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OPERATIONAL OVERSIGHT OF THE FINANCIAL CRIMES ENFORCEMENT
NETWORK
FRIDAY, MARCH 21, 1997
House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 9:35 a.m., in room
2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the
subcommittee] presiding.
Present: Chairman Bachus and Representative Waters.
Chairman BACHUS. I would like to call to order this
hearing of the General Oversight and Investigations Subcommittee of the
Banking Committee.
Good morning. This is the second of a series of hearings that
the subcommittee will hold to review the issues relevant to the fight
against money laundering.
Today we will hear from Mr. Stanley Morris, the Director of
the Financial Crimes Enforcement Network, sometimes referred to as
FinCEN--or more often--I might say. That is the agency that leads the
Treasury Department's fight against money laundering.
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FinCEN evaluates money laundering threats, supports law
enforcement agencies and implements the Bank Secrecy Act. Although a small
agency, these diverse jobs give FinCEN tremendous potential as a crime
fighting tool.
We have asked Mr. Morris to first outline FinCEN's mission for
the subcommittee and then address a number of related issues. Specifically,
we have asked him to explain FinCEN's role as a support for law enforcement
agencies.
FinCEN is responsible for gathering the various forms filed by
financial institutions that are required by the money laundering
regulations. Today we hope to gain a better understanding of how FinCEN
gathers this information and ensures the information is acted upon.
This is a particularly timely topic in light of press stories
questioning whether the system may have broken down in regard to transfers
of millions of dollars to a Texas bank by a high ranking official in
Mexico.
In addition, FinCEN implements the Bank Secrecy Act for the
Department of the Treasury. These regulations provide a first line of
defense against money laundering and help to ensure our financial
institutions are not used for illicit purposes.
We all realize, however, that these Bank Secrecy Act
regulations must be efficient. They must provide real law enforcement value
for the amount of burden placed on the industry. We hope today to find out
how FinCEN is approaching this responsibility.
Last year, FinCEN finalized the Suspicious Activity Report
System, a system that streamlines and consolidates the older system by
which financial institutions reported possible criminal activities.
Although the industry responsible appears to be favorable as the system
reduces the regulatory burden, we are anxious to examine any problems being
encountered under the new approach.
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For several years now, non-bank financial institutions or
NBFIs were identified as a weak link in the regulatory chain developed to
prevent money laundering in the United States. Last week, this subcommittee
held a hearing on the Use by the Department of the Treasury of the
Geographical Targeting Order to address the threat posed by a particular
segment of this industry, money transmitters that transmit money from the
New York City area to Colombia.
Under Secretary Raymond W. Kelly of the Treasury Department
appeared before us and testified concerning the 30 percent drop in
transmissions to Colombia and the over $50 million in currency seizures
made since the GTO went into effect.
In my view, this is a tremendous success story for your
agency, Mr. Morris, and for Under Secretary Kelly and the rest of the
Treasury Department and for other local law enforcement agencies in New
York that were involved. This subcommittee is very proud of your work and
considers that a real strike against drug dealers and the drug cartels.
In 1994, Congress passed the Money Laundering Suppression Act
wherein Treasury was given the authority to develop new rules specifically
designed to help plug the loopholes in the non-bank financial institutions
regulatory structure. In particular, Treasury was directed to register
NBFIs. This is an extremely important effort. No one doubts, however, the
difficulties involved in developing a regulatory scheme for the hundreds of
thousands of NBFIs in existence.
We hope to get an update today on where we stand in this
complex effort.
In closing, I note it is the job of this subcommittee to
conduct periodic oversight hearings concerning the agencies within its
jurisdiction. Although FinCEN was created over 7 years ago, this is the
first oversight hearing ever held concerning FinCEN.
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I also want to state for the record that FinCEN was
extraordinarily cooperative in providing information to the
subcommittee.
[The prepared statement of Hon. Spencer Bachus can be found on
page 32 in the appendix.]
I welcome Mr. Morris and Deputy Director Bill Baity to the
subcommittee. If there are no other opening statements, I will now turn to
Director Morris to make his statement.
Mr. Morris, since you are the only person testifying, I invite
you to take the time you consider appropriate in making your opening
statement. There will be no limits placed on you.
We appreciate both of you gentleman appearing before us. We
would invite Mr. Baity, if he wishes to make comments, to do so, although I
think he is not making an opening statement.
STATEMENT OF HON. STANLEY E. MORRIS, DIRECTOR, FINANCIAL CRIMES
ENFORCEMENT NETWORK
Mr. MORRIS. Thank you very much, Chairman Bachus. I am
very pleased to be here with our Deputy Director, Bill Baity.
As you note, while FinCEN was created almost 7 years ago,
today marks its very first oversight hearing. We congratulate you
personally for continuing to focus on money laundering and especially
appreciate the opportunity today to describe our programs as you have
outlined in your opening remarks and try to lay out some sense of our
future.
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FinCEN was originally created to serve as a central source for
financial analysis and intelligence retrieval to assist in money laundering
and other financial crime investigations. Two-and-a-half years ago, its
mission was broadened to include regulatory responsibilities. Now, with its
burgeoning international programs, it stands as Treasury's principal
support arm for anti-money laundering efforts.
We carry out our mission, as you say, with a small staff, in
Federal Government terms anyway, of 170 people in the 1997 budget and just
over $23 million, but I think a small and very effective team, some of whom
are sitting behind me. I am confident you will share this view at the close
of the hearing today.
My testimony will briefly summarize three important areas that
you touched upon: first, ways we support law enforcement investigations at
the Federal, State and local level; second, a progress report on our
regulatory responsibilities under the Bank Secrecy Act--the Nation's
primary counter money laundering law; and, third, FinCEN's efforts to guide
the international fight against money laundering.
The original mission of FinCEN centered on law enforcement
case support. This is still our primary job, but we have expanded it to
include specially tailored assistance.
FinCEN has provided, since its creation, to Federal, State and
local law enforcement 38,000 analytical case reports involving over 100,000
subjects. Last year alone, we worked with more than 150 different agencies
answering more than 7,600 requests. Using advanced technology and countless
data sources, our analysts linked together various aspects of a case,
finding the missing pieces, so to speak, in the criminal puzzle.
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Our databases provide one of the largest repositories of
information available to law enforcement anywhere in the world. Thus, we
arrange the detail of personnel from over 30 Federal investigative
agencies, and they use those systems at our headquarters in Vienna,
Virginia.
In sum, in addition to our case support, we assist law
enforcement by offering training, office space and systems access. We also
provide on-line support to our State and local colleagues. We do this
through a system called Gateway, which provides direct on-line access to
the 100 million records filed under the Bank Secrecy Act.
Using FinCEN-designed software, this allows our State and
local colleagues to conduct their own research. Every State and the
District of Columbia are now on-line. In 1996, Gateway processed almost
50,000 requests for information.
During its research, Gateway electronically captures that
information on incoming inquiries and automatically compares it to our
other case files in our other databases. This gives us the ability to alert
one agency that another has an interest in the same subject, a matter of
some considerable interest for an investigator.
Last year, we provided 356 such alerts of duplicative
investigations.
FinCEN's Artificial Intelligence system, AI, is another avenue
available to law enforcement in the fight against money laundering. Through
the use of advanced technology, the system identifies suspicious activity
in those BSA currency reports. For the first time in the 25-year history of
the Act, every reported financial transaction can be reviewed and evaluated
against a set of pre-established rules. This unique state-of-the-art
technology provides the ability to link disparate banking transactions,
producing leads for new investigations.
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In the last 3 years, AI reviewed more than 39 million BSA
reports against those rules for clues in the system, revealing some 3,500
subjects.
FinCEN's goal is to give its customers access to as many tools
as possible. I believe, Mr. Chairman, that if we did nothing more than our
law enforcement case support, FinCEN would justify those resources that I
mentioned. But we do much more.
FinCEN's law enforcement role and its regulatory mission are
vital and complementary. Our regulatory challenge is immense. There are
more than a quarter of a million financial service providers in the United
States. These range from banks located in the largest financial centers to
the scattered currency exchange businesses along the Southwest border, with
hundreds of variations in between.
In addition, money laundering is a constantly changing
phenomenon and to attack it requires creativity and flexibility. There are
no quick, off the rack solutions.
FinCEN's regulatory program is developed in close consultation
with the Government agencies with whom we work and, more importantly, in
many cases the private officials who make up the Bank Secrecy Act Advisory
Group.
These individuals permit a frank exchange of views, and they
have fostered increased cooperation and understanding between law
enforcement and the financial community.
Since its creation in 1994, this group has been viewed as one
of the most innovative initiatives in the regulatory arena. Its role as a
resource and potential critic increases the care with which we address our
regulatory tasks. It is also one of the reasons we have been effective in
carrying out our regulatory authorities with so little controversy. Few, if
any, of our regulatory proposals are ever published before the water has
been tested through informal consultation and discussion with those who
would be affected or be responsible for caring out the new
requirements.
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Let me now briefly describe some examples of how we balance
public and private interest in executing the regulatory authority that this
Congress and this subcommittee has given us.
Currency Transaction Reports are required to be filed on cash
transactions over $10,000. They provide the basic raw material for FinCEN
analyses. But the meaningful CTR data is often obscured by a large volume
of information that is not necessary or even relevant, and indeed clogs the
system.
Last year, more than 12 million CTRs were filed. This is
simply too much unnecessary reporting. FinCEN will soon issue a Final Rule
which will exempt most publicly-traded companies from CTR filing.
Also, we plan to issue a Notice of Proposed Rulemaking within
the next several weeks further expanding the number of businesses exempt
from any form of currency reporting. Our goal, to eliminate 6 million
filings by the end of the year, or half of those currently received.
When these draft proposals were first announced, the American
Bankers Association made the following statement:
''FinCEN's new Currency Transaction Reporting exemption
regulation is a victory of reason over process. These changes will cut down
on paperwork, save the banking industry millions of dollars and allow law
enforcement to focus on truly suspicious activity.''
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Let me also note that we have cut, by 30 percent, the
amount of information that we collect on each one of those reports, so we
take the burdens that we impose on the private sector very seriously
indeed, Mr. Chairman.
A new Suspicious Activity Reporting System was put into place
last April by FinCEN, the Federal Reserve Board and other bank supervisory
agencies. This system merged and revolutionized two older reporting systems
that had been in place for over a decade. This new system reduced the
reporting burden on banks while allowing more than a dozen Federal law
enforcement and regulatory agencies access to these reports. To date,
financial institutions have filed almost 65,000 what we call ''SARS.''
The announcement of the new rules was reported in the American
Banker newspaper under the headline ''New Anti-Laundering Rules Winning
Raves from Bankers.''
FinCEN has also put new rules into place for wire transfers.
The world's intricate wire transfer systems move over $2 trillion a day,
involving over half a million transactions. In the past, wire transfers
offered criminal organizations an easy, efficient and secure method of
transferring huge sums of money, anonymously in some cases, and in a very
short period of time.
However, two wire transfer rules issued jointly by FinCEN and
the Federal Reserve became effective on May 28 of last year. Requiring
years to design, these rules preserve a money trail that helps law
enforcement agencies trace criminal proceeds and activity.
FinCEN also regulates casinos. Since 1985, when State-licensed
casinos were first subjected to the Bank Secrecy Act, casino gaming in the
U.S. has increased dramatically. Today, 15 States permit casinos, and they
account for nearly half a trillion dollars in wagered funds.
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Given the availability at casinos of bank-like services and
the cash-intensive nature of transactions, this industry is vulnerable to
money laundering, tax evasion and other financial crimes. FinCEN is working
closely with the gaming industry to design new regulations and programs to
ensure that effective anti-money laundering programs exist.
In addition, Mr. Chairman, Indian tribal casinos operate in
nearly half of our States and account for $50 billion in wagering. As you
know, the U.S. has delicate relations with the tribal governments.
Therefore, a year ago, FinCEN sponsored a conference designed specifically
to address compliance by our Native American populations with new proposed
anti-money laundering regulations.
While tribal representatives initially expressed concern over
the potential threats to their tribal sovereignty, the final regulations
were issued without any complaints.
Our experience in dealing with casinos has taught us that
non-traditional financial service providers require special attention, as
you noted in your opening statement. Also, a creative and a sometimes
flexible regulatory approach to this industry is very important.
Let me turn to that now.
Last week, the subcommittee heard about the Geographic
Targeting Order, or GTO, to which 22 licensed transmitters of funds in the
New York area are currently subject. The GTO imposes a special $750
threshold on funds sent to Colombia.
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While this effort, as the Chairman pointed out, has been
successful, the GTO is not and cannot be the end of the story. FinCEN has
focused a searchlight on a little-understood but very large and very
important part of the financial sector. This is the class of non-bank
businesses that sell money orders and travelers checks, transmit funds,
exchange currencies and cash checks. We call these money services
businesses, and they are an important subset of the non-bank financial
institutions which include casinos, broker-dealers and the like.
Although the businesses that offer these products are often
small, the industry is not. It is estimated that $200 billion passes
through over 200,000 businesses each year. Most of the operators and agents
of these businesses are law abiding and cooperate with law enforcement
authorities, but the GTO indicates that we need to pay more attention to
updating the way the BSA applies to them.
Treasury is reviewing a FinCEN proposal that would establish a
system of Federal registration designed to capture crucial information
about the businesses themselves, while at the same time not imposing
unnecessary burdens on the vast majority of essentially small
businessmen.
We are also proposing to extend the Suspicious Transaction
Reporting requirement to certain categories of money services businesses
and require special currency transaction reporting and recordkeeping by
money transmitters.
I want to emphasize, though, that, if approved, these would
simply be Notices of Proposed Rulemaking. We will look forward to working
with the industry groups to help us further refine the proposals, striking
that necessary balance to achieve an effective and efficient regulatory
environment.
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I think you can see we have been asked to tackle a wide
variety of problems and issues on the regulatory side. There is no set of
instructions for assembly that comes with these tasks; and there are few
precedents, in many cases, for designing these regulatory systems.
As in the case of our law enforcement support operations, I
hope you will agree that the taxpayers would be getting their money's worth
if FinCEN's resources were devoted solely to designing our anti-money
laundering regime. But, still, we are required to, and indeed are, doing
more.
The business of laundering dirty money in the United States is
being made more difficult. The consequences of these successes in the U.S.
are twofold: First, money launderers are forced to move their activities
beyond our borders. Second, a growing number of countries recognize the
corrosive dangers that unchecked financial crime poses to the integrity of
their economic and political systems.
As a result, nations are seeking FinCEN's assistance. We are
meeting the challenges created by a borderless marketplace for money
launderers.
In just the past 3 years, FinCEN has worked to modernize and
revitalize the world's premier anti-money laundering organization, the
Financial Action Task Force. Created at the G—7 Economic Summit in
1989, it is a 26-nation group dedicated to promoting the development of
effective anti-money laundering controls. FinCEN heads the delegation to
the FATF.
During the U.S. presidency last year of the FATF, we
spearheaded the successful effort to strengthen the Task Force's 40
recommendations, which were originally issued in 1990.
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Another FinCEN goal has been to expand anti-money laundering
standards to key regions elsewhere around the world. To this end, we have
encouraged the development of sister organizations in the Caribbean and
Asia.
Another important development is the creation of FinCEN-type
organizations generically called ''Financial Intelligence Units,'' or FIUs,
in other nations around the globe. These units serve as the central focal
point for a country's anti-money laundering efforts. Just 5 years, ago,
there were five such organizations. Today, there are 29.
Under FinCEN's leadership, a core group of FIUs met for the
first time in Brussels in 1995, and an organization now known as the Egmont
Group was created. This group serves as an international network fostering
improved interaction among FIUs. Although differing in size, structure and
responsibilities, Egmont members share a common purpose, cooperating in the
international fight against money laundering through information exchange
and the sharing of ideas.
The effort to increase communication among FIUs has been
furthered by our development of a secure Internet web site, which permits
members of the Egmont Group to exchange information on money laundering
trends, financial analysis tools and technological developments. We cannot
emphasize strongly enough the importance we place in the expansion of such
units in other countries around the world.
Another multilateral effort is ongoing in the Western
Hemisphere. In December of 1995, 15 months ago, Secretary Rubin chaired a
conference in Buenos Aires attended by ministers from 29 of the Summit of
the Americas nations. FinCEN led the year-long effort of laying the
groundwork for the conference by coordinating development of a
communiqué, a document which committed each of the participating
countries to take steps to combat money laundering.
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Since the communiqué was adopted, Treasury has been
offering training and assistance to the Summit of the Americas countries.
We are achieving real results. Twenty-five countries in this hemisphere,
since the communiqué was signed just 15 months ago, have taken
positive steps toward implementing the communiqué by passing laws or
issuing new regulatory requirements.
Although money laundering continues to pose a serious threat
to the stability of other nations around the world, in the past 2 years
more than 25 countries with varied political systems, such as Bulgaria,
South Africa and New Zealand, have passed anti-money laundering laws. About
a dozen others such as Russia, China, Israel, Ukraine, Mauritius, have
draft laws or regulations pending. It is no accident that in this same
period FinCEN staff have visited all five continents and more than 50
countries, urging them to take the money laundering threat seriously and to
adopt effective, anti-money laundering measures.
In just the past 18 months, we have hosted at our headquarters
in Vienna over 300 visitors from over 70 countries to learn the U.S.
experience and to help them develop countermeasures in their own
countries.
Mr. Chairman, Members, it is clear that in the era of
financial globalization no single set of skills or tools alone can protect
the financial system from abuse. One reason we are able to accomplish so
much with only a few people is the diversity and professional dedication of
the men and women of FinCEN. We are former bankers, linguists, law
enforcement agents, regulatory officials, academics, lawyers and computer
experts; and it is the quality, experience and professionalism of these
dedicated men and women that allows us to accomplish so much.
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Let me close by giving you an example of what a small but
innovative team can accomplish when it thinks beyond the present and thinks
outside of the box.
I am very proud of our study of emerging new payment
technologies, often referred to as E-Money. FinCEN was one of the first
Government agencies to begin studying this issue over 2 1/2 years ago. Our
efforts began in September of 1995 at a colloquium in New York City. Then
we began and moved to chair the first international examination by law
enforcement of this subject as part of the FATF and issued a report just
last month on this subject.
We have been supporting the G—10 Working Party on
Electronic Money and have conducted computer-based E-Money war games and
sought out experts to support and validate our efforts to understand this
industry. We are also developing money laundering simulation exercises with
the Rand Corporation, the world expert in simulations.
We are not just dealing, Mr. Chairman, with the issues of the
past and the present. We intend to be ready for future challenges as
well.
Thank you again for holding FinCEN's very first oversight
hearing. While we have accomplished much, we have much more to do. The
issues that we grapple with are complex. Often, we must act with very
limited information. However, this subcommittee has given us the legal
tools we need and has held our feet to the fire on more than one occasion,
and we look forward to continuing to work with you in the months and years
ahead.
Thank you very much. We would be happy to try to answer any
questions you might have.
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Chairman BACHUS. Thank you.
[The prepared statement of Hon. Stanley E. Morris can be found
on page 35 in the appendix.]
Chairman BACHUS. At this time, I am going to ask you
some questions; and then Ms. Waters is going to follow up with some
questions. I will probably ask a few and then just defer to her. We are not
going to go strictly with the 5 minute rule.
Mr. Morris, last April you issued your final regulations
concerning the suspicious activity reports. In your testimony, you have
talked about the fact that the financial institutions have been pleased
with these new regulations. I would confirm that in that we have had no
complaints to speak of. I am not sure we have had any from the financial
institutions saying these have created a burden. In fact, what the industry
tells us is they are pleased with them, that they have reduced the
regulatory burden, and they feel it is an effective tool.
I support your efforts to make these regulations more
efficient and am of the opinion that they are working.
However, we have heard some allegations, accusations, some of
them from talk radio shows, quite frankly, that have gone out over the
airwaves. People call us and say, ''We heard someone talking on a talk
radio show''; and they said this or that.
If those allegations are true, they are serious. And I am not
saying they are or are not. I don't want to give credence to them, and I
don't want to dismiss them. I simply want to ask you about three of those
allegations.
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One allegation is that since the regulations use the word
''Suspicious Transaction Reports'' as opposed to ''Criminal Activity
Reports,'' that people are reporting suspicious, unusual transactions; and
by characterizing them as ''suspicious'' as opposed to ''criminal,'' has
led to a great increase in the number of frivolous or incorrect reports
over the prior system. Also, that people are busting the system.
Now, I know for one thing that the word ''criminal''
assumes--it would be tough for someone at a bank to file a report saying
something was ''criminal.'' That would be a judgment on their part. They
could only in my mind characterize it as ''suspicious'' or ''unusual.'' But
how would you respond to those critics?
Mr. MORRIS. Well, first of all, Mr. Chairman, it needs
to be understood that this new system took two different--actually more
than two--but two types of reporting systems and put them together into
one.
One system was previously called ''Criminal Referrals'' by the
bank regulatory agencies. These were matters in which the bank had
experienced in some cases, some loss, bank fraud, embezzlement, check
kiting, or other matters of this kind. All of those were handled in
separate reporting systems by each of the five bank supervisory reporting
agencies before this new system was put in place. Those were commonly
referred to as ''Criminal Referrals.''
We had, under the authorities granted by the Congress in the
Bank Secrecy Act, a suspicious box, or suspicious reporting requirement on
the currency report itself, so that a bank could indicate that a certain
currency transaction was, quote-unquote, ''suspicious.'' When we merged the
two systems together, we ended up calling it the ''Suspicious Activity
Reporting System.'' So that is probably the reason for some confusion.
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The second part of your question is, actually, the number of
reports, as I mentioned, approaching 65,000, is actually less than it was
under the previous system, for a couple of reasons. We have provided better
guidance to the financial institutions. There was a lot of frivolous
reporting before, which I think has been largely eliminated.
Second, we all agreed, which was no mean feat, that all five
bank regulatory agencies and FinCEN come up with a standard for reporting,
so that any loss under $5,000 would not be reported on the basis that those
kinds of cases, quite honestly, do not get investigated and prosecuted at
the Federal level. They are not prohibited to report them, but they are not
required to report them.
So those two actions I think have reduced the amount of
reporting in this area, and I think have significantly improved the quality
of the information we are getting and eliminated some of the misreporting
that existed before.
So the criticisms you are hearing probably applied more to 2
years ago than they do today under the new system.
Chairman BACHUS. These same reports, and again, I am
basing those almost entirely on talk radio people that call and say they
heard this on talk radio, that the Government is actually paying bank
tellers and other bank personnel a percentage of the recovery, or paying
them a reward for filing these claims. Would you like to address that?
Mr. MORRIS. That is absolutely not true, and to my
knowledge it has never been done, at least by FinCEN and the regulatory
agencies. We have no intention of doing that.
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It is our view that the banks and the bank employees have
certain regulatory obligations to maintain adequate books and adequate
records and report certain matters to the Government. That is their duty,
and no rewards would be paid for the carrying out of such duties.
Chairman BACHUS. It has been reported that I know these
things are going on but that I am assisting in their cover-up. I want to
confirm for the record I have asked you to report to me on whether or not
you all were paying rewards, or percentages, of recoveries. And I have
asked you that, have I not?
Mr. MORRIS. You have, indeed.
Chairman BACHUS. And you have responded unequivocally
that is not going on?
Mr. MORRIS. Absolutely not now, not then, and not in
the future.
Chairman BACHUS. All right, thank you.
Has FinCEN asked the banks to start filing reports when people
come into the bank with old money or crumpled money?
Mr. MORRIS. No, that is not a part of this system.
There is a system that the Federal Reserve manages that
provides training, I believe, and information on what kinds of currency no
longer should be used, and the banks provide assistance in that. But that
is not a part of our responsibilities.
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Chairman BACHUS. So that is actually just old currency
that needs to be taken out of circulation because it is musty----
Mr. MORRIS. That is correct.
Chairman BACHUS.----And could be confused, I suppose.
That is a good explanation.
We have got to vote. We are going to recess until such time as
we can return. We will be back as soon as we can. Thank you.
[Recess.]
Chairman BACHUS. I will call back to order the
subcommittee proceedings.
Mr. Morris, you have already testified that one of FinCEN's
primary responsibilities is to offer support to law enforcement agencies
involved in financial crime investigations and to manage the Bank Secrecy
Act and its database. I have got some questions concerning how your agency
fulfills those obligations.
First of all, would you just describe to the subcommittee what
happens to a CTR when it is filed by a bank today?
Mr. MORRIS. Certainly. About 67 percent of the currency
transaction reports are filed electronically with the IRS Detroit Computing
Center. Those basically, once they are filed, are available to a number of
different agencies in the Treasury Department. They are also available, as
I mentioned, to States through our Gateway Program, and they are available
to the many different agencies at FinCEN who work with us.
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The remaining 33 percent are filed by paper. Those are data
entered, usually on contract, into the system, so it takes a little bit
longer before they are posted. But they then are data entered and added to
the system.
We have been pushing the banking industry to, of course,
increase the amount of electronic filings, because in electronic filing,
just as in taxes and others, there are fewer mistakes and less cost,
ultimately both to the bank and to the Government. But that is the process
by which 12 million or so are filed each year.
Access to those is fairly broad. It has been our goal to
broaden it as much as possible, so that we have multiple uses of them.
Internal Revenue uses them both for their criminal investigation, but they
also use them, for example, for tax administration.
Chairman BACHUS. All right. You mentioned the IRS. What
have you all done with the huge amount of CTR data which had previously
been maintained? This data was previously maintained by the IRS, was it
not? What have you all done with that?
Mr. MORRIS. The database is still maintained by the IRS
at the Detroit Computing Center. Indeed, about half the resources of the
Detroit Computing Center are devoted to supporting FinCEN's anti-money
laundering efforts, not just the CTR, but the new Suspicious Activity
Reporting System, a new registration system, when it goes into effect, and
the like. So they are a very, very important part of our Nation's
anti-money laundering effort.
Indeed, let me do a small advertisement, if you will permit
me. One of the concerns that we have at the Treasury Department is, while
we are examining and assessing the future directions of the Internal
Revenue Service, much attention, of course, focuses on its specific tax
responsibilities.
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The finest financial investigators, I believe, in the world
are the men and women of the Internal Revenue Service Criminal
Investigation Division. The computing support that we receive from Detroit
is absolutely essential. They devote more resources to managing our data
than I have, and I would prefer that kind of arrangement continue rather
than to enlarge the size of FinCEN or to deal with some other organization.
So they continue to maintain that data.
The advantage of new technology has permitted us to now
actually exploit that data in ways that were not possible before. So a lot
of the criticisms that were heard in the past about, ''You have all of this
data, you are not using it,'' is no longer true.
Large amounts of it can be used, even though the database is
huge, because we take data off-line through servers. We run it through our
Artificial Intelligence system. We can do a lot of different manipulations
with the data that simply were not possible before. We have also developed
some very interesting software applications that have made it useful.
However, having said that, there is still too much reporting. We felt that
there was too much information being collected.
As I mentioned in my statement, we reduced for the first time
in the 25 years of the Act, the amount of data being collected on each
individual form by nearly one-third, and it is our goal within the next
year or so to cut it by at least half the number of filings.
We do not really need to know whether Hecht's is bringing cash
in to Riggs Bank three times a week. At present in many cases, that
information is going into the database. We are working on ways to reduce
that.
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Chairman BACHUS. This Detroit Center where the CTRs
come into, it is maintained by the IRS? Or is it an IRS facility?
Mr. MORRIS. It is an IRS facility, and it is basically
funded under the IRS appropriation.
Chairman BACHUS. Do you have FinCEN personnel at the
Detroit Center, or do you just have electronic access?
Mr. MORRIS. We have, of course, electronic access. We
have almost a weekly meeting with them of one fashion or the other. We have
given some consideration to having a detailee, either somebody from Detroit
at FinCEN or somebody from FinCEN at Detroit. I think we probably will be
doing that. It was less important when the regulatory requirements were
static, but the regulatory requirements are no longer static. Given the new
requirements of the laws and the new regulations that are coming on-line,
any time you make major changes in large mainframe operations you test the
ability of those operations. So we clearly have found ourselves having to
have closer and closer and closer working relationships with them.
One of the things we were hoping to do, however, and why it is
so important to cut back on the reporting, or to simplify the regulatory
requirements, is that will reduce the work load in Detroit. This will allow
us, with no additional cost to the taxpayer, to then add new
requirements.
So if we can quit doing things that are not as important and
do the things that are very, very important, we think we can change without
an increase in cost.
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Chairman BACHUS. All right. The information comes in to
Detroit. The IRS Computing Center is there. Do you get a duplicate of all
CTRs, for instance, or do you have it available to you through that
Center?
Mr. MORRIS. Both. We basically have on-line access to
the Currency and Banking Retrieval System, and we get downloads of the data
in order to manipulate it off-line.
Chairman BACHUS. How do you get it to law enforcement
agencies? Can they either request information, or when you see something
you think is suspicious, do you then report it to the law enforcement
agency? How does that work?
Mr. MORRIS. It works in several ways. First, all of the
Treasury agencies have direct on-line access to it.
Chairman BACHUS. To Detroit?
Mr. MORRIS. Either to Detroit. I think the IRS uses it
that way. In the case of Customs, they download it and put it within their
own database systems. So essentially every Customs officer has access to
the data through the Treasury system, Treasury Enforcement Communication
System, managed by Customs.
You also have the IRS, which has direct on-line use, as does,
I believe, Secret Service. We also permit on-line access by our State and
local counterparts. The Justice agencies usually work through FinCEN or
through Customs in accessing it.
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As I mentioned in my statement, we have people from almost all
of the major Federal investigative agencies at FinCEN, and they have access
to it for the purposes of their investigations.
So there are a range of ways. It is our goal really to provide
as many different avenues to these databases as possible. That, of course,
increases the benefit and utility of the data, the more people that can use
it for their investigations.
Chairman BACHUS. State law enforcement authorities have
access to it. How do you assure that they don't just go to it--can they go
directly to the Detroit Center and just start looking for information?
Mr. MORRIS. They can go directly to the Detroit Center,
and access it through a computer screen. There is a password, and we have
trained some 400 or so State and local officers in the use of the system.
They basically enter through Computer Collection Devices so that we know
who is accessing it, when they are accessing, how much use they are
providing, and the like.
We also know the subject that they are looking at, and it is
that subject that we can then run against our other databases to identify
other agencies with a similar interest in the same subject.
Chairman BACHUS. Are there any safeguards to see that
they are not just exploring for information?
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Mr. MORRIS. Well, we know when the subject comes
in, we can examine it. Maybe I ought to ask Bill Baity. He is giving
guidance. I may be off point here.
Mr. BAITY. I think, Mr. Chairman, the answer is that in
terms of protecting the information, they are trained, as Stan mentioned,
with a password. They have to tell us what they are looking for. That is
the quid pro quo of using the system. So when they come in, while
they look at it, we know what they looked at. As our computer would call
it, they leave the ''footprint,'' so we know what they looked at, so that
way we protect the integrity of the system from any misuse.
Chairman BACHUS. Have you ever called into question any
request? Or have you ever reviewed them to see if there might be abuse?
Mr. MORRIS. We had one situation in a State where we
were informed that a person who had access was the subject of an internal
investigation, and in that case we moved to eliminate their access. In a
post audit of the activity, however, we found no misuse.
But your questions are quite appropriate because this, of
course, is a very important matter, that we maintain the integrity in the
use of the system. It is a very, very serious matter. We have a security
office that is expert specifically in these areas.
Chairman BACHUS. All right. Is it FinCEN's job to make
actual referrals to law enforcement agencies, or just to develop cases, or
help them work with cases that they have already identified?
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Mr. MORRIS. Again, Mr. Chairman, we do it several
different ways. First and primarily, we will receive probably 7,000 or so
requests to check our various databases on various subjects for certain
suspected criminal activity. However, as we see matters arriving, or as we
use our Artificial Intelligence system, some of that we determine
proactively. That is, we identify a problem or hear of a problem, and in
those cases we would call the appropriate law enforcement agency and
suggest to them what we have and determine whether or not it warrants an
investigation on their behalf.
We of course are not an investigative agency, we are a support
agency to our law enforcement colleagues.
Chairman BACHUS. Have there been indications that you
actually identified activity and reported it to an agency and they
developed a criminal case?
Mr. MORRIS. Yes.
Chairman BACHUS. All right. Which Federal law
enforcement agency would you say is your main customer or user of your
services?
Mr. MORRIS. It is not as easy a question as it might
sound.
Chairman BACHUS. What are some of them?
Mr. MORRIS. The FBI, ATF, Customs, IRS. If you took
them as a group, the Inspectors General, probably, and then of course State
and local. There are a lot of different State and local agencies. As we
examine it, those are probably the primary ones.
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Chairman BACHUS. You mentioned the FBI. Has FinCEN made
referrals to the FBI in the last few years? Maybe that word ''referral'' is
not the right word.
Mr. MORRIS. We work quite closely with the FBI,
actually. They have an agent and several analysts assigned to FinCEN. They
handle some of their most sensitive cases, which are, in many cases, driven
by profit motive, and we have got very broad financial databases. The FBI
is in the top four or five users.
Chairman BACHUS. They have a database. Have they been
allowed to integrate their database into FinCEN's database, or has there
been a sharing?
Mr. MORRIS. They have a number of databases, and indeed
while we don't have direct access to all of those databases, we do have FBI
personnel who do have access to it. I think they are in the process of
setting up a direct-line access. They prefer to deal through their own
employees, rather than providing access directly, and that is fine with
us.
Chairman BACHUS. I notice that the Justice Department
asset forfeiture fund, the share that was allocated to FinCEN in 1993, was
over $1 million. It was zero last year. Do you have any comment on
that?
Mr. MORRIS. The primary purpose early-on in FinCEN's
life was to do basic asset seizure work. The availability of the databases
that we were using became increasingly available to Justice agencies. The
allocation actually for our asset forfeiture monies have gone up each year.
Justice has reduced theirs to zero as Treasury has increased theirs, and it
was because Justice felt the kind of service they needed could be done
directly by the agencies who are making the investigation, something, Mr.
Chairman, we actually support. We are not in the business of trying to
become a monopolist on data or monopolist on analysis. We have, as I
mentioned in my opening statement, we have plenty of work to do, and to the
extent others can do some of it, we are more than happy to share it.
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Chairman BACHUS. Now, you mentioned those studies that
you have done in the past. I know law enforcement agencies have said that
your studies on money laundering trends have been very useful to them. The
case studies you have done in the past have assisted them. Are you still
preparing or producing such studies today?
Mr. MORRIS. Yes, in a number of different areas. As a
matter of fact, we have just completed one we will be presenting in the
next couple of weeks in the Miami area, and we are also doing a broad
examination of a category of activity that we are seeing as a major new
money laundering trend, which is the operation by essentially Colombian
money brokers and the use of U.S. bank accounts. It is very, very
complex.
In that regard we have been supporting the interagency
coordination group which was established by MOU a couple of years ago
between the various agencies, including the FBI and DEA and Customs and IRS
and Postal Inspection. What we have been doing, along with Justice, is
providing staff support and analytic support and then providing leads
essentially. At just one meeting in the last month or so, we had over 100
people at FinCEN from those agencies, as well as some State and local,
trying to see the big picture.
In many cases, investigators are driven because of their
workload in looking at individual pieces. One contribution that FinCEN can
make through its computers and its analysis is to take all of the pieces
together and try to see what the matter looks like in totality. The result
of that has been about 200 subpoenas issued, again furthering
information.
But it really is a partnership. FinCEN would be irrelevant as
an organization without the broad support of all of the law enforcement
agencies with whom we work.
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Chairman BACHUS. All right. You probably read recent
press reports about the large asset forfeiture case involving Mario Ruiz
Massieu. When I read about that, the fact that he had a courier, his
lieutenant was coming into the country filing reports with Customs, and on
each occasion was carrying over $10,000 in currency, basically going
through the system and complying with the system, and generated, I think
his testimony was, on more than 20 occasions in late 1994 to 1995.
Had FinCEN noticed this activity?
Mr. MORRIS. We did not have any notice of the activity
in 1994. We did look at the matter in 1995.
Chairman BACHUS. Was that after the Mexican government
basically reported to you their suspicions that he was money laundering
drug proceeds?
Mr. MORRIS. Yes.
Chairman BACHUS. Why? The question I think is a fair
question, knowing you have this system, and knowing there is a large volume
of paperwork. You said you are going to reduce that to try to focus and
eliminate some of that like from Hecht's or a department store, IBM, which
would help you reduce the paperwork and be able to focus on a smaller
universe. But why wasn't there a red flag raised in this case?
Mr. MORRIS. Well, I can't speak to the initiation of
the investigation, obviously, by the investigative agencies. I do believe
that to a large extent the system worked. Indeed, I think probably part of
the challenge here is that his lawyer actually, as it would look on the
documents, filed CMIRs precisely when he left the airport. The amount of
money reported in the CTRs was similar, very closely related to those
CMIRs. They were reported diligently and accurately by the bank.
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The bank thought the matter unusual. In the old system--it
would have been a SARS today--but in the old system the bank completed a
suspicious CTR, and indeed that paper trail, those records, were absolutely
essential to the case that was brought, the civil case that was brought in
Texas and concluded last week. The assistant U.S. Attorneys who prosecuted
the case said the case probably couldn't have been made if they didn't have
all of the records. So from that standpoint, the issue, I think, is a
success in terms of the value of the information.
I think the question you are asking is should the matter have
been investigated earlier? Money laundering is complicated. In many cases,
I think most cases, we see of money laundering, we see clear surreptition.
We see efforts to structure transactions away from reporting it to the
Government. We see efforts to falsify documents and the like.
Here was a case in which a well-known Mexican official was
being quite overt about it. But the records were there, the material
worked, and finally a civil case was brought, and the funds were
forfeited.
The issue of when and the nature of the investigation is not
what FinCEN does.
Chairman BACHUS. I would agree with you that we did
have a high-ranking Mexican official, who was easily identified, who, as
you say, was being very overt about bringing large amounts of currency into
the United States, and did so in what was obviously a pattern, and it was a
tremendous amount of money, even triggering a bank saying, ''We may have
some money laundering activities here.'' The bank actually filed reports on
suspicious activity, which would mean, as a result of all that, that FinCEN
either had knowledge of it or they didn't.
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Now, by knowledge, obviously, the information was there in a
database. That doesn't mean it was used. It would be like me receiving 300
letters today and being able to say I read them all. So I understand that
possession of them would not mean that if you pulled them all out and
looked at them, you may have gone after him.
But did you know, had it raised within FinCEN or any other
agencies a red flag before the Mexican government raised concerns?
Mr. MORRIS. Well, it did not within FinCEN. My
understanding is that our colleagues were aware of the transactions because
of the report, and, as I said, any examination of the records would show a
close parallel in terms of where the money was coming from. That is, it was
not criminal activity in the United States, it was basically being brought
in from Mexico. That, of course, always makes an investigation somewhat
more difficult than those where you have criminal activity being conducted
within the United States.
Chairman BACHUS. You say your colleagues at other
agencies. Do you know who these were?
Mr. MORRIS. I think just from the press reports, I
think Customs and IRS--again, this is from press reports--were witnesses in
the civil trial that ended up in the forfeiture.
Chairman BACHUS. As you say, as far as in the
prosecution of this case, once it began, the information developed here was
very helpful in getting a conviction. I would agree. There was a trail
there, and it helped lead to the forfeiture, actually the loss of this
money, in a civil proceeding.
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Mr. MORRIS. Right.
Chairman BACHUS. This is probably not a question for
you, but, well, I think it probably is a question for you. Obviously this
was a civil proceeding where $7.9 million was--on Saturday a jury held it
would be forfeited. I don't think your job is over in this regard. This
obviously indicated criminal activity, and no criminal charges have been
brought to date against this individual. I will just say that and move on
to maybe a broader subject.
Let me ask you this, going back to that. Have you all taken
that case study and looked at maybe what you could have done better?
Mr. MORRIS. We do that all the time, Mr. Chairman.
Indeed, one of the issues we are working on as we speak is examining some
of the rules within our Artificial Intelligence system to determine whether
or not they would have, or should have, in some fashion identified the
activity.
It is important to note here, however, and I know that this is
perhaps counterintuitive, but we receive 12 million currency transaction
reports a year. Most of those are cash into bank accounts in large amounts.
And there are certain people who are very comfortable in dealing in large
amounts of cash, and it is not something familiar to me as a Government
employee of long standing. I think I have only seen a couple of $100 bills,
mostly being shown off when it came out, the new one. But that is not true
of even certain ethnic groups.
So large amounts of cash in and of themselves are not only not
illegal, but in some cases, not even particularly suspicious. So what we
have to do is be very careful as we design our software and our Artificial
Intelligence efforts to make sure that we are getting the needles that are
clearly warranted here, and not simply handfuls of hay in which from time
to time a needle exists. And that is not as easy as it might sound.
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The whole investigative process finds itself in the same
fashion. Judgments get made, because we will receive this year 40,000
suspicious reports related to violations of either the Bank Secrecy Act or
suspicions of money laundering. That is a huge amount of activity that our
investigative agencies and our systems need to weed through to find out
those that are genuinely suspicious.
So it is a difficult challenge for all of us. We clearly need
to do it better. But, as you say, we need to constantly update our tools to
identify where, in fact, we may have let a needle slip through.
Chairman BACHUS. OK. As you know, because I think you
testified before the subcommittee last summer when we looked at laundering
of drug proceeds in Mexico, we talked about the Administration developing a
coordinated effort with Mexico, coordinated money laundering strategy,
where we would have a transfer of information, as I suppose maybe was done
in this Ruiz Massieu case.
Can you discuss FinCEN's involvement in this process and the
strategy that the two countries are developing?
Mr. MORRIS. Certainly. First of all, we have been very
active in recognizing that as we become better at dealing with the money
laundering problem in the United States, the money launderers will go to
places where there is less attention. And indeed we have pushed the problem
south. In some cases, we have pushed it into the Caribbean and into a lot
of other developing nations.
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We have worked closely with the Mexican Treasury Hacienda. We
have even worked some cases with them. We have provided training. We have
been there to help them in the setting up of their computers. They are in
the process of establishing a FinCEN-like organization within Hacienda.
At the strong encouragement of the United States, this month
they will have established both currency and suspicious reporting
obligations so that when the U.S. currency goes south to Mexico, it will be
subject to very similar kinds of paper trails as we discussed earlier.
We have had senior officials here at our headquarters in
Virginia. Bill Baity was down there a couple of weeks ago and met with a
number of the senior officials discussing progress of their regulatory and,
finally, analytic efforts. It is a very important obligation that General
McCaffrey, Secretary Rubin, and Attorney General Reno are committed to make
work. It is difficult. It took us many, many years in the United States to
establish the system that we have in place, and as we have discussed here,
it is not perfect. But, nevertheless, we have a strong obligation to work
with our Mexican colleagues to try to achieve progress.
Chairman BACHUS. I want to ask you about two other
questions. Then I am going to stop at the end of that subject matter and
let Ms. Waters ask you questions.
You mentioned the money headed south. It goes south, and then
there is a desire to move it back into the United States. From the
testimony before the hearing, I don't know if it was last summer or last
fall's hearing, was a large amount of that was being moved back in bank
drafts. There was some discussion then about developing regulations as to
the problems by requiring reporting of large transfers from foreign banks
to U.S. institutions via bank drafts. Have those been finalized? What is
the status of that effort?
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Mr. MORRIS. They were finalized, and a proposal for
public comment was issued a couple of months ago. That comment period
closes in 3 weeks, I believe.
The trick here was that while we were focusing on the problem
of Mexican bank drafts, which is basically you can go to Mexico, as you
pointed out, with a large amount of cash and turn it into an instrument, a
bank instrument drawn on their correspondent bank in the United States.
That instrument is essentially negotiable, and you do not have to worry
about lugging around $40,000 in U.S. currency. It also avoids any bumps in
the valuation of the peso. It serves a lot of different purposes.
But we could not write a regulation that fixed just that. So
what we had to do was craft one that focused on foreign bank drafts opting
outside of the normal bank clearance process. As you know, Mr. Chairman,
nothing is ever as easy as it seems, and we wanted to make sure when we
came up with a new reporting requirement for these instruments, that we
didn't end up having adverse consequences in terms of foreign trade or
commercial transactions and the like. I think we have done that, and that
regulation will probably be out in the next couple of months in final
form.
However, I would like to point out that that is not everything
that can be done. That is simply a reporting requirement as a part of the
CMIR that we mentioned in the Ruiz Massieu case.
There are two other parts of this that are important players.
One, which we have already mentioned, on the Mexican side, is that the
banks there have an obligation to report these purchases because they are
purchased in large amounts, and they have an obligation to report
suspicious activity. And we work with the Mexicans and have access to those
data, and we will basically make the appeal of these instruments
significantly less, because the anonymous nature of them will go away.
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On the other side is the correspondent bank in the United
States. We have issued an advisory to our banks on this side to pay very
careful attention to those transactions. We are in the process of setting
up a means upon which to examine that.
So it really has to be a strategic look at the problem, not
just an examination of the middle. Although obviously the great value of
having these instruments made reportable is if they are not reported and
they are identified, they can be seized simply for the fact of not being
reported; therefore, it also increases the vulnerability of the instrument,
and we believe, therefore, the interest in it from the standpoint of the
money launderers.
Chairman BACHUS. OK. We talked about coordinated money
laundering strategy between Mexico and the United States which we are
developing, which implies sharing of information. Have they been
cooperative in sharing information with us?
Mr. MORRIS. I think generally as it relates to FinCEN,
reasonably cooperative. The problem that they have is that they don't have
a lot of information at present to share, and that is why these new
regulatory requirements we think are so important, because they will now
have greater data to work with us on.
Our feeling at the Treasury Department is that while there are
always going to be frustrations and difficulties and bumps, in the long
relationship we have had with the Government of Mexico, and the people of
Mexico, we have to work out ways to cooperate.
Chairman BACHUS. As I understand your testimony, they
are developing an ability to monitor and report these transactions, much as
we have?
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Mr. MORRIS. Yes, sir.
Chairman BACHUS. And their failure to date has been
just as much the lack of having that information as opposed to a failure to
share it?
Mr. MORRIS. That is correct.
Chairman BACHUS. What type of timeframe do you think
there is on them being able to develop a system?
Mr. MORRIS. The regulations went into effect, or are
going into effect, May 1.
Chairman BACHUS. Of this year?
Mr. MORRIS. Of this year. They will go into effect.
They have been promulgated, and I guess that is the effective date.
Chairman BACHUS. I guess there is a commitment on their
part to share information?
Mr. MORRIS. We have a financial exchange agreement with
Mexican authorities that was signed by Secretary Bentsen a couple of years
ago, and that would work. We also have a tax agreement with them as
well.
Chairman BACHUS. What about our database? What type of
sharing arrangement do we have with them? What access do they have to
FinCen's database?
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Mr. MORRIS. They have, under that particular agreement,
the authority to ask us for information, and we will provide it to them,
assuming that there are no reasons not to provide it to them. Basically, it
comes to us in a formal paper request and we respond to it accordingly.
Chairman BACHUS. OK. And my last question is this:
There was a report in yesterday's New York Times that the Treasury
Department had notified Mexico that there was $184 million in a bank
account in Mexico. This was drug money. And that when the Mexican
government seized the account that there was only $18 million in the
account.
First of all, the Mexican government claimed that was all that
was in the account, and $184 million was not the amount that had been moved
in and out of the account, and that there was actually $18 million in the
account.
Assuming that the story in the New York Times is
correct, should we believe the Mexican government? Or do we have sufficient
documentation to confirm whether or not their explanation is correct? Or
have we asked for that information?
Mr. MORRIS. If you will forgive me for a piece of
whimsy here, this is, I like to say, ''This is why God made deputies.''
You can answer that, Mr. Baity.
No. Obviously, Mr. Chairman, this matter is under
investigation on both sides of the border. There have been expressions
which are correct, as reported in the newspaper, of concerns by the
Treasury Department regarding the results of that. I really don't know any
more than that, and it would be, I think, inappropriate for me and Mr.
Baity to comment.
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Chairman BACHUS. But I am glad that the matter is being
investigated and documented. We are going to be very interested in the
results of what you find out, and this will be a continuing story.
In closing, before I turn to Ms. Waters, I referred to the
Ruiz Massieu case earlier and why it has been handled as it has, and do you
have any more information you would like to share with us on maybe why an
arrest has not been made or a criminal case? Or do you think it might be
inappropriate?
Mr. MORRIS. I think that would be clearly outside my
responsibilities and, even more importantly, outside of my knowledge.
Chairman BACHUS. That was one of those questions I
wondered whether I should ask.
OK. Ms. Waters.
Ms. WATERS. Thank you, Mr. Chairman.
Chairman BACHUS. We appreciate your participation.
Ms. WATERS. Well, you are certainly welcome, and I
appreciate your taking the time and putting forth the effort to help us
understand better the resources we have available to deal with money
laundering and the tracking of suspicious resources, and so forth.
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I have two areas I am interested in. I understand much of
the responsibility over enforcing money laundering laws falls under
Treasury but it also seems like too many agencies share a small piece of
the anti-money laundering pie, making coordination cumbersome and costly.
In fact, a GAO report requested by Mr. Gonzalez and issued last year
pointed out that foreign countries looking to cooperate with the U.S. on
money laundering think there are too many agencies involved in anti-money
laundering activities and they simply don't know who to go to.
What is your reaction to the idea of creating a single entity,
say, a money laundering czar, that would serve as the coordinator of
anti-money laundering policy across Federal agencies?
Mr. MORRIS. Well, Congresswoman Waters, part of the
problem that our foreign colleagues have in dealing with the United States
is the reality that we have not centralized our law enforcement
authorities, for lots of different reasons, not the least of which is our
healthy distrust of centralized law enforcement authority.
It is simpler in other countries to do one-stop shopping, but
I would also say that I don't know of any country in the world that
prosecutes more money laundering cases; I know of no country in the world
that makes as many convictions; there is no country in the world who makes
as many seizures; and I don't know of any country in the world that has as
broad a set of regulatory laws and regulations in place. So what is broken
perhaps is the perception of messiness that our governmental system
sometimes appears to be.
We have, for example, five different bank supervisory
agencies. No other country in the world would do that.
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The amazing thing is is that it all works reasonably
well, and I think the results speak for themselves. Clearly, in my
judgment, the Secretary of the Treasury and Under Secretary Kelly have the
primary lead responsibility in the area of money laundering.
The Department of Treasury devotes the most resources to the
matter. It has the regulatory authorities, the anti-money laundering
regulatory authorities that we have been describing here under the Bank
Secrecy Act. So there is a lead agency. There is coordination, as I
mentioned, with the interagency coordinating group.
But you are quite correct that not only does the Federal
Government have many different agencies involved here but so do the States.
As a matter of fact, I think we should all take great pride in the fact
that 3 years ago 21 States had anti-money laundering statutes and 3 years
later we have increased that by--my math, as Mr. Chairman knows, isn't very
good--to 30, which I think is about a 25 percent, 30 percent increase.
So I think that collapsing all of the activities of the FBI
and the DEA and Inspectors General and IRS and Customs and FinCEN into some
super agency would be ill-advised.
Ms. WATERS. Thank you.
Let me just kind of share something with you. For the last 6-,
7-, 8-months I have been involved in trying to get to the bottom of serious
allegations that were made by the San José Mercury News about
a drug traffic ring that operated in South Central Los Angeles that kind of
fueled the explosion of crack cocaine.
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The principals in this case were a man called Danilo
Blandon and another man called Norman Meneses from Nicaragua. In looking
through all of the documents that I have been able to look through, as we
kind of wait on the investigations to take place, there is a name that
popped up. Orlando Murillo, who was in charge of the money laundering for
this drug ring operating out of Florida, with one of these agencies that we
have been--a company-type company that I think we have been
describing--that we wanted to get registered, money remitters.
What is interesting about this name, or this person, his name
is in the documents that we saw, associated with the case, the money
laundering. He pops up again in Nicaragua. He has just been named by the
president to chair Nicaragua's national investment funds. He has a long
history. He has been involved for a long period of time operating out of
Miami. Everybody seems to know about him, the DEA, the CIA. Now he gets a
chance to get his hands on our money, because of the position that he is
in, he will be working with the International Monetary Fund and all of
those agencies.
It is documented, for example, that he had one--he formed a
company called Precious Woods Industries--and it is connected to another
country, and someone out of Colombia named El Nica, and it is documented
that this company recently shipped 1,200 kilos of cocaine hidden in wooden
bars into Florida during the latter part of the 1980's.
Now, I guess I say all of that to say this: It appears that
Mr. Murillo has operated for a long time. Money laundering is his business.
Some of our agencies know about it. Does anybody at Treasury know about
it?
It is unfair for me to expect you to know this right now. But
if I sat down and talked with these guys, sent deputies that you have, or
something, would anybody--would this name pop up somewhere? Would they know
about someone who has got a history of money laundering, who now has just
been appointed to a high post in Nicaragua, I mean?
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Mr. MORRIS. Well, I don't know, obviously, specifically
about that individual. The answer is that if he has been a known money
launderer, then he would show up in a number of our databases as well as
other elements in the Customs and IRS and Secret Service and other pieces
within the Department of Treasury, as well as within Justice.
So we could certainly sit down and determine what we know
about this individual and we could come up and let you know what we do know
and what the issues are. If he was a money remitter in the State of
Florida, money transmitter of some fashion, he would have had to be
registered. They have a registration system in Florida.
If the activities that he is conducting in other areas were
illegal, then probably some actions could have been taken within Florida. I
don't know the specifics on this, but the short answer, Congresswoman, is
that we could certainly, if you like, do an assessment of what we do know
and brief you or your staff.
Ms. WATERS. I would like that very much.
Now, as I understand it, your responsibilities stop with
investigation and compiling of information and you would give it to law
enforcement?
Mr. MORRIS. Yes.
Ms. WATERS. Who would you give--for example, if you
took a look at this name and you were able to put something together, who
would you give that to?
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Mr. MORRIS. Well, it would depend a little bit on what
the underlying illegal activity was. If it was strictly money laundering,
then that would either go to Customs or IRS.
In Florida, we have a high intensity drug trafficking area
program, where FinCEN, along with a number of other agencies, work with a
strong focus on financial crimes and money laundering. And so our approach
would be if we had information like that, and it fit into several different
areas, we would probably put it into that task force, but it depends a
little bit on what the underlying criminal activity is.
Ms. WATERS. Let me give you another aspect of this. Our
USAID money would be going directly to this man to administer. What then is
your responsibility? I mean, where would you send it if that was the
description of the complaint rather than the other aspect that you and I
were alluding to a moment ago?
Mr. MORRIS. Well, it would depend, again, if there was
criminal activity or, indeed, if there was waste, fraud, abuse, alleged or
potentially alleged, then that subject would be the responsibility, because
this would be State Department funds, would be the responsibility of the
Office of the Inspector General of the Department of State, who we work
quite closely with and provide a number of case supports with them. Again,
it depends a little bit on what the perceived criminal activity is.
Ms. WATERS. Does your work take you in, directly in, to
other countries such as Nicaragua where you could seek cooperation from
authorities there to work with you? I don't know what they have down there
that would be synonymous with what you do or who you are, but do you have a
working relationship down in Nicaragua?
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Mr. MORRIS. In Nicaragua, you are asking a harder
question. I wasn't ready for a Nicaragua question.
The generic, the general answer is that we have a lot of
international activity, bilateral activity, with a lot of countries around
the world. And we have been very active in this hemisphere.
Secretary Rubin chaired a conference 15 months ago, in Buenos
Aires. I believe that Nicaragua was there. They signed on to a
communiqué that would have required certain kinds of actions.
We do not have an exchange agreement with them. You know, we
have had a long, sort of a strained relation with Nicaragua, which is
changing. They do not have a FinCEN-like organization. I don't know what
the status of their money laundering laws are, but I think they have taken
some steps, since the meeting, because I have a list of the countries that
have not taken steps and I don't see them on it.
But, again, we could provide more detail for the record. It is
very important to us to see countries establish parallel regulatory
regimes, as we have in the United States. One, because we think it makes it
harder for organized crime to operate if they have difficulty laundering
their money. Second, it is fair because our financial institutions operate
in many countries around the world and we think there should be a level
playing field, that all financial institutions should meet at least certain
minimum anti-money laundering standards. But I can provide greater
information if I can get back to the office and do an assessment of
Nicaragua.
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[The following information was provided to the subcommittee at
a later date by Hon. Stanley E. Morris]
Nicaragua is not considered an important regional financial center. The
banking system is quite small and too primitive to be used to hide vast
sums of money. However, the country is used as a transit point for drugs.
In January 1997, a new government was installed in Nicaragua, and just last
month, the new government drafted an anti-money laundering bill which would
criminalize money laundering. It is believed that the draft legislation
includes requirements for financial institutions to report significant
currency transactions.
In addition, Nicaragua participated in the Summit of the Americas
Ministerial on Money Laundering in December 1995, and signed a
communiqué, in which they agreed to take specific actions against
money laundering. Nicaragua also participates in the Caribbean Financial
Action Task Force, a sister agency of the Financial Action Task Force,
created by the G—7 to promote the development of effective anti-money
laundering controls and cooperation around the world.]
Ms. WATERS. What could trigger your aggressive efforts
to get some country like Nicaragua involved with you if there was a feeling
that there was a great need to do that based on some information that would
kind of document money laundering that is creating problems for us here in
this country?
Mr. MORRIS. Well, there are a number of things. The
Department of State has been very aggressive in pressing the anti-money
laundering agenda, both in this hemisphere and elsewhere. And most of our
Ambassadors and DCMs are aware of the priority that the President and the
Treasury Secretary place on this.
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As I said, the Secretary himself met with 30 countries, just
15 months ago, and then followed it with a meeting with all of the Finance
Ministers less than a year ago. While there were a range of issues
discussed with all of the Finance Ministers, one of them was the importance
of addressing the issue of money laundering.
We have also had discussions with the Inter-American
Development Bank, which provides development loans in a lot of these
countries, and they are beginning to now, for the first time, recognize the
importance of establishing preventive measures within the countries.
In our judgment at the Treasury Department, a financial system
that has integrity and that takes steps to ensure that organized crime
can't launder its money and that corruption doesn't undermine the
democratic process, that then is as important, indeed I would suggest more
important, than roads and dams and the like, which is where a lot of the
development money has gone in the past. And so this is a significant new
initiative for us to use the multilateral development banks as additional
leverage in bringing these matters to the interest of the Government.
Plus we have all of the other tools that the United States
has. We have used even our commitment to deal with anti-money laundering
into such things as our trade discussions in the Asian Pacific Economic
Council, for example, on the belief that you can't have a fair trade policy
if some governments are taking in illicit proceeds as a part of their
capital development.
So we have a number of tools, Congresswoman Waters, and we
will use them. And if we see problems in a country growing, particularly in
a developing democracy like in Nicaragua, then we will bring all the
necessary attention to bear.
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Ms. WATERS. Well, let me just say this: The Inspector
General of the Justice Department and the Inspector General of CIA and both
Intelligence Committees of the House and the Senate are all involved in
this investigation. I will be talking with the Inspector General of the
Justice Department about his work with this drug trafficking ring and the
connections in Nicaragua and taking a look at this gentleman who pops up
again as a money launderer who now has a big role in government and may be
spending our USAID money on other things. Because I think that whatever
agencies we have that can come to--I mean, can take a look at this overall
drug trafficking and money laundering that has been going on for so many
years connected to Nicaragua, then we all ought to get involved in it. So I
am certainly going to pursue, you know, requesting your assistance, perhaps
in several ways.
Mr. MORRIS. Happy to help.
Ms. WATERS. Thank you very much.
Chairman BACHUS. Thank you. I would like to sort of
follow up on something that Ms. Waters mentioned to you. She mentioned the
money remitter or transmitter and the role that it played in the matter
that she brought before you.
I want to ask you two questions about the non-bank financial
institutions and, of course, this includes not only money transmitters or
remitters but also check cashers, currency exchanges, your 7-Eleven stores,
and we heard quite a lot about that in the testimony by Under Secretary
Kelly in our hearing a week before last on the GTO and your work on
that.
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But when he appeared before us he made reference to the
fact that some of these NBFIs are engaged in money laundering, some but
certainly not all or the majority because we are talking about a legitimate
industry, and that this was basically, in many ways, a hole in the bottom
of the bucket in our efforts to suppress money laundering.
And he also mentioned the need to register these NBFIs. In
fact, in the 1994 Money Laundering Suppression Act, Congress called for the
registration of these institutions.
I think Under Secretary Kelly made reference to this, it made
it a crime to be unregistered and to operate. But we still don't have that
registration process.
Can you give us some timeframe on that or what difficulties
you have been experiencing and when we can expect some closure on this?
Mr. MORRIS. Certainly, Mr. Chairman. Again, a certain
bit of whimsy, probably very few Government officials have been up before
this Congress in the last 4 years being asked why they are not regulating
faster.
The challenge that we face under the statute here is that what
we refer to as the subset of non-bank financial institutions. Because we
include casinos and broker/dealers and others in the subset, in order to
make this easier--not any easier to pronounce, I might add, than NBFIs--we
call them money service businesses, and that is really what they are doing,
whether they are cashing checks or exchanging currency or remitting money
or selling money orders or travelers checks and the like.
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Our problem has been struggling with the issue of
definition. We don't want to come up with a system that includes Safeway as
a registrant because there are very powerful penalties involved, civil
penalties as well as criminal. A failure to register is subject to a $5,000
fine for each day that you have not registered, and we wanted to make the
system focus clearly on the problem at hand rather than including
everybody, and we thought it was very important to be as careful as
possible.
We asked Coopers and Lybrand, through a contract, to examine
the industry for us. This was undertaken for us to get a better sense, to
make sure that we knew as much about this money services business as we
do--as we could. That study is completed. A draft, I think, was made
available to your staff last week.
We have come up with a proposal for registration. It is
narrowly designed, and we think that it probably will result in perhaps
fewer than 10,000 actual registrants because we would rather register the
industry business, the major business, rather than the sub-agents, except
in certain circumstances.
Take Western Union, for example, who has 45,000 agents or
something like that. That would be a major burden.
So what we want to do, and it took us awhile to craft this,
was have a way that we would create a registration for Western Union that
would be sent to us and a registration that would be a recordkeeping
requirement within Western Union that would be available to law enforcement
and regulatory oversight.
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We think we have worked our way to begin to have crafted
that. We had discussions as long ago as 18 months ago. Indeed, we even had
a draft of a form, registration form, but our problem was one of
definition.
That is the reason that this Act was passed in the fall of
1994, and in the spring of 1997 I am telling you that probably within the
next month a proposed rule will be out. We have drafted it, had an
opportunity to brief in some detail both the Under Secretary and the
General Counsel on it, and I think we have done as good as we can at the
first set, but we do need to continue to work with the industry.
We have had very good working relationships, and I mentioned
Western Union, but with Money Gram and American Express and others who are
the large organizations, very much committed to setting in place anti-money
laundering programs here.
Again, we want to focus our attention on the problem and we
want to maintain the kind of good working relationships that we have
established with the industry in other areas.
Chairman BACHUS. All right. Now, you know we basically
are discussing two things here. One is registration and the other is the
special requirements of recordkeeping and transaction reporting.
Mr. MORRIS. Right.
Chairman BACHUS. You were talking somewhat about the
second thing, which is the recordkeeping and the record reporting, the
reporting of transactions.
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Now, let me focus on that one for a minute. How necessary is
that? I mean, you were talking about how we wanted more regulation. My
question really was about the registration. The GTO, the targeting, the
monitoring of these institutions, some ability to monitor them, as with the
GTO, you know, that is a possibility. And also you were mentioning with
registration that the penalties may be so high in certain cases that it
eliminates an option.
We would hope that you would come back to us sometime, or the
Treasury would, and report whether there may be problems with certain
provisions of the law; we would like to do this but this provision of the
law gets in the way of doing that; if it didn't say this, we would have
better options.
I would invite, first, for you to tell us where you have a
problem with the law, not here today. But also would you comment on maybe
whether you have looked at just a monitoring requirement or use of this
GTO-type thing as opposed to a broader regulatory scheme?
Mr. MORRIS. Yes. What we----
Chairman BACHUS. Do you understand the question?
Mr. MORRIS. Yes, I think so.
Yes, we have looked at this. At present, these businesses,
when they transact above $10,000, are subject to the same reporting
requirement as are banks. And it is important to note that they also have
the same reporting requirement. But we don't really know who they are. It
is very difficult for us to discipline that system.
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Also, the nature of their business is different and we really
need to tailor our regulatory approach and our working relationship
differently.
These businesses provide a very, very valuable service. Banks
have left a lot of our inner cities, for example, and a lot of our rural
areas. And so that the only financial services available to a lot of people
are the check cashers or the money remitters who are not the Bank of
Americas and the Citibanks and the like.
So what we are trying to do is establish a registration system
that is sensitive to the fact that these are small businesses, and then
begin to do the second part of this, which we think is important, and that
is some mechanism for suspicious reporting.
So that if they see people coming in and purchasing--the same
person purchasing--a whole series of $1,000 money orders, that they view as
a money laundering activity, that they have an obligation and a duty to
report. We think that is fair. The banks have that obligation. They have
that.
But we think we should do that in a way that recognizes that
these are small businesses operating, in many cases, you know, in providing
multiple services.
In a third area, we believe, at present, and again it is
something we need to talk with the industry about, but we think that
cash-purchased money remittances going offshore deserve special attention.
That has been our experience in GTO.
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The value of the Coopers and Lybrand study was we
determined that the average purchase in cash is about $300. Most people
don't go in and put $3,000 down and say, ''Send this off, in cash,'' to
somebody.
So we are looking at a reporting requirement that would be
different for money remitters than it is for banks, because there is no
customer relationship. And the experience we have had is that a large
percentage of the activity we saw in New York, and we see no reason why
this wouldn't apply in a lot of other areas, was for money laundering
purposes because these were operating outside of a fair set of
standards.
So we are very sensitive to the concerns, as this subcommittee
has been, in making sure that we take our regulatory responsibilities with
the sensitivity and the burden reduction orientation that I think we all
share. And I think we can design a system that does not impose significant
burdens and, in fact, helps the professional parts of these businesses
squeeze out the illegal activity, which is a small part of it. Because of
the size of the business and the fact that it has largely been unexamined
at least at the Federal level and only partially examined at the State
level, regulation will bring a greater professionalism to the business but
not increase their costs in any way that would affect their ability to
provide the important services that they do.
Chairman BACHUS. Good. Thank you. That concludes my
oral questions to you. I have about four or five written questions I am
going to submit to you. One concerns the Money Laundering Suppression Act
mandate from Congress or request that the National Conference of
Commissioners on Uniform State Laws work with the States in developing
uniform State laws regulating the NBFIs, and what your participation in
that may be.
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I also want to ask you, you mentioned the CTRs and exempting
part of the industry, and I want to make some inquiries into that.
Third, I am just trying to think--know your customer, that the
Fed has developed, I have a question or two on that. And the final thing is
the IRS, some of the questions that this hearing is about--maybe what your
involvement is and sharing that information.
Mr. MORRIS. OK.
[The information referred to can be found on pages 56 and 92
respectively in the appendix.]
Chairman BACHUS. With that, Ms. Waters, do you have
anything?
Ms. WATERS. I have no further questions.
Chairman BACHUS. OK. This concludes the hearing. We
very much appreciate, as I said earlier, your cooperation with us, and your
participation. Thank you very much. I commend you for your work. I know it
is complicated. Thank you.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[insert offset folios 31 to 126 here.]
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