1997 Congressional Hearings
Intelligence and Security

Michael F. Zeldin
Price Waterhouse LLP

before the

United States House of Representatives
Committee on the Judiciary
Subcommittee on Crime

July 24, 1997

I would like to thank the Chairman and the Committee for the opportunity to present my views on the issue of money laundering. The views expressed are my own and not necessarily those of Price Waterhouse at which I am a principal.

The U.S. money laundering regime is as sophisticated and complex as any in the world. On the regulatory end of the spectrum, U.S. financial institutions, both bank and non-bank, are subjected to an array of laws and regulations that require them to employ an army of attorneys and compliance officers within and outside their institutions. On the criminal enforcement front, the money laundering statutes and the applicable forfeiture provisions provide little if any room for any putative defendant to avoid prosecution and total divestiture of all ill gotten gain. It is easier to make an argument that we need less money laundering laws than more. In the end, the likelihood of success in the area of money laundering enforcement largely comes down to the budgetary resources available to the enforcement agencies, especially those with responsibility for enforcement at the border. That being said, I have a few suggestions for technical improvement and a few areas worthy of study.

1. Foreign-Based Money Laundering

When the money laundering laws were first drafted and then amended, their primary purpose was to provide a means to prosecute money launderers operating within the United States and abusing U.S. financial institutions. As the cumulative effect of tightened internal controls, greater vigilance and selected prosecutions made it more and more difficult for the launderers to ply their trade through domestic financial institutions, increasingly they turned to foreign banks. Unfortunately, U.S. anti-money laundering laws did not keep pace. The changes I suggest will correct this situation.

Access to Records in Bank Secrecy Jurisdictions

It is frequently the case that in order for the government to respond to a claim in a money laundering forfeiture or a substantive money laundering case, it must have access to financial records from abroad. For example, in a drug proceeds case where a claimant asserts that the forfeited funds were derived from a legitimate business abroad, the government might need access to foreign bank records to demonstrate in rebuttal that the funds actually came from an account controlled by international drug traffickers or money launderers.

Numerous Mutual Legal Assistance Treaties (MLAT's) and other international agreements now in existence provide a mechanism for the government to obtain such records through requests made to a foreign government. In other cases, the government is able to request the records only through letters rogatory.

Other times a foreign government declines to make the requested financial records available because of the application of secrecy laws. In such cases, where the claimant is the person protected by the secrecy laws, he or she has it within his or her power to waive the protection of the foreign law to allow the records to be made available to the United States, or to obtain the records him or herself and turn them over to the government. The Supreme Court has recognized that compelled waivers do not violate the Fifth Amendment in Doe v. United States, 487 U.S. 201 (1988). It would be unreasonable to allow a claimant to file a claim to property in federal court and yet hide behind foreign secrecy laws to prevent the United States from obtaining documents that may be material to the claim.

Currently, 18 U.S.C.  986 provides a mechanism for the issuance of a subpoena duces tecum to domestic financial institutions or agencies and branches of foreign banks in the United States for books and records or other documents as needed in any civil forfeiture action brought for violation of 18 U.S.C.  1956, 1957 (money laundering) or 31 U.S.C.  5322, 5324 (Bank Secrecy Act). No provision authorizes the release of bank records located outside the United States.

It is my suggestion that a new section be added to 18 U.S.C.  986 that provides that the refusal of a claimant to waive bank secrecy in circumstances in which the foreign bank will not otherwise release the records, under authority of bank secrecy laws, many result in the dismissal of the claim with prejudice as to the property to which the financial records pertain.

Laundering Through a Foreign Bank

Section 1956 makes it an offense to conduct a transaction involving a financial institution if the transaction involves criminally derived property. Similarly, Section 1957 creates an offense relating to the deposit, withdrawal, transfer or exchange of criminally derived funds "by, to or through a financial institution." For the purposes of both statutes, the term "financial institution" is defined in 31 U.S.C.  5312.

The definition of "financial institution" in  5312 excludes foreign banks operating outside of the United States. Thus, as presently drafted, the government cannot rely on this definition to prosecute an offense under either  1956 or  1957 involving a transaction through a foreign bank. For example, if a person in the United States sends criminal proceeds abroad -- to a Panamanian bank -- and launders them through a series of financial transactions, the government could not rely on the definition of a "financial institution" in  1956(c)(6) to establish that the transaction was a "financial transaction" within the meaning of  1956(c)(4)(B) (defining a "financial transaction" as a transaction involving the use of a "financial institution"), or that it was a "monetary transaction" within the meaning of  1957(f) (defining "monetary transactions" as, inter alia, a transaction that would be a "financial transaction" under  1956(c)(4)(B)).

Section 1956(c) should be amended to include foreign banks within the definition of a financial institution. The definition for foreign banks found in 12 U.S.C.  3101(7) is already employed in Section 1956(c)(7)(B) for another purpose.

Additional Predicate Crimes Triggering Money Laundering Statute

Crime in general and money laundering in particular is a global phenomenon. Criminals do not recognize international borders. In order for law enforcement agencies to keep pace with criminal organizations, federal statutes must incorporate a growing number of foreign offenses. Federal money laundering statutes already incorporate certain foreign offenses involving violence and bank fraud. The list of specified unlawful activity crimes found in Section 1956(c)(7) should be expanded to include all crimes as to which the United States is under an obligation to extradite or prosecute alleged offenders.

Section 1956(c)(7) should also be expanded to include the laundering of proceeds of frauds against foreign governmental entities and crimes of public corruption that have a nexus to the United States, including for example, bribery of a public official or theft or embezzlement of public funds by or the benefit of a public official.

2. Trades and Business Reporting

Since 1985, trades and businesses have been under an obligation to report certain cash receipts that total more than $10,000 to the Internal Revenue Service on Form 8300. Since 1992, cash reporting obligations were expanded to include cashier's checks, bank drafts, traveller's checks and money orders with a face value of $10,000 or less if they are received in payment for consumer durables, collectibles and travel or entertainment.

Despite this, Form 8300 filings do not appear to be rising at rates reflective of this development. When the banking industry became aware of the high influx of illicit cash into U.S. financial institutions, CTR filings skyrocketed from a few hundred thousand in the mid-1980's to twelve million in 1996. While a variety of factors could account for this, it is my suspicion that lack enforcement by the IRS and the absence of a solid private sector partner like the American Bankers Association is largely to blame.

A coherent plan must be developed to enhance 6050I compliance. It is my suggestion that locating this provision within Title 31 of the United States Code would be a useful first step. Its presence in the IRS Code has presented prosecutorial problems (tax forms are typically more difficult for state and local prosecutors to access) and has relegated enforcement initiatives to the back burner as the IRS grabbles with higher priority agenda items. Additionally, Treasury should be tasked with undertaking a comprehensive review of 6050I compliance with specific recommendations for bolstering Form 8300 compliance. Finally, the form itself needs to be reviewed and simplified as the same way that the CTR form recently was modified to ease the burden of compliance.

3. Money Laundering Sentencing

Money laundering sentencing continues to be a problem as applied to certain classes of white collar criminals. This is due to the inflexible base level that applies to all money laundering sentences and the disparity that exists between the sentencing guideline levels applied to money laundering crimes versus that applied to most white collar crimes. This imbalance has created unintended hardships well documented by the Sentencing Commission and recently featured in the Wall Street Journal. Unfortunately, the Sentencing Commission's latest effort to correct this problem died in Congress because it was tied to the crack cocaine sentencing guidelines. An example of the problem makes the point.

Assume a bank teller embezzles $11,000 by arranging for a wire transfer of funds from a customer's account at his employer's bank in New York to the teller's personal account at a different bank in New Jersey. When the embezzlement is detected, the government charges the teller in a two-count indictment alleging violations of 18 U.S.C.  656 (bank embezzlement) and 18 U.S.C.  1344 (bank fraud).

Under Sentencing Guideline  3D1.2(d), the bank embezzlement and bank fraud offenses are grouped together, and under  3D1.3 and 3Dl.4, the combined offense level is level 9. If the bank teller accepts responsibility for the offense, he is entitled to a two-level-downward bringing the total offense level to 7 which yields a sentencing range of 1 to 7 months with eligibility for a probationary sentence. If the government adds a count charging a violation of 18 U.S.C.  1957 because the teller transferred the $11,000 from his employer's bank to his personal account - arguably the knowing engagement in a "monetary transaction" in "property that is of a value greater than $10,000 and derived from specified unlawful activity." Under Guideline  2S1.2, the base offense level for money laundering is 17 which yields a sentencing range of 24-30 months.

4. Asset Forfeiture

The money laundering sentencing issues cannot be separated from the issue of asset forfeiture, that is, law enforcement agents always seek counts that give rise to forfeiture because their agencies directly benefit from the use of forfeited funds through participation in the assets forfeiture fund. Because most white collar crime statutes do not directly allow for forfeiture, prosecutors are "forced" to add money laundering counts to obtain forfeiture orders. For example, suppose a criminal organization engages in mail/wire fraud conspiracy and innocent parties are defrauded. If convicted, the perpetrators can be imprisoned and fined. Forfeiture of the proceeds and/or any property used to facilitate the fraud is not an available sanction. Consequently, victims may suffer for lack of capital to pay restitution. If, however, the same conduct is charged as the predicate criminal activity underlying a money laundering offense, criminal forfeiture of the proceeds and facilitating property is an available remedy upon conviction. Additionally, a civil in rem forfeiture action can be instituted against the violating property.

As a consequence of this difference, prosecutors intent on dismantling the criminal organization and divesting it of its ill gotten gain, will always charge the additional money laundering offenses. In many cases the supplemental charge will be appropriate, in others it will not. Title 18 should be amended to make the proceeds of any crime in Title 18 subject to civil and criminal forfeiture.

By providing for forfeiture of the proceeds of all federal Title 18 offenses, the amendment ensures that the government will have a means of depriving criminals of the fruits of their criminal acts without having to resort to the RICO and money laundering statutes in cases where it is unnecessary to do so.

I would like to offer three other suggestions in my remaining time:

1. Re-evaluate Charter Revocation Provisions of Title 12 U.S.C. 593. The charter revocation provisions enacted in part of the Annunzio-Wylie Anti-Money Laundering Act of 1992 were in direct response to the BCCI prosecution when it was discovered that bank regulators lacked the statutory tools to revoke BCCI's charter. While no charters have been revoked to my knowledge as a consequence of a money laundering conviction, the possibility exists. While such a remedy might be appropriate were another BCCI to come along, in the more classic case of corporate criminal liability derived from a finding of collective knowledge based on the acts of one or more individuals, the sanction is far too severe.

Although revoking a bank's charter is discretionary with the bank regulators, the possibility that such a penalty could be imposed makes it impossible for a bank, faced with any allegation of money laundering, to risk a trial on the merits. Consequently, banks are necessarily forced to forgo their right to trial because they simply cannot risk losing. This is so even if they believe that they possess an arguably meritorious defense. To put banks between such a rock and a hard place is unfair. It is time to re-evaluate the charter revocation provisions as currently in effect. The bank regulatory agencies should be tasked to study these provisions to determine whether their coercive consequences can be ameliorated.

2. Criminal Safe Harbor Protection. Related to the charter revocation issue is that of criminal safe harbors for financial institutions that report suspicious activity.

Under the terms of Annunzio-Wylie Anti-Money Laundering Law of 1992, U.S. financial institutions enjoy civil liability protection for reporting suspicious activity. However, unlike financial institutions in the UK and elsewhere, U.S. financial institutions are not protected from criminal liability. Thus, a financial institution that properly reports suspicious activity but continues to do business with the customer (pending notification from the government not to) could be charged with a money laundering crime.

I believe that the time has come for Congress to provide protection from criminal liability for designated classes of domestic banks that develop and implement reasonably designed anti-money laundering compliance programs and that promptly identify, investigate and report suspicious activity to and cooperate with appropriate law enforcement authorities.

3. Elimination of the CTR Filing Requirement for Specified Banks. While CTR reporting requirements for domestic financial institutions have long been the mainstay of the enforcement regime under the Bank Secrecy Act, the number of forms presently filed annually outstrips the government's ability to utilize them for investigative leads. Few, if any, cases are developed as a consequence of any intelligence based on an analysis of the CTR form. Rather, law enforcement agencies typically rely on the absence of a CTR, in a retrospective analysis after the case has been developed by other means, to prove a money laundering offense.

Given the enormous cost of complying with CTR reporting (not to mention storing and processing the forms), and in light of the fact that US law enforcement and bank regulatory agencies appear to be placing greater emphasis on Suspicious Activity Reporting, it may be time to eliminate the CTR filing requirements for large classes of domestic banks.

A commission or the Bank Secrecy Act Advisory Group should be charged with studying this issue. Simultaneously, FinCen should be tasked with reporting to this Committee on the number of cases developed proactively using its artificial intelligence capabilities based on CTR filings.

At the end of the process of study, it may be determined that CTR's are so much a part of bank compliance programs and the fabric of law enforcement that its elimination would prove more onerous than beneficial. However, such an inquiry should be undertaken.

This concludes my statement and I would be happy to answer any questions that the Committee has.