1997 Congressional Hearings
Intelligence and Security

Good Morning Mr. Chairman and members of the Subcommittee, I am John Byrne, Senior Counsel of the American Bankers Association (ABA) and a member of the Treasury Department's Bank Secrecy Act Advisory Board. The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership -- which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks -- makes ABA the largest banking trade association in the country. I have been asked to discuss money laundering trends both domestically and internationally and how our industry is coping with this difficult issue. We welcome this opportunity to outline for the Committee the banking industry's efforts in deterring all types of financial fraud. ABA believes that the industry response to this problem has been strong and our ongoing efforts successful.

The industry is working diligently with our government counterparts to ensure that the financial community has all the appropriate tools to combat all types of money laundering and bank fraud. The ABA is committed to that result, and we have created educational mechanisms so that our members are prepared for financial crimes and know best how to respond to that problem.

The ABA has long supported the efforts of the Congress and the U.S. Government in their drive to address money laundering activity throughout the world. ABA was pleased to be actively involved in working toward enactment of the Money Laundering Suppression Act of 1994 (P.L. 103-325), which was enacted to improve the regulatory process covering the Bank Secrecy Act. Due to that legislation and the implementing regulations, FinCEN has successfully reduced the size of the Currency Transaction Report (CTR) and is close to further streamlining the entire cash reporting process. If the government stays on track, all of these initiatives will assist the industry and the government in their efforts to stop money laundering by refocusing efforts from routine reporting to suspicious transaction reporting. FinCEN deserves much of the acclaim for spearheading the regulatory burden reduction process that has benefited both bankers and law enforcement.

ABA would like to reemphasize the partnership developed in the past several years between the government and the banking industry. This alliance needs to be highlighted because the same relationship is not common in foreign countries. The lack of private-public sector teamwork internationally needs to change if the goal is improved (and more effective) vigilance on the part of the banking industry. Specifically, the UnderSecretary for Enforcement at the Department of Treasury initiated, and the Director of FinCEN carried out, the formation of a Bank Secrecy Act Advisory Board comprised of private and public sector representatives to meet on a regular basis and discuss trends in money laundering, as well as the current regulatory structure and what changes are necessary to streamline and improve the system. Over thirty individuals meet and engage in candid discussions which, we believe, have resulted in an improved regulatory system. This "forum" was duplicated at a January, 1996 meeting in Paris with international representatives prior to a regularly scheduled Financial Action Task Force (FATF) meeting and should be the goal for all nations.

In the international arena, the Financial Action Task Force serves as a forum for ideas and recommendations on how to eliminate money laundering activities not only in the FATF countries but with other countries throughout the world. FATF is to be commended for its dedication to this worthy goal, and it is imperative that the private sector lend its expertise and energy to increasing the obstacles for narcotics traffickers and other criminals who illegally use our financial institutions to move their ill-gotten gains. ABA has supported these efforts, but, as we previously mentioned, the record of our international banking counterparts has been mixed, at best.

The ABA stands ready to continue its decade-long involvement in educating bankers and other private sector representatives on the need for compliance and vigilance with money laundering laws and activities. We have worked with FATF and its members so that one day we can all trumpet the end of money laundering in financial institutions everywhere. All must support the need for increased international cooperation. It should also be pointed out, Mr. Chairman, that FATF has recently given the United States an "outstanding" rating for anti-money laundering activities. The private sector, as well as Congress, should be proud of the work of our government in this difficult area.

To understand money laundering activities in the United States, one must realize that the U.S. financial industry is extremely varied, with institutions ranging from small community banks to large international financial service providers. Thus, the experiences will differ widely as to what is attempted by criminals who attempt to use our institutions for illegal purposes. Much of what we have seen in the past several years, in the aggregate, has been continued attempts to evade the cash reporting requirements (i.e. through structured transactions), the creation of "front" companies designed solely to move the proceeds of illegal activities and complicated investment schemes. In addition to those well-known activities, domestic financial institutions are wary about transactions with certain countries that are considered drug havens by U.S. and international authorities. While we do not avoid business with these countries, bankers are trained to do extensive research on banking transaction activities in these countries.

We have also seen a rise in possible illegal transactions in certain financial institutions that are not regulated by federal banking agencies. As with any general statement, it must be emphasized that many "non-bank" financial institutions are working toward developing improved compliance systems, but the amount and frequency of federal examinations will often dictate the seriousness by with which those institutions take anti-money laundering deterrence responsibilities. We are confident that most other financial service providers share our support for improved compliance. Congress should continue providing oversight in this area and not be swayed by critics who claim unfair extension of the money laundering laws to those entities.

Any new trends in money laundering, Mr. Chairman, must, by definition, be monitored by law enforcement and state and federal bank regulators since those entities are much better equipped than bankers to discover new forms of criminal activities and to distribute this information to all concerned parties. The U.S. government has been working toward an improved "alliance" with the private sector to share information on new trends and schemes, and we are optimistic that the sharing of critical information will continue. The ABA has offered its services in this regard, and we urge our counterparts both in the U.S. and abroad to do the same.

While there are many examples of banker cooperation with the government in the money laundering arena, I would like to offer some examples of these efforts. The level of success in deterring money laundering achieved by the models of industry-government cooperation in such places as Oklahoma speak for themselves. The following are money laundering schemes uncovered by the joint efforts of Oklahoma bankers and law enforcement agents as reported by the Internal Revenue Service and the U.S. Attorney's Office in Oklahoma:

• A financial institution reported suspicious activities by a group of individuals who were opening new accounts. As a result, a major cocaine distribution organization was uncovered. This organization had deposited in excess of ten million dollars in Swiss banks. The investigation resulted in the following seizures: a $375,000 home in Oklahoma City; $1,000,000 in cash in an Oklahoma City bank; an airplane located in Tucson, Arizona, valued at $5,000,000; and in Reno, Nevada, automobiles valued at $100,000, and gold and jewelry from a safe deposit box valued at approximately $3,000,000.
• A financial institution employee contacted the Financial Task Force in Oklahoma concerning a new account holder who was receiving wire transfers from California and then withdrawing the money in currency (approximately $50,000 each wire). This information uncovered a theft ring which had stolen almost four million dollars in microchips from a business in Oklahoma City.
• Three financial institutions independently reported suspicious transactions concerning the purchase of one or two cashier's checks in amounts of $3,000 to $4,000 with currency. This lead initiated an investigation which uncovered an international heroin organization which had laundered in excess of one million dollars through Oklahoma City banks in less than twenty-three days. The individuals who purchased the cashier's checks, known as smurfs, went to as many as twenty banks in one day acquiring cashier's checks. Law enforcement seized over 26 pounds of heroin valued at twenty million dollars in Oklahoma City.

The Oklahoma model of partnership (which has been duplicated in California, Arizona and Florida among many other locations) strengthens both the banking industry and the government and is made possible only through the efforts of dedicated public servants that work closely and well with our industry. These stories, Mr. Chairman, often go unreported, and the ABA is attempting to change that. [See article from ABA's Security and Fraud Newsletter (Attachment A).]

Finally, we would be remiss if our association did not commend the various federal agencies for their efforts to train foreign law enforcement, regulators, and bank officials on current detection and prevention efforts. ABA has participated (as have several major U.S. institution bank officials) in a global attempt to share information and offer advice on how to craft effective fraud deterrence programs. The United States Customs Service, the Federal Reserve Board, FinCEN, various U.S. Attorney offices, as well as many others have developed seminars, conferences and other forums to train our international counterparts in the critical area of fraud prevention and detection. The programs do not stress the U.S. regulatory and legal model as the answer to worldwide money laundering, but create an opportunity for information exchanges that greatly assist all participants. This area of support gets little recognition, and that needs to be remedied.

Another area that we have been asked to cover concerns what countermeasures U.S. financial institutions have developed in order both to comply with our regulatory responsibilities and to develop an appropriate proactive response to money laundering. While the U.S. does not now have a regulation in place (although one is expected in 1997), the ABA has long supported the concept of formalizing a "Know Your Customer" policy. In 1990, the ABA surveyed its membership to determine the extent to which institutions already had policies that could be construed as Know Your Customer procedures. At that time, over 86% of the respondents had KYC procedures of some type. The task force also developed recommendations in this area.

Much of the banking industry's "countermeasures" will stem from a solid Know Your Customer procedure. The Task Force also concluded that, in a KYC policy, establishment of a tiered monitoring system of certain accounts and activities may be appropriate. ABA stresses that if there are no "red flags" or other indications of unusual behavior then monitoring need not take place. If, based on government and industry warning signs, there is an indication of illegal activity the bank would be required to conduct more research or analysis to determine if there is a problem. It must be emphasized that the risk level associated with a well-known and respected corporation differs from that of some other entity. In addition, risks will vary along bank-product lines. ABA has advocated that any final rules permit such differentiation. As long as the government allows flexibility in handling customer monitoring, a KYC policy that includes this requirement could, and will receive, solid support from our industry. On the other hand, any attempt to mandate that certain types of commercial monitoring systems be created will be met with active resistance from our industry. A KYC policy must take into account our diverse industry and the fact that some banks may have a "better" method of compliance than the government. Finally, as the Federal Reserve Board and the other banking agencies work toward a KYC regulation, it must be reemphasized that all non-banks should have KYC requirements.

In November 1995, ABA's Executive Vice President, Don Ogilvie wrote to FATF President, Ronald K. Noble, in response to a request to review long standing FATF recommendations on creating effective money laundering enforcement programs. I will summarize several key points that we made at that time.

First, many of the FATF recommendations (i.e. passage of laws criminalizing money laundering, reporting of suspicious transactions and due diligence) have been implemented in U.S. banks and in place for many years. The ABA remains committed to the need for policies requiring non-banks as well as banks to keep certain records and identify customer transactions. We believe that our industry has an excellent record of emphasizing account-opening procedures in employee training programs as outlined in several FATF recommendations. We have also pointed out the need to streamline, and in some instances eliminate, reports and records on routine transactions, and the federal agencies responding to the Congress have already begun that process. Therefore, while we support having several of the U.S. Bank Secrecy Act laws being placed on all financial institutions throughout the world, changes and modifications to those laws are also necessary.

We also stressed that recommendations addressing the reporting of suspicious transactions and other "Know Your Customer" procedures are important requirements for all institutions to assist in money laundering deterrence, but that financial institutions must be protected from civil and criminal liability for fulfilling their responsibility to detect and report unusual or potentially criminal violations as well as closing accounts of individuals who have acted contrary to law and regulation.

Mr. Chairman, U.S banks already have civil liability protection from individuals bringing suit against an institution for suspicious transaction reporting. ABA is also concerned about criminal liability for money laundering offenses that may be inappropriately assessed against an institution. We ask that the Committee consider a proposal to protect bankers that have continued to do business with an individual that has been suspected of money laundering, if we have been asked by law enforcement to keep that suspect account open for investigatory purposes. While there is no case law that have found banks liable for this particular action, we feel that clarity in this area is needed. We would be happy to work with the Justice Department and other appropriate agencies to work on this still troubling issue.

Finally, with the advent of smart cards, banking on the internet and other "cyberspace" financial services, Mr. Chairman, both the government and the industry must be prepared to address these tremendous new technologies as potential vehicles for money laundering. This must be done before, not after, they become commonplace. A recent report prepared by the National Association of Attorney's General (NAAG) pointed out that "[i]f there are widely accepted alternatives to the banking system criminal activity could exist undetected, undiscovered and unchecked." In addition, ABA's Payment Systems Task Force in 1996 concluded that the banking industry should "establish a formal partnership with the appropriate government agency or agencies that are charged with oversight of all elements of electronic banking." This is necessary to ensure that "any new legal responsibilities created in response to changes in technology be considered only after balancing law enforcement and economic concerns."

Consistent with the ABA policy (also established by the PSTF) that non-bank players in electronic commerce be covered by laws such as the Bank Secrecy Act, FinCEN has proposed that, among other things, issuers of "stored value cards" register with the Treasury Department.

FinCEN should be commended for stating that it will not "stifle innovation" in electronic commerce. We do not share the views of critics that state that the "registration" part of this proposal will adversely affect the commercial viability of those products or would "kill the industry." FinCEN's public meetings on this issue is certainly the correct approach to determine what is the most appropriate method to handle these emerging technologies. This is just another excellent example of government reaching out to affected industries to get needed information.

As we all grapple with global financial crimes and how best to address fraud, our Association reiterates that one must consider the level of resources available to law enforcement in the United States. Due to the lack of funds in many agencies, frauds committed under certain thresholds (i.e. $100,000 in New York City) are simply not prosecuted by U.S. Attorneys or investigated by law enforcement. Therefore large scale frauds, committed over time, may go unreviewed because of the dearth of manpower hours that can be dedicated to such offenses. While this is not a criticism of law enforcement, it is nonetheless frustrating and harms financial institutions in their goal of ensuring the safety and soundness of their industry. In fact, one of the major changes to the new suspicious activity report was to substantially raise thresholds for reporting frauds. This was done because many small dollar frauds simply cannot be handled by the government.

ABA recognizes that the battle for appropriations encompasses many competing interests, but the ever-dwindling amounts given to combat fraud are disappointing. Simply stated -- our partners in the government need more tools to solve financial crimes. We continue to advocate the increase of law enforcement resources.

Finally, bank security officers continue to complain about the inability of institutions to prevent corrupt employees from moving from bank to bank after committing and admitting to a crime against the institution. ABA urges this Committee to consider the proposal we have placed as an appendix to this testimony as a solution to this problem (Attachment B).

The American Bankers Association has long advocated adherence to Know Your Customer principles as a means to deter fraud and protect the banking industry. Those concepts can work in the area of money laundering as well as for other financial crimes. We humbly recommend that our international counterparts consider the same principles because organized criminal groups can only succeed if vigilance is poor or non-existent. By working together, financial institutions and law enforcement can craft workable, flexible and reasonable regulations that will deter criminals from using our banking system to launder the proceeds of illegal activities. This can, and does work in the United States and should be replicated abroad.

Thank you for this opportunity and I would be happy to answer any questions.

Section 5318 (g) of title 31 (Reporting of suspicious Transactions) is amended in subsection (3) (Liability for disclosure) by adding the following (in brackets):

Any financial institution that makes a disclosure of any possible violation of law or regulation [to the appropriate government agency, or in response to a request from another financial institution provides a written employment reference] or a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution, shall not be liable to any person under any law or regulation of any state or political subdivision thereof, for such disclosure or for the failure to notify the person involved in the transaction or any other person of such disclosure.

[The civil liability immunity applies to the financial institution unless the institution acted with malice or reckless disregard for the truth].

Insider abuse and bank fraud have been the focus of industry and governmental concern for many years. With the losses reaching billions of dollars, banks have stepped up their efforts to report possible crimes, improve investigative techniques and to create fraud deterrence programs. Congress has increased the penalties for fraud and for hiring individuals that have been convicted of crimes against financial institutions. In addition, financial institutions are required to report possible violations of law on a "Suspicious Activity Report" or SAR to the federal government.

Unfortunately, not all reports are investigated due to limited government resources so crooked employees often go unpunished. In addition, financial institutions cannot inform another institution that an employee was terminated for theft or embezzlement for fear of lawsuits. Several states (11 with one pending) have remedied this situation by granting liability protection to employers who respond to requests for employee work records including advising of "any involvement in a theft, embezzlement, misappropriation, or other defalcation by the subject for which the request for reference is made." [See, 8-2-111.5 of the Colorado Statutes]

In order to protect an individual from misuse of this protection, the amendment also grants the liability protection only if the institution does not act with malice or reckless disregard for the truth. Financial institutions need this liability protection to improve the tools at their disposal for ensuring the safety and soundness of our financial industry.