1997 Congressional Hearings
Intelligence and Security

Chairman McCollum, Mr. Schumer, members of the Committee, I appreciate your providing me with the opportunity to be here today to speak about a subject of central concern to Secretary Rubin, the US Treasury Department, the US Department of Justice and Congress -- the US Government's effort to combat drug money laundering.

As Under Secretary of Treasury for Enforcement, my office has oversight authority over the U.S. Secret Service, the Customs Service, the Bureau of Alcohol, Tobacco and Firearms, the Financial Crimes Enforcement Network or "FinCEN," and the Office of Foreign Assets Control, or "OFAC."

These entities, in turn, are responsible for significant elements of the U.S. Government's anti-money laundering effort. IRS-CI, Customs, the Secret Service and ATF are charged with investigating money laundering in cases where the underlying criminal act lies within their core jurisdiction. FinCEN is charged with administering the Bank Secrecy Act, which prescribes transaction reporting and record keeping requirements for financial institutions designed to insulate those institutions from money laundering, and to provide a paper trail for investigators. FinCEN also serves as the central point for collection and analysis of Bank Secrecy Act data, providing case support to law enforcement investigations. OFAC is responsible for implementing sanctions against nations determined to be a threat to the national security, economy or foreign policy of the United States, pursuant to the International Emergency Economic Powers Act -- or IEEPA.

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Money Laundering Generally

I will begin my remarks with a few comments about the challenges we are confronting. Then I will turn to the approach which the Treasury Department, in conjunction with the Departments of Justice, State, ONDCP and other agencies, and the financial services sector, is taking to address these challenges. Specifically, I will discuss Treasury's domestic efforts, and the initiatives we are pursuing in the international sphere.

As you all know, much of what we consider the crime problem affecting our nation and our neighborhoods -- particularly as it relates to narcotics trafficking and the myriad of associated crimes -- is the work of sophisticated, international criminal enterprises. Money laundering is the life support system of these enterprises. The ability to sanitize ill gotten gains permits drug trafficking and other criminal organizations to perpetuate, and live lavishly from, their illegal activity.

But while money laundering is the "life blood" of organized crime, it also is its "Achilles Heel." The steps which criminal groups must take to give their illegal profits the appearance of legitimacy provide us with an invaluable opportunity to attack the groups themselves. The better we are at tracking dirty money, the better our chances at reaching the leadership of the drug trafficking groups. For while the drug kingpins can separate themselves from street-level sales, they cannot separate themselves from the profits those sales generate.

The money laundering problem we are facing today is increasingly international in character. The greater integration of the world economy, and the removal of barriers to the free movement of capital, have combined to create new commercial opportunities. Unfortunately, the same efficiency and convenience that the global economy affords to legitimate commerce, also make easier the job of disposing of criminal proceeds.

Now, more than ever, drug trafficking and other criminal groups can manipulate an expanding array of tools to shield their profits, without regard to international borders. A well organized and abundantly financed criminal world can exploit weaknesses in nations' legal and regulatory systems by shifting business to and through countries with less stringent anti-money laundering controls.

Let me give you an example which illustrates the scope and complexity of money laundering today: In Miami, Colombian drug traffickers exchange their U.S. drug dollars for Colombian pesos through a Colombian currency exchanger. The currency exchanger then buys cashier's checks at U.S. banks in amounts under $10,000, avoiding currency reporting requirements. The currency exchanger then sells these dollar-denominated cashier's checks to Colombian businessmen. The Colombian businessmen use the checks to purchase goods and services in Panama, Europe and Asia. The drug trafficker has converted the drug proceeds -- dirty money -- into Colombian pesos -- clean money -- which can be spent as legitimate funds.

Treasury's Response: Regulatory and Investigative Efforts

So what do we do to address the money laundering threat? First, we develop a domestic counter-money laundering strategy that focuses on both prevention and enforcement. Second, we promote an aggressive international campaign to ensure that all nations are pursuing the money laundering problem with the same degree of vigilance.

Domestically, our goal is to combine effective prevention of money laundering with aggressive enforcement after the fact. Leveraging Treasury's unique regulatory authority in concert with its enforcement capabilities (and those of other agencies), we seek a comprehensive approach to the money laundering problem -- one that both insulates financial institutions from criminal proceeds, and enhances the prospects for identifying launderers and disrupting their schemes.

We are accomplishing this objective in several ways. To enhance our ability to prevent money laundering, for example, we are developing more intelligent, targeted regulations for banks and other financial institutions. In the last several years, FinCEN has been engaged in an effort to strip away unnecessary and burdensome regulations while actually increasing the utility of the information provided to law enforcement. We have reduced the amount of information required by eliminating duplicative or unnecessary fields on currency transaction reports -- thus reducing the time bankers devote to generating the reports and law enforcement's time to analyze them. And we are working to reduce CTR filings by one third -- or about 3 million reports. This reduction will be accomplished by streamlining the process by which banks exempt legitimate, cash-intensive business from filing reports.

In place of these costly requirements, we have introduced an invigorated system of suspicious transaction reporting. Our objective is to permit the financial sector to redirect its resources from mechanical compliance to more proactive detection methods. We seek to form an alliance with the financial services community, utilizing their expertise to identify potential criminal conduct within their midst. After all, the institutions are in the best position to understand their customers' businesses and to recognize and report suspicious activity.

We are also working to extend the Bank Secrecy Act's anti-money laundering controls to institutions which traditionally have not been covered, or which have not been covered in appropriate and effective ways. As a consequence, these institutions have proven to be at-risk for exploitation by money launderers. The evidence has demonstrated that as we have become more successful in preventing illicit funds from entering banks, the criminals have moved their money to other providers of financial services. To define the universe of these non-bank financial institutions, we have proposed rules requiring the registration of issuers and sellers of travelers checks and money orders, money transmitters and other "money services" businesses. To provide better protection against money laundering, we have issued proposed rules requiring certain of these institutions to report suspicious activity, and imposing a special currency reporting rule on certain outbound currency transfers.

Let me emphasize that the overwhelming majority of the businesses affected by these new rules are engaged in legitimate and valuable commercial activity. Indeed, the industry has been generally supportive of our work. The rules are intended only to make life difficult for the money launderers and their accomplices, and to prevent the manipulation of honest businesses by criminal enterprises.

In addition to our regulatory efforts, which are geared toward preventing the placement of illicit proceeds in our nation's financial institutions, we are working through our investigative bureaus to enhance the detection of money laundering. Customs and IRS-CI in particular are aggressively pursuing investigations in which the disruption of a money laundering operation, and the arrest and prosecution of the launderers, are the primary objectives. Together, the agencies have approximately 1,100 expert financial investigators and staff dedicated to these "pure" money laundering investigations. Last year, they conducted thousands of investigations, arresting and convicting approximately 2,000 money launderers and seizing approximately $ 314 million dollars.

Last year, IRS-CI conducted 1,850 money laundering investigations, obtaining 1,265 indictments and 1,031 convictions. IRS-CI seized $ 78 million in connection with money laundering cases. The Customs Service last year arrested 1,066 individuals on money laundering charges, resulting in 686 convictions. Only two days ago, Customs seized $ 1.2 million and arrested three suspects in connection with a significant money laundering investigation.

The paradigm example of the holistic, combined prevention/enforcement approach to money laundering which Treasury is seeking to cultivate can be seen in the recent New York Geographic Targeting Orders, or GTOs. Through the work of a Treasury-led task force, Operation El Dorado, it became apparent that Colombian drug traffickers were using certain money remitters in the New York City area to launder drug cash. The evidence demonstrated that 12 remitters alone had funneled approximately $800 million to Colombia last year. To account for this money legitimately, each Colombian household in the area would have had to wire $ 30,000 to Colombia each year -- an amount which exceeds the $ 27,000 average annual income for this community.

To address this problem, to address this problem, Treasury invoked a little-used statutory provision which grants the Secretary of the Treasury authority to require special reporting and record keeping by financial institutions in specific geographic areas where necessary to fulfill the purposes of the Bank Secrecy Act. The first New York GTO was adopted in August 1996. It required 12 New York area money remitters and their approximately 1600 agents to obtain and report identifying information on all cash remittances of $750 or more to Colombia. A second GTO was signed in October 1996, extending the heightened reporting requirements to 10 additional remitters and their agents. The GTOs have been extended by Treasury five more times.

The New York GTOs have had a significant impact on the flow of drug proceeds through the targeted remitters. Several of the remitters targeted under the GTOs have stopped sending funds to Colombia altogether, while many others are sending significantly lower amounts. Six remitters have been indicted or pled guilty to structuring transactions to avoid the GTOs, including an indictment handed down two days ago. Several others are under investigation.

The GTOs also forced the traffickers to resort to other, more difficult tactics to move their profits back to Colombia, thereby improving our chances of seizing more money and effecting more arrests. In the first six months since the GTOs went into effect, Customs seized approximately $50 million in currency at East Coast ports of entry -- a four hundred percent increase over a comparable period last year -- as traffickers had to move money in bulk.

The New York GTOs represent the model for intelligent money laundering control. Beyond using traditional law enforcement techniques to address discrete instances of criminal activity, the GTOs marshaled Treasury's regulatory authority to identify and correct a weakness that had penetrated a small but important part of the money transmitter industry. This preventative effort, in turn, triggered a wave of enforcement activity, as money launderers were forced to resort to riskier means of moving their funds once the vulnerabilities in the transmitter industry had been remedied. Finally, the evidence gleaned through the New York GTO experience prompted Treasury to propose a more permanent solution to the problems it sought to address. In May, FinCEN issued a proposed regulation applying the GTO's $ 750 reporting requirement to all cash-purchased, overseas remittances by money transmitters nationwide.

International Efforts

Through innovation in regulation and enforcement, then, we are working to make U.S. financial channels less user friendly to criminal enterprises. But this is just half the battle. As we have said, organized crime is increasingly a transnational phenomenon. No country's individual efforts -- whether in the legal, regulatory, or law enforcement arena -- will be sufficient given the relative ease with which money flows across borders. A truly effective attack on the Colombian cartels, on the Russian mafia, and on the myriad groups operating in this country, requires that effective controls over the movement of their funds be implemented by all nations.

Important strides have been made in this area, particularly through multi-lateral initiatives. Chief among these has been the Financial Action Task Force, or "FATF." The FATF is an independent, international group formed in 1989 by the G-7 nations to cultivate the development of effective anti-money laundering controls and enhanced cooperation in investigations among its membership and around the globe. The FATF 40 Recommendations, issued originally in 1990 and updated in 1996, serve as a benchmark for governments addressing the legal, financial and regulatory aspects of money laundering. Further, the FATF has ensured that its members have taken action to comply with these measures, and has persuaded an increasing number of non-members to do so as well. The U.S. delegation to the FATF primarily consists of representatives from the Departments of Treasury, State and Justice.

In the eight years since its inception, the FATF has made significant progress. The organization's membership has expanded to include 26 nations and two regional organizations, representing the world's major financial centers. Virtually all of its members, including most notably traditional bank secrecy proponents such as Switzerland and Luxembourg, have undertaken important regulatory and legislative reforms to comply with the 40 FATF recommendations. Whereas prior to the establishment of the FATF, money laundering was a criminal offense only in the U.S. and a couple of other nations, now all FATF members have such laws in place.

In addition, while the FATF cannot directly be linked to any money laundering cases, the organization has been instrumental in bringing about legislation which in turn has made major transnational investigations possible. For example, Operation Dinero was a 1994 IRS/DEA investigation conducted jointly with authorities in Spain, Canada and Italy which targeted an international laundering ring connected to the Cali Cartel. Dinero culminated in the arrest of 116 suspects in the participating countries, as well as the seizure of more than $90 million in cash and nine tons of cocaine. The Italian suspects arrested in connection with the investigation were arrested under an anti-money laundering law passed in the wake of, and to comply with, the FATF 40 Recommendations.

The FATF has forged an international consensus on the need for stronger counter-money laundering programs. Experience has instructed, however, that turning consensus into effective, practical measures requires specific steps appropriate to local and regional conditions, cultures and financial systems. Two regions of the world -- the Western Hemisphere and Asia -- already have begun to establish their own FATF analogues. The U.S. is actively supporting the development of these organizations.

A similar initiative designed to build upon the FATF's success in the Western Hemisphere is the Summit of the Americas. As a follow up to the 1994 Summit in Miami, Secretary Rubin convened a conference of Finance and Justice Ministers representing the 29 of the 34 democracies of the region in Buenos Aires in December 1995. The purpose of the Buenos Aires conference was to develop a coordinated, hemispheric strategy to combat money laundering. The conference produced an agreement on the basic elements of such a strategy, including the need to: criminalize the laundering of the proceeds of drug trafficking and other serious crimes; adopt reporting and record keeping regulations to protect financial institutions; take steps to enhance international cooperation in money laundering investigations; and create financial intelligence units that specialize in the collection and analysis of pertinent financial records in order to help track criminals' financial activities.

Although it is early, the Summit process has yielded promising results. Over one third of the Summit nations have passed legislation criminalizing money laundering, or have issued anti-money laundering regulations. Many others are considering doing so. Three have established financial intelligence units. Cooperation across national lines appears to be increasing, as evidenced by the arrest of major money launderers such as Mexico's Juan Garcia Abrego and Panama's Israel Murdoch, the product of joint investigations between U.S. law enforcement agencies and their counterparts in those countries.

While multilateral initiatives are a necessary component of Treasury's international anti-money laundering strategy, bilateral initiatives are equally important. Working with our partners at the Departments of State, Justice, and the Office of National Drug Control Policy, we focus a significant amount of time and attention on individual relationships. Our goal is to generate the necessary political will to bring about needed reforms in legislation and regulation. We also seek to provide the technical expertise and training to permit new laws and rules to be implemented effectively. Finally, we work to promote aggressive enforcement of these measures both domestically and across national lines.

A primary example of the benefits of such a dialogue is the situation in Mexico. With the support and encouragement of the U.S. Government, Mexico adopted legislation criminalizing money laundering in 1996. Since then, we have been working closely with Mexican authorities to build upon the new legislation. In March of this year, the Government of Mexico undertook a significant step to insulate its financial institutions from money laundering by issuing regulations mandating currency transaction reporting, suspicious activity reporting, and customer identification by banks and financial institutions.

Treasury, in conjunction with our colleagues from Justice and State, has been working closely with the Mexican Finance Ministry to assist in the development of these new rules. This includes the design by FinCEN of a computerized database to make the best use of such reports. The first phase of the Mexican initiative -- the development of a suspicious transaction reporting system -- is under way. We look forward to continuing our work with Mexican authorities on the implementation of the suspicious transaction reporting and further implementing a currency transaction reporting system, due in the beginning of 1998.

The final component of Treasury's international strategy embraces situations where cooperative efforts are simply insufficient, and where well-targeted enforcement measures will. In October, 1995, President Clinton issued an executive order invoking his powers under the International Emergency Economic Powers Act to block assets and prohibit transactions with the people and businesses associated with the Colombian Cartel. The President's order granted OFAC, working in conjunction with the Departments of State and Justice, the authority to block the assets of the traffickers and their front companies in the U.S. and to bar U.S. citizens and companies from doing business with them.

The initial list of the so-called "Specially Designated Narcotics Traffickers" subject to the President's directive included the four kingpins of the Cali Cartel and 94 companies doing business with them. OFAC has added over 300 persons and companies to the list. Additional names subject to the order were released earlier this year.

In pursuing this type of initiative, which is unprecedented under the IEEPA statutes, President Clinton has sent a clear message: if you participate in drug trafficking and other serious crimes, we're coming after you; if you help hide the assets of those committing such crimes, we're going to hit you just as hard.

Moving Forward

Of course, we hope that there will be less need for tougher measures as we proceed in our fight against money laundering and financial crimes. Constant reassessment will help us in making the necessary policy determinations. It also will help us develop threat assessments in the face of constantly changing technologies that present economic opportunity not only to the mainstream, but to the criminal element.

The emergence of new payment technologies, such as smart cards and Internet banking, may present new challenges to law enforcement authorities seeking to stem international financial crime. We must continue to monitor such developments, realizing their potential benefits for legitimate commerce. But we also must be in a position to adapt to the new systems as they mature.

Law enforcement authorities like to compare money laundering to a balloon. Just as putting pressure on one end of the balloon will force air to the other, so too will effective enforcement measures force money launderers to seek new paths of least resistance. As a consequence, we cannot rest on our recent successes. Working in a cooperative spirit with the Departments of Justice, State, and the Office of National Drug Control Policy, and with our counterparts overseas, we must be prepared to shape our response to meet an ever-evolving threat.