attempted to adapt to continued threats of financial crime. 
I support FinCEN in its mission to enforce BSA/AML, because I 
believe that preventing illicit finance on all fronts is 
essential to national security. I personally witnessed the 
benefits of cutting the head off the snake.
    However, I am very worried that the current framework is, 
at times, both onerous and outdated and, therefore, unable to 
keep pace with emerging threats and evolved criminals that have 
adapted to our security posture. Criminals are constantly 
adapting their tactics, techniques, and procedures (TTPs) to 
bypass our defenses.
    As Congress considers reforms to the law, it is critical 
that we provide the private sector with a flexible, suitable, 
and effective regulatory regime that actually assists banks and 
credit unions in preventing illicit finance. We should strive 
to equip regulators and financial institutions with clear 
directives and critical information, and create strong 
partnerships with law enforcement. Collaborative data sharing 
between law enforcement and financial institutions is essential 
to supporting FinCEN's mission.
    I very much look forward to hearing the testimony from our 
witnesses. And thank you for being here today.
    I yield back.
    Chairman Cleaver. Thank you.
    Chairman Cleaver. Thank you, Mr. Stivers.
    The Chair now recognizes the gentlelady from California, 
the Chair of the full Financial Services Committee, Ms. Waters, 
for such time as she may consume.
    Chairwoman Waters. Thank you very much, Mr. Chairman. And 
congratulations on convening the first hearing of the 
Subcommittee on National Security, International Development 
and Monetary Policy. This hearing is on an important and timely 
topic: promoting corporate transparency and safeguarding our 
financial system from terrorists, traffickers, corrupt 
officials, and other criminals.
    Our nation's anti-money laundering framework needs an 
overhaul. In the past few years, we have seen an increase in 
human and narcotics trafficking through online marketplaces, 
large-scale cyber attacks from maligned foreign actors, and the 
proliferation of shell companies being used to hide illicit 
funds. It is for this reason that the House debated a 
resolution I introduced that advocates for the closure of 
money-laundering loopholes. At the same time, we have 
experienced tremendous technological advances that can both 
help detect bad actors, and facilitate terrorism and crime.
    The need for responsible innovation of new technologies is 
especially important in this rapidly changing environment. In 
addition, the Treasury Department and its partners need better 
access to actionable financial intelligence. And financial 
institutions large and small must better understand what is 
required of them in the shifting landscape.
    It is also painfully clear that some institutions 
unrepentantly abuse our financial system and are willfully 
blind to money laundering occurring within the banks instead of 
being held criminally accountable. However, these institutions 
often get away with penalties and fines that amount to a slap 
on the wrist.
    The legislation being discussed today would address these 
concerns while also improving compliance and innovation, thus 
strengthening the anti-money laundering framework.
    I yield back the balance of my time.
    Thank you.
    Chairman Cleaver. Thank you.
    Today, we welcome the testimony of our four witnesses. Our 
first witness is Mr. Jacob Cohen. Mr. Cohen is a subject matter 
expert, with over 8 years of policy, regulatory, and 
operational experience working to combat money laundering and 
terrorist financing domestically and internationally. From 2012 
to 2018, Mr. Cohen held various roles in the U.S. Department of 
the Treasury's Office of Terrorism and Financial Intelligence, 
including as policy advisor in the Office of Terrorist 
Financing and Financial Crimes. He also served for several 
years as the Director of the Office of Stakeholder Engagement 
at the Financial Crimes Enforcement Network (FinCEN). He 
currently advises financial institutions and emerging Fintech 
companies regarding Bank Secrecy Act requirements and potential 
exposure to economic sanctions, money laundering, and terrorist 
financial risk. Welcome, Mr. Cohen.
    Our second witness is Mr. Dennis Lormel. Over the last 15 
years, Mr. Lormel has served as the founder and president of 
DML Associates, where he provides consulting services and 
training related to terrorist financing, money laundering, 
fraud, financial crimes, suspicious activity, and due 
diligence. Prior to that, Mr. Lormel served as a Special Agent 
at the Federal Bureau of Investigation for 28 years where, in 
2000, he became Chief of the FBI's Financial Crimes Program.
    Following the terrorist attacks of September 2001, Mr. 
Lormel established and directed the FBI's comprehensive 
terrorist financing initiative, which evolved into the 
formation of the formal section within the counterterrorism 
division of the FBI known as the Terrorist Financing Operation 
Section. Welcome, Mr. Lormel.
    Our third witness is Mr. Amit Sharma. Mr. Sharma is the 
founder and CEO of FinClusive, a digital financial services 
platform for financially underserved and excluded entities that 
leverages blockchain technology and risk compliance tools to 
drive financial inclusion, build economic resilience, and 
protect financial system integrity. Mr. Sharma previously 
served as Chief of Staff to Deputy Secretary Robert Kimmitt, 
and as advisor to Treasury's senior team under Secretary Henry 
Paulson.
    Prior to that, he served at the Treasury's Office of 
Terrorism and Financial Intelligence, where he developed tools 
to combat transnational threats and financial crime and anti-
money laundering counterterrorist financing strategies. 
Welcome, Mr. Sharma.
    Our final witness is Dr. Gary Shiffman. Dr. Shiffman is an 
expert in the economics of organized violence, and the CEO and 
president of Giant Oak, Incorporated. His company supports 
Federal law enforcement and compliance professionals in 
regulated industries through software that brings the craft of 
behavioral science together with computer science and subject 
matter expertise to better understand patterns of illicit human 
behavior, such as money laundering, human trafficking, drug 
trafficking, insurgency, and terrorism.
    Dr. Shiffman previously served as Chief of Staff at the 
U.S. Customs and Border Protection. He also teaches at 
Georgetown University in the School of Foreign Service.
    I welcome all four of you.
    Mr. Cohen, you are reminded that your oral testimony will 
be limited to 5 minutes. And without objection, your written 
statement will be made a part of the record.
    You are now recognized for 5 minutes.

     STATEMENT OF JACOB COHEN, FORMER DIRECTOR, OFFICE OF 
  STAKEHOLDER ENGAGEMENT, FINANCIAL CRIME ENFORCEMENT NETWORK 
                            (FINCEN)

    Mr. Cohen. Thank you.
    Chairman Cleaver, Ranking Member Stivers, and distinguished 
members of the Subcommittee on National Security, International 
Development and Monetary Policy, I am honored by your 
invitation to testify before you today.
    Today, I want share my views on the importance of providing 
FinCEN and the Department of the Treasury with the appropriate 
resources to expand engagement in collaboration with domestic 
and global stakeholders. I will focus my remarks on FinCEN 
engagements efforts domestically, but I will also touch upon 
Treasury engagements with foreign counterparts through its 
attache and technical assistance program.
    The current AML/CFT landscape in the United States and 
around the world is complex, dynamic, and requires FinCEN and 
its private sector partners to constantly adapt. The global 
dominance of the U.S. economy places FinCEN and U.S. financial 
institutions at the forefront of combating financial crimes.
    To continuously adapt to the ever-evolving threats, FinCEN 
must have the resources to regularly and systematically engage 
with all its stakeholders. FinCEN plays an often understated, 
but outsized role in protecting the integrity of our financial 
system.
    FinCEN serves two roles. First, it is a financial 
intelligence unit, or FIU, for the United States. FinCEN is 
responsible for the collection, analysis, and dissemination of 
financial intelligence to law enforcement agencies and other 
authorities.
    Second, FinCEN is the lead AML/CFT regulator for the 
Federal Government.
    To effectively carry out these roles, FinCEN engages and 
shares information with the private sector through a variety of 
mechanisms, including Bank Secrecy Act advisory group (BSAAG) 
meetings, sharing information through advisories with financial 
institutions, and select speaking engagements. However, these 
engagement efforts are not sufficient to keep up with the 
current threats and the increasing cost from industry for more 
information to better detect and deter financial crimes.
    Held twice a year, BSAAG meetings allow FinCEN and other 
regulators to have frank discussions with a cross-section of 
industry representatives regarding the operations of the Bank 
Secrecy Act. However, engagement with a small fraction of 
financial institutions twice a year is not sufficient to 
generate the level of collaboration, continuous change, and 
learning that FinCEN and the private sector need to engage in 
to stay abreast of emerging threats and identify innovative 
approaches to continuously update and modernize our BSA/AML 
regime.
    FinCEN also communicates with industry by issuing public 
and nonpublic advisories to alert industry of specific 
financial crime threats. These advisories provide actionable 
information to financial institutions that allows them to 
enhance their AML monitoring systems and produce more valuable 
reporting.
    Due to limited resources dedicated to engage stakeholders, 
not to mention limited analytical support, FinCEN publishes 
advisories infrequently. This is evidenced by the low number of 
threat-specific advisories issued by FinCEN over the past 3 
years. Advisories on human trafficking, trade-based money 
laundering, and virtual currency were notably missing.
    Today, I would like to express my strong support for a few 
provisions in the discussion draft that I believe will enable 
FinCEN and Treasury to continue to meet the challenges facing 
our financial system.
    The scope of FinCEN's responsibilities require ongoing 
engagement with stakeholders beyond the Beltway. Providing 
FinCEN with the resources to deploy domestic liaisons in key 
cities across the country would allow FinCEN to systematically 
engage with financial institutions, Federal, State and local 
partners, and other stakeholders. The benefits of such a 
program would be substantial. Similar benefits include: 
identifying region-specific illicit finance risks; issuing 
region- or industry-specific advisories and geographic 
targeting orders; communicating priorities and guidance more 
directly, and with greater frequency to stakeholders; staying 
abreast of opportunities and challenges of BSA/AML-related 
innovation.
    In December 2017, FinCEN launched a FinCEN exchange program 
to enable greater information sharing between the public and 
private sectors. Sharing information about specific threats 
enables financial institutions to more effectively allocate the 
limited resources, to identify and report illicit financial 
activity. This important initiative should be supported with 
dedicated resources for FinCEN to conduct the necessary 
research and analysis, and to increase collaboration with the 
private sector.
    Treasury attaches play a key role in advancing U.S. 
sanctions policy, advocating for implementation of financial 
action tasks for recommendations, and combating financial crime 
threats. However, limited resources and the small footprint of 
the attache program forces Treasury to play a zero-sum game, 
essentially closing programs in countries that might still 
offer significant value when a new program elsewhere is 
required.
    Treasury, through its Office of Technical Assistance (OTA) 
supports foreign regulatory law enforcement, FIUs, and judicial 
authorities. OTA's approach entails strengthening and 
integrating the work of the entire spectrum of AML/CFT 
stakeholders, but with a specific focus on FIUs as a lynch pin 
of an effective AML/CFT regime.
    This enables FinCEN to engage in more productive 
information-sharing relationships with FIU partners around the 
world.
    While these proposals will enhance FinCEN's ability to 
increase engagement with industry, without the proper resources 
to support these new requirements, you will be placing 
additional burdens on an already resource-strained bureau.
    In my experience, one of the greatest challenges for FinCEN 
has been its ability to hire and retain mission-critical staff. 
FinCEN is at a disadvantage because it competes for the same 
experts with Federal banking agencies (FBAs), law enforcement, 
and the intelligence community, which either have higher 
salaries, special hiring authority, or both.
    Allowing the Director of FinCEN to set salaries at the 
level of the FBA's will position FinCEN to better compete for 
quality candidates, and I would also urge this committee to 
consider providing FinCEN special hiring authority to recruit 
high-quality candidates for mission-critical, hard-to-fill 
positions. This would go a long way toward ensuring FinCEN is 
best positioned to achieve its mission, and to adapt to new and 
emerging threats to our financial system.
    Thank you for the opportunity to testify today.
    I look forward to your questions.
    [The prepared statement of Mr. Cohen can be found on page 
36 of the appendix.]
    Chairman Cleaver. Thank you.
    Mr. Lormel?

STATEMENT OF DENNIS M. LORMEL, PRESIDENT & CEO, DML ASSOCIATES, 
                              LLC

    Mr. Lormel. Thank you, sir. And thank you for inviting me. 
I appreciate it, and I want to congratulate the committee for 
the work you are doing. I think it is really important.
    In your opening remarks, I agreed with everything you just 
said. And, Mr. Stivers, the comment you made about the 
inclusion and about the unintended consequences is really 
important. And that is one of the things I want to focus on 
later.
    Thank you for accepting my written statement. And I would 
like to highlight some things around that.
    I have been involved in this space--fighting fraud, 
corruption, money laundering, and terrorist financing--for over 
45 years now. And these are very serious problems, as you 
pointed out.
    Mrs. Maloney, I want to congratulate you and thank you for 
your perseverance in continually bringing up the beneficial 
ownership issue. I think that is an incredibly important issue. 
So, thank you for that.
    I know firsthand, having been in law enforcement, and the 
first shell company I ever dealt was in 1975. So that goes back 
a long way. I want to strongly encourage the committee to pass 
this legislation, the beneficial ownership legislation. I have 
been an advocate for this since 2012, and I think it is really 
important. I think all of the legislation that you are 
considering is extremely important.
    It's interesting that you bring up the kleptocracy issue 
with--and Mr. Lynch, thank you for that--the beneficial 
ownership issue, because kleptocracy, if you want case studies, 
go to every kleptocracy case out there. One MDB right now is 
one of your most significant cases. And that has shell 
companies all over it, and it is so difficult to follow those 
cases, so thank you for that.
    Looking at the beneficial ownership legislation, I think 
the best-case scenario would be if we had the incorporation 
information captured and reported at the point with the States' 
Secretaries of State. That is not a realistic opportunity, so I 
think the opportunity that Mrs. Maloney is advancing by using 
FinCEN as the conduit and repository for information is our 
good-case scenario. And it is our best alternative going 
forward. I think it helps law enforcement. It certainly gives 
law enforcement a lot of good access, and I am sure we will 
discuss that later.
    I like what is not included in the other bill, which is the 
thresholds, the reporting thresholds for SARS and CTRs.
    In my written statement, I spent a lot of time on the Bank 
Secrecy Act. Law enforcement is your number one beneficiary of 
Bank Secrecy and the reporting. And having been an FBI agent, I 
was the firsthand beneficiary of suspicious activity reports 
and CTRs. I think anything to diminish the reporting levels 
would be very detrimental for law enforcement, and I would 
encourage you, and encourage every committee, to really consult 
with law enforcement on that issue, because it is so important.
    In terms of the other things here, I like the theme in your 
bill about information sharing and building partnerships. Those 
are critically important. And the innovation. I am not an IT 
expert. These two gentlemen are. And I certainly defer to them 
on that. But innovation is critically important. When you can 
combine partnerships with innovation, that is a win-win 
situation for us going forward. And I think that is critically 
important.
    I think the information sharing--if you can expand 314, 
that is one of the biggest things I hear, one of the 
detriments, is that we didn't have a consistent feedback 
mechanism to financial institutions. And I was partly 
responsible when I was running the financial crimes program. I 
met with the Director of FinCEN on a regular basis, and we beat 
that to death trying to figure out how do you do it.
    Well, that 314(a), how you recommended it here of providing 
scenarios and kind of working concepts I think is fantastic. I 
think that is the type of thing, and I think my old 
organization, TFOS, in the FBI, they have a tremendous working 
model just where they do that, where they have a working group 
of financial institutions, and they share that information.
    And on that, I am going to run out of time, so I will stop, 
and I will look forward to questions.
    [The prepared statement of Mr. Lormel can be found on page 
42 of the appendix.]
    Chairman Cleaver. Thank you, Mr. Lormel.
    You are now recognized for 5 minutes, Mr. Sharma.

     STATEMENT OF AMIT SHARMA, FOUNDER AND CEO, FINCLUSIVE

    Mr. Sharma. Ranking and distinguished members of the 
subcommittee, thank you very much for the opportunity to 
testify before you today.
    In particular, I am grateful for the opportunity to discuss 
several initiatives that this committee and others in Congress 
broadly are pursuing to modernize our anti-money laundering and 
counterterrorist financing regime of the United States, and the 
attendant issues that emanate from the U.S. Bank Secrecy Act 
amidst an ongoing and evolving financial crimes threat, not 
only in terms of the evolution of how criminals move money, but 
also the attendent consequences or, albeit unintended, of de-
risking and the issues related to financial exclusion, which I 
believe are paramount, and certainly related to our broader 
national security objective.
    I am happy to discuss during the Q&A session additional 
issues associated with this hearing, including corporate 
transparency, beneficial ownership, and other parts of Titles 
I, II, and III. But I am going to focus my short remarks on the 
issues related to strengthening the coordination between public 
and private agencies, in particular, in recognition of the 
evolution of technology to advance some of these issues, not 
only for inclusion, but also to enhance, modernize, and make 
much more efficient the anti-money laundering and 
counterterrorist financing regime for banks and nonbanks alike.
    To start, I would say that there are several important 
trends that are very, very important to recognize, as we think 
about both the evolution of illicit finance threats, and the 
evolution in financial services themselves.
    The first is the recognition that there has been, and 
continues to be, an exponential increase in financial 
intermediation taking place outside of traditionally regulated 
channels. The direct extension of credit and lending by 
institutions, and individuals to one another, peer-to-peer 
transactions, web- and mobile-based banking, the increased 
digitization and tokenization of financial instruments and 
assets, and these are just some examples.
    Under any rubric, we are seeing financial innovation 
blossom to assist traditional financial market participants and 
increasingly nontraditional entrants are driving that 
innovation. And we have to take notice of the same when we 
think about modernizing and strengthening the broader BSA 
requirements that impact them.
    Secondly, this growth in financial activities outside 
traditional channels provides a hugely tremendous opportunity 
to increase access for the globally underserved, the 
underbanked, the unbanked, and those otherwise financially 
excluded. Such efforts have understandably given financial 
regulators pause as nonbank entities and other nontraditional 
market participates have come in. Technology and social media 
companies, online and e-commerce retailers, corporate entities 
with large recurrent user and consumer populations, and others 
with large and growing affinity groups are increasingly 
realizing the commercial benefits and the potential of 
providing financial intermediation within their infrastructure 
and their networks.
    And while some of these provide tremendous opportunities, 
the attendant issues that have otherwise impacted and really 
been relegated specifically to traditional financial 
institutions, must now necessarily apply to that growing 
nontraditional space.
    Finally, since the tragic events of September 2001, and 
exacerbated by the credit and financial crisis in 2008, there 
is a growing body of regulation. Financial oversight rules have 
understandably caused consternation, not only to traditional 
market players, but increasingly in the nontraditional, nonbank 
sector.
    With an average governance risk and compliance, GRC spend 
for most major banks of 25 percent or more, many organizations 
are presented with this unfortunate economic decision of 
whether or not to do business with certain sectors, with 
certain constituents, and has led importantly to financial 
exclusion and exacerbated de-risking.
    I think the comment and the joint statement in December 
2018 by the financial regulators to talk about innovation and 
the AML/CFT space is a very, very good start. But I think some 
practical steps can emphasize taking that forward in a 
meaningful way with industry.
    One, coordination with examiners. Having senior leadership 
and director level at individual regulators drive finance, 
technology, and innovation centers with examiners in the field 
is paramount. Too often, bank and nonbank entities have to 
navigate this myriad examination space that is largely 
uncoordinated between the State and Federal level, and doing so 
with examiners not only helps with respect to the assessment 
and application of technology, but with the examination and 
audit process itself.
    State-based coordination is paramount to enhance that 
coordination, but also to ensure that bank and nonbank 
applications of this technology are kept in check, and are done 
so in a way that financial industry participants, when facing 
exams with and by State and Federal authorities, where 
sometimes there may be conflict, can do so and reconcile.
    In sum, we have to look at some of these financial 
inclusion tools as part of the national security tool kit and 
the AML/CFT process versus looking at it as a binary and false 
choice between inclusion and AML/CFT implementation.
    And I think with that in mind, I certainly commend this 
subcommittee's and other efforts to modernize the system to do 
the same.
    [The prepared statement of Mr. Sharma can be found on page 
52 of the appendix.]
    Chairman Cleaver. Thank you.
    Mr. Shiffman?

      STATEMENT OF GARY M. SHIFFMAN, CEO, GIANT OAK, INC.

    Mr. Shiffman. Distinguished members of the subcommittee, 
thank you for the opportunity to appear before you today to 
discuss the important topic of countering financial crime.
    I am an economist who focuses on technology, behavioral 
science, and people who do bad things such as money laundering, 
human trafficking, drug trafficking, terrorism, fraud, and 
corruption.
    I am the CEO of Giant Oak, a software company focusing on 
making screening easy. I teach courses at Georgetown University 
on organized violence. And I am also a Navy Gulf War veteran, 
and I have served in Federal law enforcement.
    I have no interest in reforming AML compliance for 
compliance's sake. I tell you about my background to emphasize 
this point. I come to the subcommittee today as a technologist 
to argue that we can and must do better to combat money 
laundering, trafficking, terrorism, and other illicit acts.
    Our current AML regime requires radical reform. We are 
inefficient. According to the United Nations, the estimated 
amount of money laundering globally in 1 year is 2 to 5 percent 
of global GDP. At the same time, spending to combat money 
laundering and the financing of terrorism exceeds $7 billion in 
the United States, and $25 billion globally. However, of the 
approximately 2 million suspicious activity reports generated 
by today's AML systems for FinCEN, less than 5 percent of those 
provide value.
    In short, it appears we have an AML regime which compels 
the industry to spend billions of dollars, generates mostly 
useless data, and counters less than 1 percent of the problem. 
We must do better.
    We can begin by harnessing available technologies and 
focusing them on supporting our law enforcement and national 
security professionals.
    When I say, ``technology,'' I refer primarily to machine 
learning, artificial intelligence, and the application of 
behavioral science to patterns in data analytics. I define 
machine learning as the training of computers to identify 
patterns in data.
    If you imagine a spreadsheet with millions of rows and 
columns, it is not hard to believe that patterns exist 
somewhere in the data. But because our human eyes and brains 
cannot find those patterns, none of us will ever again live in 
a world without machine learning.
    By utilizing machine learning, we can teach computers to 
find and reveal patterns for us. Any future AML regime must 
include machine learning, and a future BSA/AML regime without 
machine learning seems unbelievable.
    So what can we do? To build the best machine to detect and 
deter financial crime, one needs good training data. Machines 
are literal. If you teach a machine to play chess, it will not 
learn to play checkers. The best machine on the planet for AML 
will be built by training it on AML data.
    If we apply this to financial crimes, the vulnerabilities 
and opportunities are obvious. Government agencies know which 
SARs provided the best quality information, but the banks do 
not, so they cannot train their tools properly. The few banks 
using machine learning for AML today train their machines on 
previous years' SARs data. But if more than 95 percent of past 
SARs were wrong, then the banks simply perpetuate the 
inaccuracies, just more efficiently.
    However, with feedback from law enforcement, systems can 
learn and improve. This is where we need to bring the AML 
regime: information sharing, and priorities.
    I do not want to end without raising a word of caution. 
Computers are powerful tools that can do both good and bad. As 
far back as the 1968 Stanley Kubrick and Arthur C. Clarke film, 
``2001, a Space Odyssey,'' we humans have understood the need 
to harness the computer. To ensure we maintain the balance 
between risks and rewards of advancing technologies, I suggest 
three core principles for the subcommittee to consider as part 
of any reform or legislative proposal.
    First, encourage information sharing between law 
enforcement, financial institutions, and regulators. This will 
enable the sharing of priorities and the training data for 
machine learning.
    Second, avoid opaque solutions where humans cannot 
understand and interpret the internal processes and outcomes of 
the machines.
    And, third, keep humans in the loop. Let machines sort and 
filter data, but let humans adjudicate good and bad, right and 
wrong.
    To close, machine learning already pervades our lives. 
Technology will increasingly enable regulated financial 
institutions to identify threats with increasingly precise 
measurements that will enable enhanced security, protection of 
privacy, and promotion of financial inclusion.
    We spend billions today to generate mostly useless data, 
and miss 99 percent of global financial crime. Law enforcement 
knows that better systems, based upon existing technologies, 
are available to generate good data and keep us all more safe 
and secure.
    Thank you for your time. I look forward to your questions.
    [The prepared statement of Dr. Shiffman can be found on 
page 61 of the appendix.]
    Chairman Cleaver. Thank you very much.
    I now recognize myself for 5 minutes for questions, and 
begin by making reference to this New York Times article, which 
is very disturbing. It talks about one of the executives from 
Goldman who runs their Asian office, and he has pleaded guilty 
in a Federal criminal investigation of fraud, and has been 
ordered--this is the part that troubles me; it is not the main 
part--to forfeit $44 million. That is not insignificant. But 
that is the extent of his penalty, forfeiting $44 million. This 
is just one more example of what happens if you wear a tie and 
are considered to be in a proper job. I know people in jail who 
stole $44.
    That has nothing to do with the hearing, but I had to get 
it off my chest.
    But this particular fraud emanated in Malaysia. And I 
understand Treasury's Financial Crimes Enforcement Network, 
FinCEN, is one of 159 financial intelligence units in the 
world. Through international cooperation, these units are 
better able to detect and counter transnational crime, 
including terrorism.
    In my home State of Missouri, we have six foreign banking 
organizations engaged in a range of financial transactions. And 
so, I am hopeful they are not engaged in any such illicit 
activities and are not doing any damage to my constituents. But 
what makes me feel assured is Treasury's work with the 
international counterparts.
    So Mr. Cohen, can you discuss, ever so briefly, FinCEN's 
efforts with the international counterparts and the value of 
Treasury's technical assistance international attache's 
program?
    Mr. Cohen. Absolutely.
    I will start with FinCEN. FinCEN is part of the Egmont 
Group of financial intelligence units (FIUs). In fact, it is 
one of the founding members of that international body. It is a 
group of, as you said, 159 FIUs that meets on a regular basis 
to discuss what the operational standards are for information 
sharing. Between these bodies, these financial intelligence 
units, every country has more or less an equivalent of FinCEN.
    FinCEN has both financial intelligence units and regulatory 
responsibilities. Other FIUs just have one or the other, or 
maybe both. And so that engagement is tremendously important 
for the United States as we are one of the predominant players 
in that space in sharing information with our partners. And the 
information that we receive is tremendously helpful for our law 
enforcement agencies and others.
    In regards to the Treasury attache program, that is a 
program where we have, in select strategic countries around the 
world, just like you have CBP attaches, FBI attaches around 
the--I mean, embassies around the world. You have Treasury 
attaches, but to a much lesser extent. And they advocate for 
U.S. sanctions policy. They advocate for combating financial 
crimes, and implementation of international AML standards.
    So in that sense, it is tremendously important.
    Chairman Cleaver. Thank you.
    I want to get to the FBI. I could hardly wait to ask you 
this question. What can Congress do? Where can this committee 
begin in terms of creating international support and 
cooperation in fighting money laundering? You have places where 
people traditionally go to launder money, but what can we do as 
a body?
    Mr. Lormel. Thank you, sir, for that.
    I think there is an awful lot that you can do. And it 
starts with understanding what the issues and problems are.
    And to the point that Mr. Stivers made earlier about what 
not to overreact to, the first thing for law enforcement is--or 
the FBI law enforcement in general, is the reporting 
thresholds. We need to be able to have--and law enforcement 
needs the ability to access and to use that information. And 
they do that to a very good degree.
    I think part of the answer to the question you are asking 
is the difference between regulatory requirements and 
regulatory expectations involving the regulators. And I think 
there is kind of--if you look at it--the financial institutions 
and the regulators and law enforcement, there is a triangle 
here. And there are hard lines between the financial 
institutions and law enforcement, and financial institutions 
and the regulators. But there is a broken line between law 
enforcement and the regulators.
    Chairman Cleaver. Keep that line right there. I will get 
back to you with that line.
    My time is up.
    I recognize the distinguished ranking member for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I really appreciate 
you calling this hearing. Again, I want to thank all the 
witnesses for your great testimony. And Mr. Lormel, I want to 
ask you first, there were 900,000 suspicious activity reports 
last year, give or take. That is an approximate number. I have 
to deal in round numbers because it is all I can handle.
    But of those, some were very useful, and some were less 
useful. And to the point you just made, I don't want to reduce 
the number of suspicious activity reports, but I want us to be 
able to efficiently process them, which speaks to Mr. 
Shiffman's point about machine learning.
    Are we using machine learning enough, and are we 
communicating back? I have looked at the draft in Sections 109, 
201, 202, and 203. Nothing really refers back to the kind of 
machine learning and computers that have to happen to go 
through 900,000 reports. Are we helping create a more efficient 
system, to my opening statement again? And what can we do in 
this draft to empower that?
    I will go to Mr. Shiffman next. But have we mentioned the 
right things in here? I like the fact that it requires a 
feedback loop, but are we doing what we need to do?
    Mr. Lormel. I think this is a very good start. I think this 
is a great foundation to build on.
    The question you are asking, though, sir, it is such a much 
more complex issue, because if you look at suspicious activity 
reports from a law enforcement standpoint, the first part of 
your question was the analytics. And when I was at headquarters 
and on a program level, we would use those types of analytics. 
And we need more and better of those analytics, so I will defer 
to these--
    Mr. Stivers. And I want to go to Mr. Shiffman now, because 
you brought up a really good point. Machines only learn what we 
tell them. So if we are not giving them good feedback, machines 
aren't getting better. We could be a lot more efficient.
    Is there anything in this draft we need to do to 
acknowledge what is going on, or be more specific about the 
machine learning that is going on to make it better?
    And I want to acknowledge, again, Mr. Chairman, this draft 
is great. It is a really good start. But I am asking, Mr. 
Shiffman, can we improve it?
    Mr. Shiffman. Thank you, Mr. Stivers.
    I agree. I think this draft is very good. I really like the 
bill and where it is going and take very little exception to 
anything in the bill.
    I would emphasize that--so picture a triangle. You have law 
enforcement, you have the regulators, and you have the banks. I 
would argue that communication across all those channels is not 
good, or is just one way sometimes.
    In order to take advantage of technology, the banks need 
the feedback from law enforcement so they can train their 
algorithms. The banks are already investing billions of dollars 
in this. So this isn't a matter of appropriating dollars. This 
is a matter of giving the banks the data they need to train 
algorithms and to set priorities. That concept is already in 
this bill. I would just emphasize it for the members of the 
committee.
    Mr. Stivers. I guess that goes to the heart of my question. 
When I read the draft, it does talk about sharing compliance 
resources in Section 202. It talks about sharing suspicious 
activity reports within a financial group and the FinCEN 
exchange with their financial institution counterparts.
    Do we need to more expressly define that triangle and that 
sharing that needs to happen between the three and between the 
machines at the three places for the computer analysis that 
needs to happen here? It seems to me we might do a better job 
of explaining the legislative intent of what we want to help 
them actually comply with law enforcement and FinCEN and the 
financial institutions.
    Mr. Shiffman. I think that would strengthen the bill. I 
think the bill is already pointed in the right direction, but 
that would strengthen it.
    Mr. Stivers. And I believe that, too.
    Thank you.
    I am going to yield some time to the gentleman from 
Arkansas, Mr. Hill.
    Chairman Cleaver. The gentleman is recognized.
    Mr. Hill. Thank you, Mr. Stivers. And I appreciate you 
calling this hearing, Mr. Chairman.
    Just following up on that question, Mr. Shiffman, how do we 
protect the privacy of Americans in this triangle you 
described? What is in this bill that thoroughly protects 
people's Fourth Amendment right to privacy?
    Mr. Shiffman. I can't speak as an expert on this bill 
itself. But I think that there are ways in which we can move 
forward, improve a system, take advantage of the vast resources 
spent in this AML regime and get better results and protect 
privacy. And I think we need to do that.
    I know privacy is addressed in the bill. I am not an expert 
on what the committee had in mind as they drafted it. But I 
think we do need to be acutely aware of the tradeoff between 
law enforcement and privacy, and it is something that we have 
all been dealing with throughout our careers.
    Mr. Hill. I yield back. Thank you.
    Mr. Stivers. I yield back the balance of my time.
    Chairman Cleaver. Thank you.
    I would like to ask unanimous consent to allow Mrs. 
Maloney, who has done enormous amounts of work in this area, to 
claim 5 minutes for questions.
    Mrs. Maloney. Thank you so much.
    Chairman Cleaver. Without objection.
    Mrs. Maloney. Thank you so much, Mr. Chairman, and Mr. 
Ranking Member, for holding the hearing. I thank you for 
allowing me to participate. And I thank all of my colleagues, 
and I thank all the panelists for your testimony today.
    This hearing is examining a bill that I have been working 
on for 10 years, along with my good friend, Peter King, the 
Corporate Transparency Act, which requires companies to 
disclose their beneficial owners to law enforcement and 
financial institutions.
    The problem that we are trying to solve here is very 
simple: Criminals and terrorists have always used anonymous 
shell companies to finance their operations. And because they 
never have to disclose who actually owns the shell companies, 
there is no way for law enforcement to figure out who is 
involved in a transaction conducted by a shell company.
    Law enforcement tells me that whenever they are following 
the money in an investigation, they always hit a dead end at an 
anonymous shell company. They can't figure out who is behind 
it, so they can't follow the money any further.
    This is a very serious problem in the City of New York. 
This challenge was brought to me by law enforcement who are 
very concerned about, first and foremost, terrorism financing. 
We are a terrorist target. Since 9/11, numerous other people 
have tried to strike us. Where did they get the money? Where 
did it come from? Where did the technology come from? Where did 
the bomb-making skill come from? All of this information they 
would like to know. And when they say they hit this LLC, they 
can't figure out who owns it.
    You can just ride through my district at night, the East 
side of Manhattan, and you will pass buildings, complete 
buildings, where there are no lights on. They are bank 
accounts. And they simply want to know who owns that bank 
account, for national security.
    President Obama was so concerned about this issue that he 
even formed a task force the last year he was in office with 
Jim Clapper, head of National Security, and others trying to 
figure out how to pass this bill that would allow law 
enforcement to get the tools that they feel they need to 
protect us.
    To help address this problem, FinCEN passed a rule in 2016 
that requires financial institutions to identify the beneficial 
owners of the companies that open accounts with them. My bill 
would take this burden off of financial institutions, and would 
require companies to disclose their beneficial owners at the 
time the company is formed. FinCEN would collect this 
information. And the only people who would have access to it 
would be law enforcement and financial institutions. And in the 
case of the financial institutions, the person with the 
information would have to allow that to be disclosed.
    I think my bill would help protect our national security, 
and law enforcement believes the same, and would provide 
regulatory relief for financial institutions.
    I want to submit for the record a statement from the Bank 
Policy Institute on the importance of beneficial ownership 
legislation, and a letter from 9 different financial services 
trade groups supporting beneficial ownership legislation, and 
also statements from law enforcement in support of the bill.
    Chairman Cleaver. Without objection, it is so ordered.
    Mrs. Maloney. I want to thank the chairman for yielding to 
me, and Mr. Lormel, I want to ask you about beneficial 
ownership. I know you have seen my bill, and I want to thank 
you for your support for this effort.
    Now, my colleague, Mr. Hill, has also circulated a bill on 
beneficial ownership, which I personally think is far, far too 
weak.
    Have you seen Mr. Hill's bill?
    Mr. Lormel?
    Mr. Lormel. Yes, ma'am. I have.
    Mrs. Maloney. Do you think Mr. Hill's bill is workable, or 
do you think Congress would be better off, and the safety of 
the American people better off passing my Corporate 
Transparency Act?
    Mr. Lormel. I think your Act is much more comprehensive.
    Mr. Hill, I thank you for your effort in this, but I think 
that--you recommended that the IRS be the collection point, and 
that is not workable, sir, from my experience. And I think that 
Mrs. Maloney's bill is much more comprehensive. You also, Mrs. 
Maloney, you don't have any thresholds. You are asking for all 
beneficial ownership. I didn't believe that to be the case in 
the other bill.
    Mrs. Maloney. Are you concerned that--and I congratulate 
Mr. Hill's interest and hard-working efforts, but are you 
concerned that Mr. Hill's bill doesn't even have a provision 
that would give law enforcement access to the beneficial 
ownership information?
    Mr. Lormel. Yes, ma'am. I think that is a serious problem 
because as a law enforcement--
    Chairman Cleaver. Go ahead and finish.
    Mr. Lormel. Okay. Just to the point about access, as an FBI 
agent, I wouldn't have access to that information because I 
would have to have a court order to get IRS information, 
especially tax information.
    Mrs. Maloney. You can't collect information if you can't 
see it, right? Has my time expired?
    Chairman Cleaver. Yes.
    Mrs. Maloney. Thank you.
    Chairman Cleaver. The Chair recognizes the gentleman from 
the great State of Texas, Mr. Williams.
    Mr. Williams. Thank you, Mr. Chairman. Thank you all for 
being here today.
    And Mr. Lormel, since you have had firsthand experience in 
the law enforcement perspective, can you walk us through an 
example where having the beneficial ownership information was 
crucial for you?
    Mr. Lormel. Yes, sir. I served 10 years in New York. I was 
a supervisor in New York. Back in 1983, there was a case that 
we had with a broker-dealer, and it was an internal 
embezzlement of about, at that time, $18 million, so you can 
imagine that $18 million today would be a lot more. The subject 
who embezzled that money set up, at first, four shell 
companies, and then he expanded to eight shell companies. And 
working through those shells to get to--and back then, it was a 
lot more difficult because we didn't have the internet; we had 
a paper trail. And so, working through those shell companies 
was very, very difficult. There were so many impediments to get 
around them, and to develop the evidence that we needed. It was 
very challenging, sir.
    Mr. Williams. Okay. Thank you. Dr. Shiffman, you mentioned 
in your testimony that technology and machine learning will be 
the cornerstone of any future BSA/AML regime. FinCEN has an 
entire technology division within the department. My question 
to you is, what is the biggest hurdle in getting this 
technology into use for BSA/AML purposes?
    Mr. Shiffman. Sir, I think FinCEN has great data, because 
they have all the data sent to them by the financial 
institutions, but I am not sure it is the right data, but they 
have a lot of data. The banks also have a lot of data. I think 
it is about training tools to identify the right data. As I 
said in my testimony, at least 95 percent of the suspicious 
activity reports sent to FinCEN never provide any value, so 
that is a massive investment on behalf of the banks, and it is 
a massive amount of data at FinCEN that never provides value.
    So my concept here is that, let's get the ground truth 
data, the actual cases of known money laundering, terrorism, 
drug trafficking, things like that, and train algorithms, both 
at FinCEN and in the financial institutions, and we will have a 
much more efficient system.
    Mr. Williams. Mr. Cohen, I would like to hear what you have 
to say, if you have anything to add to that answer.
    Mr. Cohen. Absolutely. I think it is critical for the 
machinery to work, if I understand it correctly, and I am 
certainly no expert, but communication and information sharing 
with the private sector is fundamental.
    FinCEN as the FIU aggregates all this information, all the 
SARs that are submitted by financial institutions, and then 
they can provide critical insight to financial institutions 
around the country to be able to better identify the type of 
activity.
    So I think that FinCEN Exchange programs, like the FinCEN 
liaison program, the domestic liaison program where you have 
folks engaging with industry, understanding the threats 
locally, regionally, that will greatly enhance, in my opinion, 
financial institutions' ability to detect suspicious activity 
and make the algorithms and machine learning even more powerful 
when that information then comes out and is looked at by an 
analyst.
    Mr. Williams. In 2016 alone, there were over 900,000 
suspicious activity reports filed with FinCEN along with 3\1/2\ 
million currency transaction reports. With so much information 
coming in, it seems that bad actors will easily be able to slip 
through the cracks, since millions of other legitimate 
transactions are being reported. So my question to you, Mr. 
Lormel is, I see from your testimony that you are not in favor 
of raising the thresholds for SAR and CTR. What recommendations 
do you have, then, in order to make the information within 
these reports more useful?
    Mr. Lormel. There are a few things, sir. You have to look 
at different perspectives. Now, from where I have sat at 
headquarters, we did data mining, and we did analytics, and I 
think that is one of the ways forward in terms of using that. 
But if you go down to the grassroots, to the SAR review team 
level out in the field, they are going through it by hand. So 
you have two different perspectives that you are dealing with.
    But part of the issue, again, comes down to, from where I 
sit, regulatory expectations versus regulatory requirements and 
financial institutions kind of getting caught up. If you think 
about the flow of information from a financial institution to 
law enforcement, that flow gets impeded by the regulatory 
requirements to a degree and then the regulatory expectations, 
so part of the answer also is the feedback. We have to have a 
better feedback mechanism, like Gary said, from law 
enforcement, where the banks understand it, and they get those 
scenarios. I think with the bill that you guys have introduced, 
you are setting the stage for that with 314.
    Mr. Williams. Thank you for your testimony.
    I yield back.
    Chairman Cleaver. Thank you.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chairman, and gentlemen, 
thank you for your testimony.
    I want to focus, first, on sort of the technology piece of 
this thing. We have two detectives, one in financial and the 
Treasury, and one police detective and sort of two 
technologists who want to provide--help them have the best 
information they can have. So Mr. Sharma, you said something, 
and that I was kind of scratching my head. You said that 
growing regulation IT costs and compliance has led to financial 
exclusion. Am I quoting that right? What did you mean? I didn't 
know what you meant.
    Mr. Sharma. Right. Thank you for your question. What we 
have seen, especially with global financial institutions, 
certainly western financial institutions, and the U.S. in 
particular, is that the combination of growing financial sector 
requirements, vis-a-vis AML compliance, and the ongoing fines 
that have increased over time, many of which are fully 
warranted for negligence or willful blindness, et cetera. Many 
institutions start looking at particular types of transactions, 
particular types of entities and constituents as just high 
perceived compliance risk. An example would be global 
remittance flows. And if I as a bank am spending an increased 
amount of time, energy, manhours, and money on understanding 
money services businesses Fintech companies and other non-bank 
FI activity that are sending money to the tune of hundreds of 
billions over the course of a year, but that is costing my 
business a lot from a compliance perspective, many institutions 
have just said I am not going to do business at all.
    Mr. Perlmutter. And so, quickly, how would you remedy that? 
And I have some questions for Mr. Shiffman.
    Mr. Sharma. This is where I think technology plays a vital 
role both in terms of the use of applied and advanced analytics 
like AI and machine learning. Distributed ledger technologies 
that can bring real-time transaction tracking and client 
monitoring while preserving the essential personal identifying 
information in the back end offer great promise to do these 
things in an environment that has been a very high 
traditionally man-hour-centric environment or process. So these 
two technologies have tremendous promise to drive inclusion and 
keep folks in the system, while, at the same time, following 
the anti-money laundering, know-your-customer, customer due 
diligence, monitoring and transaction tracking that are 
essential to the compliance tool kit.
    Mr. Perlmutter. All right. Thank you. And so Mr. Shiffman 
and Mr. Hill brought up the fact that we want to have as much 
information, make it as effective as possible for our law 
enforcement, but we are all subjected to the Constitution and 
our rights to privacy and things like that. So the three of 
us--Mr. Gonzalez, Ms. Wexton, and I--are all on the Science 
Committee, and you talked about Hal from ``2001, A Space 
Odyssey.'' I talked about Skynet from ``The Terminator.'' Why 
did you bring up Hal? What is it that you are worried about 
with artificial intelligence in this arena?
    Mr. Shiffman. If you recall, Hal wouldn't let Dave back 
into the spacecraft.
    Mr. Perlmutter. Right. I know. I mean, in ``The 
Terminator,'' Skynet became aware.
    Mr. Shiffman. Right. Absolutely.
    Mr. Perlmutter. And singularity is when the computers 
become aware. I am not trying to minimize it.
    Mr. Shiffman. Right.
    Mr. Perlmutter. I think the concern is that--I am over on 
the fiction section, not the non-fiction section. The concern, 
though, is coming back to the Constitution, coming back to the 
right of privacy, you said we need to focus on three core 
things: information sharing; avoiding opaque solutions; and 
keeping humans in the loop. Can you expand on that a little 
bit?
    Mr. Shiffman. Sure. Machines are literal. They will do what 
they are taught, and they don't know right from wrong. They 
don't have judgment. So you could intentionally, or 
inadvertently, program a machine that does the wrong thing, and 
that is why we always need to have, in my opinion, a human in 
the loop. Humans do know right from wrong. Machines don't. 
Machines do what we tell them to do. That is why I want to live 
in a world--my point is we are not going to stop machine 
learning, artificial intelligence. It is here. It is here to 
stay. It is pervading every aspect of our life. Therefore, it 
will make it into AML, so let's deal with it, and let's keep in 
mind that we want humans in the loop so that way, we can 
address things like financial inclusion and things like 
privacy. And if we don't think a lot about that now, we are 
going to be in trouble later.
    Mr. Perlmutter. Okay. Thank you, Mr. Chairman, and it was 
fun talking about that. I yield back.
    Chairman Cleaver. You and Dr. Shiffman need to go into the 
corner.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill.
    Mr. Hill. Thank you, Mr. Cleaver. I appreciate that. I 
appreciate Mrs. Maloney's long years of work on the Corporate 
Transparency Act and her various iterations of it over the past 
couple of Congresses. And, of course, all of us support the 
adequate disclosure that we need for law enforcement to do 
their job. That is really not in question here. And since the 
know-your-customer rules were promulgated as a part of Gramm-
Leach-Bliley, banks have been collecting this information and 
had obviously a responsibility for 40 years to follow 
suspicious activity reports.
    Mr. Lormel, I was reading your testimony. On page 7 of your 
testimony, you say your long-time preference is that the States 
collect this information, and you said they resist doing that. 
Are you aware of Congress having hearings on the States 
collecting this information?
    Mr. Lormel. Yes, sir. Back in 2012, I was actually invited 
to the annual conference of the National Association of 
Secretaries of State (NASS) where we discussed this issue, and 
I--
    Mr. Hill. They resisted, of course, and, you know, that is 
their prerogative.
    Mr. Lormel. Yes.
    Mr. Hill. We have 50 States. We have a Federal Government, 
federalism, and we incorporate entities at the State level. 
Hasn't this been a problem for years? As an FBI agent, you 
would say that your biggest concern are all the Californians 
who claim they are Nevadans, right, for tax evasion purposes. 
Isn't that a big problem in this country, tax evasion, using 
the laws of Nevada if you are either a California or an Alaska 
trust?
    Mr. Lormel. Yes, sir.
    Mr. Hill. So we have this challenge with the States, but if 
we had a set of best standards and beneficial ownership 
requirements that the States could collect, and should collect 
in your view, I think, based on reading your testimony, you 
would support the States doing a better job of being 
transparent, then, wouldn't you?
    Mr. Lormel. In most circumstances, I probably would.
    Mr. Hill. Yes. That is the way I took your testimony, so 
thank you for that. I think we all agree that it would be great 
if there was consistent information collected by the States in 
a machine-readable format. We don't have it. I will argue that 
that has never really been requested by the Federal Government 
on behalf of national security for tax evasion purposes, not 
that I can read in the record. So I will leave it at that for 
the moment. I know Secretary Mnuchin prefers that. I know the 
members of this committee prefer if the States would do that.
    One of the issues, though, you also bring up in your 
testimony, on page 8, you raise serious concerns about FinCEN's 
capacity to collect and disseminate beneficial ownership 
information. Is that in your testimony?
    Mr. Lormel. Yes, it is.
    Mr. Hill. Yes. So that is why I focused on this issue of 
perhaps the normal tax collection process. Like we have changed 
Schedule B on the Form 1065 many times to collect additional 
information about foreign bank accounts and foreign activity 
that we change, that collect beneficial ownership in the same 
place where we collect all the ownership information of a pass-
through entity in the case of an LLC or a partnership and then 
on the C corp forms or S corp forms for a corporation, and we 
change the question there. We had that material. In contrary to 
the testimony you all exchanged in your colloquy, it would be 
shared with FinCEN from the IRS, so that is the way my bill 
reads. And I think that is where most small businesses do this 
kind of work. Instead of having another form with another 
criminal penalty, Heritage estimates there could be a million 
unintended felons under the draft bill that we are considering 
because of the way it is written. I don't know if I agree with 
that. It could be an exaggeration. But the point is, we are 
asking charities, every business entity in America, to file 
directly with FinCEN beneficial ownership information, and yet, 
we collect all the ownership information, the contact 
information, the foreign bank account information, everything 
as a normal part of the income tax preparation. Isn't that 
right?
    Mr. Lormel. To a degree, yes, but I don't know that we 
collect all of the beneficial ownership information.
    Mr. Hill. We don't do it now. We collect the ownership 
information undeniably unless you want to be penalty of an 
IRS--commit IRS fraud. I don't think most people want to do 
that.
    Mr. Lormel. No. No, not at all, but the other issue you 
have, Congressman, is the fact that I would need a court order 
as an FBI agent or another law enforcement officer.
    Mr. Hill. So are you suggesting if we use Mrs. Maloney's 
FinCEN form, you won't have a court order? You can just go look 
at it? Is that what you are suggesting?
    Mr. Lormel. Yes.
    Mr. Hill. You think that protects people's privacy, or 
should they have a reasonable reason supported by law 
enforcement to go look at people's information?
    Mr. Lormel. I think that is very reasonable.
    Mr. Hill. So if in my paper records--I will yield back. 
Thank you, Mr. Chairman.
    Chairman Cleaver. Thank you.
    The Chair now recognizes the gentlelady from Virginia, Ms. 
Wexton, for 5 minutes.
    Ms. Wexton. Mr. Chairman, I have no questions for these 
witnesses.
    Chairman Cleaver. The Chair now recognizes the gentleman 
from Ohio, Mr. Gonzalez, for 5 minutes.
    Mr. Gonzalez. Thank you, Mr. Chairman. Thank you, 
everybody, for being here, and for your testimonies today.
    When I think of the challenge before us, I think of my home 
State, and I think of Fentanyl. I think of Fentanyl coming from 
China, going into Mexico, or going through our mail and coming 
into my community. In Ohio, over the past few years we have 
lost, in each individual year, more people due to the opioid 
crisis than we lost in the entirety of the Vietnam War. More 
people in a year than the entirety of the Vietnam War. It has 
absolutely devastated my community, and so I thank you all for 
the work. I thank this whole committee for the work and the 
commitment to stopping money laundering, and making sure that 
we take care of the people of Ohio.
    When I think of machine learning, and Dr. Shiffman, you 
will correct me if I am incorrect, I think you need good data, 
and you need it at scale, right? You need a lot of good data, 
essentially, and the more good data you have, the quicker your 
machines will be able to train themselves and be able to spot 
nefarious actors. In your testimony, you talked about 2 million 
suspicious activity reports, but less than 5 percent provide 
value. Mr. Cohen, if I could quickly, does that sound accurate? 
That is a bold claim. I have not heard that before, but is most 
of the data just not useful?
    Mr. Cohen. Again, I can't speak to the numbers. I do know 
that the data is tremendously useful to law enforcement 
agencies and our international partners. Again, if you are 
talking about percentages, I don't know those numbers.
    Mr. Gonzalez. Okay. Dr. Shiffman, can you talk about that a 
little bit? How are you kind of making that claim?
    Mr. Shiffman. Sir, there is a footnote in my testimony for 
that claim, and it is the clearinghouse article called, ``By 
the Numbers on AML.''
    Mr. Gonzalez. Okay. Thank you. My next question, then, 
would be, again, to Dr. Shiffman. So it sounds like we have a 
bad data problem, essentially, among others, but what data do 
we need that we are not collecting, or how can we improve the 
SAR process generally?
    Mr. Shiffman. Sir, thank you for the question. The idea 
here is that in the world we live in today, where we are 
talking about this new generation of technology, we have to get 
data and algorithm into the same place at the same time. So how 
do we do that? We can compel banks to send data in to FinCEN, 
and that is what they do. But we don't do a good job of letting 
the banks know this data was good, this data wasn't, because if 
we did that, then they could refine their algorithms and send 
better high quality data more efficiently, right.
    So it is just a matter of thinking about data and algorithm 
in the same place at the same time to do the training, because 
your understanding of machine learning is exactly right. It is 
about having good data and quantities of it.
    Mr. Gonzalez. Okay. And then quickly, Mr. Lormel, I talked 
about the Fentanyl crisis in Ohio. Could you describe, sort of, 
how that works from a shell corporation standpoint, and how 
they bury, essentially, what they are doing inside of these 
shell corporations?
    Mr. Lormel. You could liken that with the Fentanyl to any 
number of crime problems, but using your example there, if I 
have an operation, and I have people out there pushing Fentanyl 
for me, at some point, that money needs to get into the system. 
And so, one of the ways I am going to get that into the system 
is through shell companies, and the more opaque I can make 
that, and the more layers I can put in there, the more I am 
going to be able to comfortably move my money through and start 
to legitimize it again. You raise, you move, you store, you 
spend. And the more that you store and you move, the more 
opaque it gets. And that is exactly what I would be doing if I 
was involved in one of those operations.
    Mr. Gonzalez. Thank you. And with that, I will yield back 
the balance of my time. Thank you.
    Chairman Cleaver. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you very much, Mr. Chairman, and Ranking 
Member Stivers. And thank you to the witnesses. We really 
appreciate it. I am familiar with all of your work. Thank you 
so much.
    Mr. Lormel, I did not realize you had been doing this for 
46 years. You must have been violating the child labor laws 
when you started out. Just like me. You can take the Fifth on 
that.
    So I have been on this committee a while, and for a while, 
I was the chairman of the Task Force on Terrorist Financing 
before they made it a subcommittee. We are involved in Kabul 
Bank. We had a situation with the ATMs in Gaza that were 
operated by Arab Bank. Nigeria. We had a terrible diversion of 
natural resources. In all those jurisdictions, we had very weak 
rule of law. And so, one of the ways that we were able to get 
at that was that FinCEN--thank you, Mr. Cohen--was able to work 
with people on the ground in those countries that actually 
provided firsthand information, so we were able to get at this.
    So that is what led to the kleptocracy bill, because in 
many of these countries, especially developing countries, 
because of the lack of rule of law, and the lack of a strong 
independent judiciary, it is the only way we can get at this 
stuff, and FinCEN has been doing a lot of this stuff already. 
They just haven't been formalized, but that is what I hope to 
do in my bill.
    I am just wondering, Mr. Lormel, if there is--let me shift. 
Mr. Sharma, you are dealing with a new area, and I am aware of 
your work with CGS before on doing a lot of this work. Mr. 
French Hill and myself have been asked to head up this Fintech 
task force now. We just started it. Ms. Waters created it. What 
are the dangers? What are the new and different dangers that we 
see moving from this sort of brick-and-mortar system to online 
banking, and the digital dimension of this?
    Are there new and different things that we need to upgrade 
our regulatory framework to address that type of threat? I know 
you have been doing a lot of that work, and also, you have been 
doing great work on underbanked areas and things like that, but 
just the technology change. How would we best respond to that 
threat?
    Mr. Sharma. A couple of things. I really appreciate the 
question. So in my opening statement, I talked about a couple 
of trends that I think that we need to layer in as we look at 
oversight. One is that increased financial remediation is 
happening outside the banking network.
    Mr. Lynch. Yes. It is shadow banking, you mean.
    Mr. Sharma. Shadow banking. I often tongue-in-cheek ask the 
regulators, when was the last time you visited Walmart? When 
was the last time you visited Target? When was the last time 
you visited Amazon? These are banks. At the end of the day, 
these are institutions that have certainly a nationwide, if not 
a global network and engage in credit, lending, stores of 
value, et cetera. And so now you add that to the growing and 
emerging non-bank and Fintech space, and there is just 
increased financial intermediation there. And so from a 
regulatory perspective, we need to start looking in areas 
outside of what has been traditional covered institutions.
    The second is in the context of how some of these new 
technologies, in particular for the advanced analytics side and 
in distributed ledger actually provide tremendous opportunity 
to the unbanked, and some of these are macro challenges that we 
treat as compliance challenges.
    Mr. Lynch. Let me ask you to pause there, because we have 
had some major hacks of our blockchain technologies, Bitcoin in 
particular.
    Mr. Sharma. Yes.
    Mr. Lynch. With Mount Gox and some others, $350 million 
went in one whack, so have we--and those were fairly recent. I 
think the last one was in 2014. But have we got to a point 
where we trust the system? And believe me, I know, in theory, 
that blockchain will work, and it is probably our best hope, 
but are we there yet to a point where we can actually, as a 
Congress, sort of endorse this going forward without having 
some level of fear for the risk that it creates?
    Mr. Sharma. I believe blockchain and some of these 
technologies aren't panaceas. They aren't going to be the be-
all-end-all. We do need to understand the difference between 
the applications of these technologies in the areas that are 
hackable or corruptible, as we have seen in the Mount Gox and 
other crypto areas. The underlying technology of distributed 
ledger does hold promise insofar as the encryption, 
distribution, and immutability of that ledger. It is harnessing 
that technology in the context of AML/CFT for transaction 
tracking and the protection of the underlying information, 
whether it is your personal data or otherwise.
    Mr. Lynch. Data, yes.
    Mr. Sharma. And that is the key.
    Mr. Lynch. Yes.
    Mr. Sharma. And so, no, I would not be here saying you must 
endorse a particular technology as the be-all-end-all but this 
is where the coordination and technology and innovation centers 
with regulators can look at both the application tested both in 
beta and in live-market situations of that technology to 
address both the inclusion elements and AML/CFT in tandem.
    Mr. Lynch. Thank you.
    Mr. Chairman, I yield back. Thank you for your indulgence.
    Chairman Cleaver. Thank you.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Riggleman.
    Mr. Riggleman. Thank you, Mr. Chairman, and thank you very 
much to the witnesses. I want to thank my esteemed and 
venerable colleagues for asking most of the questions I was 
going to ask. First of all, thank you.
    Second, I want to say--I want to go a little bit geeky 
here. My background is a little bit different, I think, and so 
I want to tell you guys what I have done before I ask some of 
these questions, because I looked at your resumes. I looked at 
your bios, and I am very impressed, and probably, it is going 
to be all of you trying to ask some of this. But for about 26 
years, I have been in counterterrorism. For the past 15 years, 
I have been involved in trying to build data ecosystems to 
automatically predict what would happen in the command and 
control networks, right, and you guys know that is a complete 
infrastructure from fiber to cyber.
    So listening to this, I don't think this data problem is 
unique based on what I have gone through, and I want to let you 
guys know I have broken a lot of capabilities for machine 
learning and AI in my life. I have completely broken them, and 
it might have been operator error, but not most of the time.
    I want to ask Mr. Lormel something. First of all, thank you 
for your service for 46 years. I very much appreciate that, and 
I want to ask you: When you are looking at SARs and CTRs for 
your teams, are you noticing any attributes? Are you noticing 
any consistencies in the data that allows you to hone in on 
something rather than another based on the manual templates 
that you have built and trying to see what SARs or CTRs are 
effective?
    Mr. Lormel. Thank you, sir. Yes. Again, if you are looking 
at SARs from where I sat at a program level, I am looking at it 
differently, so I am using the data mining capabilities. And so 
it is easier for us, then, to sort and we are looking at 
certain things. At the street level, it is going to come down 
to what we are looking at in those specific locations, which 
agencies are involved, what violations do we work because that 
is going to help inform where I am going to look for--what I am 
going to look for in SARs. So you have the SAR review team. You 
have an IRS agent. You have an FBI agent. They are going to 
look at the same SAR. They may see it differently.
    Mr. Riggleman. I put in a couple bills, 1038 and 1039, to 
be a little bit more clear on the requirements from the 
Department of the Treasury and what you guys are looking for, 
and I am wondering, this is for Dr. Shiffman and Mr. Sharma, 
and I think, Mr. Lormel, I am going to assume something, that 
some of your teams are very good at SARs and CTRs and tracking 
down people.
    When you look at requirements, and Dr. Shiffman and Mr. 
Sharma, you are going to smile at this question. If you are 
going to build an ML template, a machine learning template, we 
could use Mr. Lormel and his teams to start that ML template to 
look at what SARs and CTRs are actually effective in going 
after these certain individuals. Anytime we are parsing data, 
it is the ``gazintas'' and the ``gazoutas,'' right? So when you 
are looking at the ``gazintas'' and the ``gazoutas,'' that is 
my operational term for data. When you are looking at that 
data, and we use Mr. Lormel's template, is it possible that we 
could actually build within the bill, or whatever bill that we 
pass, the ability to be more specific on requirements based on 
the templates that are built, could you, Mr. Sharma and Dr. 
Shiffman, look at the specific SARs and CTRs, based on machine 
learning, where we could be more specific on what is to be 
reported, so it is not everybody in the world trying to report 
these specific items? And either one of you can start.
    Mr. Shiffman. Absolutely, you can do that, sir. You don't 
want to preclude the ability for the machine to tell you things 
that the human couldn't identify on their own. The machine can 
look at a million attributes where a human can't. So you want 
to be open to that, but absolutely that is where you start.
    Mr. Sharma. And I would just add where it is the big data, 
a lot of the data and the associated algorithm to learn, and 
this is where a human judgment, both on the input and the 
output side, is critically important. You don't want the 
machine to just simply reinforce underlying biases in the data, 
and you don't want it to provide ``garbage out'' simply because 
it would be fully learned, because that is effectively what 
data you gave. This is where the 46-year esteemed career of 
Dennis Lormel plays a huge part in informing machine learning.
    And then secondly, technologies like distributed ledger 
can, in fact, allow for permissioned access across a number of 
different data stores that, by mandate, have to be protected.
    Mr. Riggleman. I would say that I don't think we should 
take a human out of the loop in any of these processes. I think 
that is what we are going to, right, Mr. Sharma? No human out 
of the loop. But I think my biggest fear--I have owned multiple 
companies. I have filled out multiple forms, whether they are 
OOIs, TTB types of information, all the background check you 
have to do. I had to do Federal acquisition requirements. I 
have had a lot of fun in my life, trying to go with regulation. 
But when I look at what Mr. Hill is talking about, and we are 
looking at bills across the committee, I think the Treasury is 
more specific in those requirements, based on maybe machine 
learning that you guys could do for us. Maybe we can dig down 
and actually build out of those 1065s, OOIs, background checks 
that we have and use data parsing to get the information that 
we have from the templates that are built by Mr. Lormel's team 
and then actually transition those to machine learning or AI or 
algorithms that can dictate what we want for requirements, 
rather than just going wholesale, sort of, beneficial ownership 
like cataclysmic idea of data.
    Mr. Shiffman. Just to build on that, I think you are right, 
and one of the points that I would emphasize from my testimony 
is this idea of priorities. What you are talking about is 
establishing the priorities, and that is going to make the 
system much, much better. We don't really do a good job of that 
today.
    Mr. Riggleman. Thank you, gentlemen. I am very impressed by 
you all. Thank you.
    Chairman Cleaver. Thank you.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Garcia.
    Mr. Garcia. Thank you, Mr. Chairman, and I too want to 
thank all the witnesses who have provided such valuable 
testimony here in our endeavor to make an impact on this great 
challenge that we face.
    I would like to ask Mr. Lormel a question. While there are 
many factors that contributed to the opioid epidemic, a 2016 
report from the organization Fair Share explains that a key 
facilitator of opioid trafficking is the ease with which drug 
cartels can open anonymous shell companies to launder their 
illicit gains, and mask their identifies from law enforcement. 
Has it been your experience that drug cartels hide behind 
anonymous shell companies to impede law enforcement 
investigators?
    Mr. Lormel. Yes, sir. Again, you can use a lot of examples, 
but yes, I mostly worked financial crimes in my career, but 
where I did assist with drug investigations, that was always a 
challenge that the people who are responsible for laundering 
the money, the people involved on the facilitation side like 
that, that is their job description is to go out and hide that 
money. They want to disguise it. They want to make sure that it 
avoids detection.
    Mr. Garcia. Thank you. And do you believe that collecting 
beneficial ownership information of those companies formed in 
the U.S. as the draft Corporate Transparency Act proposes to do 
would help law enforcement pursue criminal traffickers of 
heroin, Fentanyl, and other illicit opioids?
    Mr. Lormel. The simple answer is yes. I think that is very 
much so, but I also believe that the bad guys are going to be 
out there looking to see how they can exploit other avenues, 
because they are going to look for other vulnerabilities. But 
to the direct question, yes. It would be very helpful.
    Mr. Garcia. Okay. Thank you.
    Mr. Chairman, I would like to enter the Fair Share report 
into the record, if it is possible.
    Chairman Cleaver. Without objection, it is so ordered.
    Mr. Garcia. And then one final question. Again, Mr. Lormel, 
can you give us some examples of bad actors using anonymous 
shell companies in the U.S. from your experience in law 
enforcement?
    Mr. Lormel. I will use a kleptocrat. Vladimir Montesinos 
was the head of internal security in Peru. Montesinos, at one 
point, set up shell companies to launder $400 million around 
the world. I was running the financial crimes program in the 
FBI when we tried to help Peru render him back to the United 
States first. He had over $40 million through shell companies 
in the United States.
    Mr. Garcia. Any others that you would like--that you can 
share at this juncture?
    Mr. Lormel. There are just--there are so many. If you look 
at right now the ongoing 1MDB case, you can see a lot of use of 
shell companies there. There is just--I am sorry, sir. There 
are just so many cases you can go through.
    Mr. Garcia. I see some heads nodding, so it must be a known 
fact. Thank you very much. I yield back, Mr. Chairman.
    Chairman Cleaver. The gentleman from Tennessee, Mr. Rose, 
is recognized for 5 minutes.
    Mr. Rose. Thank you, Mr. Chairman. I yield my time to Mr. 
Hill.
    Chairman Cleaver. The gentleman is recognized.
    Mr. Hill. I thank the chairman. And I thank Mr. Rose. I 
appreciate his time and willingness to do that.
    Mr. Cohen, I was interested in this issue of balance. We 
were talking about the most important things, data from CTRs 
and SARs and beneficial ownership. All of these things are 
clues to put the puzzle together to catch bad actors, domestic, 
and to my point, and international. What do you think the most 
fundamental is from your time at FinCEN? Is it the SAR, the 
suspicious activity report? Is it the best clue among that 
group of many things, you think?
    Mr. Cohen. I can't single out a single report that is most 
effective. I think it just depends on the nature, and I think 
Dennis will speak better to that. I think every law enforcement 
agency, every single piece of the puzzle provided by that 
particular report could sort of break a case. So I certainly 
don't want to say what report is best or not. Certainly, the 
suspicious activity report is very important when you talk 
about the threats to the U.S. financial system, because a lot 
of that obviously comes through our financial institutions.
    Mr. Hill. Yes. I have done it for 35 years in both the 
brokerage business and the banking business. The nice thing 
about it from a law enforcement point of view is it isn't 
quantitative, it is qualitative. There are some rules around 
it, and there are categories in which you report. But if it is 
a suspicious activity, you have a duty to report which is an 
ideal source of clues.
    Mr. Cohen. Yes. Absolutely. I would add the sophistication 
of financial institutions varies around the country and around 
the world. The resources you have to devote to having--some 
banks have a dedicated financial intelligence unit internally, 
but others maybe have a few people. And so, I think working 
closely with the private sector, with financial institutions, 
law enforcement, we share a lot of information with them. 
Having FinCEN as the aggregator, right, because FinCEN has a 
big picture of all the SARs. They are the ones that collect all 
the SARs.
    Mr. Hill. Right. I appreciate that response.
    Mr. Lormel, on the issue of structuring, the big issue, no 
matter--we had a CDD rule put in place at Treasury last May, 
and, of course, it arbitrarily took 25 percent of the company 
you are supposed to report the beneficial owners. And yet, when 
we look at IRS data, it can be zero, or it can be 100 percent 
ownership of a company, a shell company, in your example. When 
we pick a number like 25 percent, like Treasury did in the CDD 
rule, isn't easily structured around? I know there is no right 
answer there, but what is your perspective on--and I would say 
most law enforcement people. You can't give them enough 
information, and you can't give it to them fast enough, and you 
can't give it to them better without a warrant. But with that 
caveat, how do you feel about that 25 percent, and having done 
it for 4 decades? What is your view of that?
    Mr. Lormel. There is always going to be wiggle room, so you 
have that 25 percent, I always make the misstatement if it is a 
``good bad guy.'' a proficient bad guy who really understands 
how to move money is certainly going to be able to circumvent 
that.
    Mr. Hill. Yes. And that is an area where if you had 
aggregated information that you blended with SAR data in a 
legal way, you have a much better shot at moving that success 
ratio up.
    Mr. Cohen, in your experience at FinCEN, does FinCEN 
aggregate open source data with that SAR trail as you are 
building a case, and to kind of respond to Dr. Shiffman and Mr. 
Sharma's analysis?
    Mr. Cohen. I will caveat that by saying it's not analysis 
at FinCEN they do from my understanding in working closely with 
them. Yes, they do aggregate open source information with the 
BSA reporting that we receive, yes.
    Mr. Hill. Right. So there are many good things, Mr. 
Cleaver, in this bill that are really improvements over the 
work, and I thank Mr. Perlmutter and Mr. Lynch, and Mr. Pearce 
in the last Congress. We have listened to a lot of this. A lot 
of what we have heard is captured here like trade-based money 
laundering, and expanding the target on real estate, something 
of concern to the Chair and to Mrs. Maloney. So there are many 
improvements here, but I think we really tried to find some 
bipartisan consensus on this definition on beneficial 
ownership. I thank Mr. Rose. I yield the time back to Mr. Rose.
    Chairman Cleaver. The Chair now recognizes Mr. Sherman from 
California for 5 minutes.
    Mr. Sherman. I want to focus a little bit on 
cryptocurrencies. I think, ultimately, they will be swept into 
the dustbin of history, but for purposes of these questions, 
let's assume that they will continue to be around for a while. 
They undercut the power of the United States Government.
    First, the U.S. Government makes a lot of profit off of 
seigniorage, and I may be mispronouncing that term, the profit 
we make by minting money. We get to spend it first. Our banking 
sanctions have been incredibly effective, in large part because 
of the importance of the U.S. dollar, and cryptocurrencies seek 
to deprive the United States of this money and this power.
    Now, among those rejoicing in the hope that 
cryptocurrencies will be successful are our foreign enemies, 
and also a strange group of people who view themselves as 
patriotic Americans. They just want to disempower the U.S. 
Federal Government, a certain Libertarian stream that wants us 
to stop terrorism so long as there is no power in the U.S. 
Government. We want a currency to be a medium of exchange and a 
store of value. The U.S. dollar is clearly superior to any 
cryptocurrency in those two things.
    So it appears as if from the user's standpoint, the 
advantage of cryptocurrency is that it is a system for design 
and transmission designed to evade the U.S. Government. That is 
not only useful for terrorists, it is useful to ordinary 
criminals, and it is useful to people who view themselves as 
law-abiding Americans. They just want to cheat on their taxes.
    Does cryptocurrency offer the user an advantage over U.S. 
currency or other euros or whatever, if they are not intent on 
evading Federal law? Mr. Sharma?
    Mr. Sharma. Sir, thank you for the question. I think that 
the first thing that we need to be taking great care of is that 
not all cryptocurrencies are the same. Not all cryptocurrencies 
are treated equal. Not all cryptocurrencies are created for 
purposes of full evasion or anonymity. In fact, there are 
tremendous benefits with respect to digital assets.
    Mr. Sherman. The dollar can be a digital asset, too.
    Mr. Sharma. Correct. Exactly.
    Mr. Sherman. I am saying cryptocurrency as compared to a 
dollar. Obviously, you wire money. You have been doing that for 
100 years.
    Mr. Sharma. Correct.
    Mr. Sherman. And you can say cryptocurrency is better 
because you can wire it.
    I do want to move on to another question. Mr. Cohen, since 
2016, FinCEN has had in place a continuous series of 6-month 
geographic targeting orders or GTOs. Do these GTOs, title 
insurance companies and a number of areas around the country 
have worked with FinCEN to collect and report beneficial 
ownership information of LLCs and other legal entities in 
certain all-cash real estate purchase transactions?
    It is my understanding that currently title companies are 
the only segment of the real estate industry taking part in 
Federal law enforcement programs to prevent money laundering. 
How did FinCEN come up with the decision to rely primarily on 
title companies for the collection of beneficial ownership 
information to combat money laundering in real estate? And to 
your knowledge, has beneficial ownership information collected 
and reported to FinCEN by title companies benefited law 
enforcement efforts?
    Mr. Cohen. I have a quick reply to that because while I am 
aware of the issue, I was not involved in the specifics of the 
matter, but I do know that FinCEN worked very closely with law 
enforcement agencies in industry in order to develop the GTO in 
question. And I do know that information that has been provided 
must be--I think it has been reported publicly and has been 
useful to FinCEN.
    Mr. Sherman. And have the title companies paid for their 
efforts in this area?
    Mr. Cohen. I am not sure. I am sorry about that.
    Mr. Sherman. Does any other witness have a response to that 
question about title insurance and GTOs? Hearing no answer on 
that, I can go back and ask for another witness to identify 
some advantage that cryptocurrencies have for the law abiding 
user over the U.S. dollar. Dr. Shiffman?
    Mr. Shiffman. As you said, sir, cryptocurrencies have 
gained appeal in kind of the Libertarian sort of movements. The 
advantage to criminals is that it has anonymity or actually 
pseudonymity, and so therefore, it is like cash, but it is much 
easier to move around than cash.
    Mr. Sherman. It is the only currency designed chiefly for 
law evaders. I yield back.
    Chairman Cleaver. The Chair now recognizes the gentleman 
from Missouri, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and I thank all 
of the witnesses for being here today.
    Mr. Lormel, I just want to first thank you for your 
service, and then I would like to ask you about--you talked a 
little bit today about the levels on SARs and CTRs, and I have 
a concern about that from the standpoint of it hasn't been 
raised since it was instituted 30, 40 years ago. I think Dr. 
Shiffman made a comment that most of it was wasted. Can you 
give me a justification for not raising the SARs and CTRs 
whenever you have thousands and thousands and thousands of 
these things, millions of them, quite frankly, and it takes 
hundreds of thousands of people? How many people at FinCEN does 
it take to overlook these things when it takes hundreds of 
thousands of people to put them together?
    Mr. Lormel. You certainly bring up a good point, but in 
today's environment in particular, I think one of the biggest 
problems that we are looking at now is micro structuring in 
smaller amounts. The biggest threat we have is the homegrown 
violent extremist. I can't give you accurate statistics, 
because I am not in the FBI right now, but I believe that the 
FBI has some statistics that they used last year in 2018 that 
talked about the percentage of cases that CTRs, in particular, 
were used in, and it was a pretty high level.
    Mr. Luetkemeyer. I would love to have that information. If 
you can get ahold of it for me, that would be great. My concern 
is that we are weaponizing the banks. We are making law 
enforcement officers out of them. I understand your position. 
The more information you have, the better chance you have to 
catch somebody, but let me ask you this question: Would you 
support putting a policeman on every single corner to prevent 
crime?
    Mr. Lormel. I'm sorry?
    Mr. Luetkemeyer. Would you like to see a policeman on every 
single corner to prevent crime?
    Mr. Lormel. In a perfect world, yes.
    Mr. Luetkemeyer. Okay. That is my point. In a perfect 
world, we had a single SAR for every single transaction, so 
where do you draw the line? Do you draw the line on having an 
office to put patrolmen every so many blocks, every so many 
miles? It is just like the SARs and CTRs. There is a cost 
benefit here. At some point--right now you have deputized the 
banks to be law enforcement officers.
    Mr. Lormel. On that point, that is dangerous in the sense 
that I would never call the bankers, and want to deputize or 
give them any--
    Mr. Luetkemeyer. They are not enforcing law, but they are 
gathering data for you, just like a detective would.
    Mr. Lormel. Right.
    Mr. Luetkemeyer. They are gathering data to help you make a 
case.
    Mr. Lormel. Their responsibility is to identify suspicious 
activity and report it, and that is really important.
    Mr. Luetkemeyer. I am not trying to say that this shouldn't 
be done, but I am trying to say, look, we have to find a cost 
benefit spot, or sweet spot, and I would like to work with you 
to find a sweet spot where we can raise the threshold to allow 
the hundreds or thousands or millions--some of these banks are 
paying millions of dollars to do these SARs, and according to 
Dr. Shiffman, most of it is wasted.
    So Dr. Shiffman, I want to ask you to go back over your 
numbers for me. Can you give me those numbers again? I think I 
saw that 5 percent of SARs and CTRs actually provide value. Is 
that what you said?
    Mr. Shiffman. Yes, sir. Nobody knows for certain, but the 
estimates based upon polling done of the banks and others in 
the clearinghouse report, it is 5 percent at most.
    Mr. Luetkemeyer. It looks to me like most of the money 
laundering in today's world, isn't that being done with 
cryptocurrencies anyway?
    Mr. Shiffman. I don't know whether that is true.
    Mr. Luetkemeyer. If you look at the size, the amounts.
    Mr. Sharma. I think what you would find, sir, is that most 
of the money laundered in the world is in cash, and we are not 
going to outlaw cash.
    Mr. Luetkemeyer. It is laundered through cryptocurrencies, 
right?
    Mr. Sharma. In some instances, but no, I would not argue, 
nor have I seen any data to support that the most laundered 
instrument in the world is crypto. I don't believe that is 
true.
    Mr. Luetkemeyer. Really. That is information I have been 
given by multiple people, so that is interesting. Okay.
    Dr. Shiffman, continue.
    Mr. Shiffman. I would say just to bring the law enforcement 
and Mr. Lormel's perspectives and mine together; law 
enforcement loves the FinCEN database right now, because it is 
massive, and 5 percent of a lot of data is a lot of data, 
right? So they have a lot of data that they like, and I 
wouldn't want to take that away. As Mr. Hill was saying, I 
don't want to take data away from them.
    Mr. Luetkemeyer. I am not advocating to take it away. I am 
trying to find a way for everybody to live here--
    Mr. Shiffman. Right.
    Mr. Luetkemeyer. --to be able to do your job to find the 
bad guys, but yet, don't push the cost on the financial 
institutions and say, if you don't do this, then you are part 
of the problem.
    Mr. Shiffman. Right. I think we love the current system 
because it is the system we have, but I think across law 
enforcement, there is this understanding--
    Mr. Luetkemeyer. Part of the bill, the BSA bill we put 
together last year, Congressman Pearce and I had in there a 
pilot program that had, I think, using some of your technology, 
Dr. Shiffman, to have an algorithm sit there and figure out by 
the transactions that go through a bank in a day's time, you 
can figure out when you come in the next morning, there will be 
a program, or a printout sitting there saying, we have three 
people you need to take a look at for the transactions for the 
day versus SARs and CTRs. That may be an indication, but there 
are a whole lot of other transactions, I think, if you use the 
right algorithm, it can actually do a better job. So that is my 
point. There is a better way to do this than SARs and CTRs. 
Thank you very much for your testimony.
    Chairman Cleaver. Thank you, Mr. Luetkemeyer.
    I would like to thank all of the witnesses for your 
testimony today. You have been very helpful to us as we have 
dealt with an issue, and one of the beauties about this 
particular hearing is that there is no partisan component to 
it.
    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.
    [Whereupon, at 3:53 p.m., the hearing was adjourned.]

                            A P P E N D I X



                            March 13, 2019 
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]