Money Laundering: U.S. Efforts to Combat Money Laundering Overseas
(Testimony, 02/28/96, GAO/T-GGD-96-84).
GAO discussed U.S. efforts to combat money laundering abroad. GAO noted
that: (1) U.S. bank regulators rely on financial institutions' reporting
currency transactions that exceed $10,000, involve known or suspected
money laundering, or are inconsistent with the account holder's stated
business; (2) European countries focus their anti-laundering efforts
less on routine currency transaction reports and more on reports of
suspicious activities; (3) host countries' anti-laundering and bank
privacy and protection laws, to which overseas branches of U.S. banks
must adhere, sometimes hinder U.S. bank regulators' reviews of overseas
branches, and examinations of overseas banks tend to be more narrowly
scoped; (4) while European law enforcement officials acknowledged the
important role of several U.S. law enforcement agencies in
anti-laundering activities, they also indicated that it was difficult to
determine which U.S. agency they should coordinate efforts with; and (5)
the United States works with other countries through multilateral and
bilateral treaties and arrangements to establish global anti-laundering
policies, enhance cooperation, and facilitate the exchange of
information on money-laundering investigations.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-GGD-96-84
TITLE: Money Laundering: U.S. Efforts to Combat Money Laundering
Overseas
DATE: 02/28/96
SUBJECT: Banking regulation
Money laundering
Financial institutions
Multinational corporations
Monetary policies
Bank examination
International cooperation
Reporting requirements
Law enforcement
Foreign governments
IDENTIFIER: Treasury Financial Crimes Enforcement Network
European Union
Hungary
Poland
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Cover
================================================================ COVER
Before the Committee on Banking and Financial Services, House of
Representatives
For Release on Delivery
Expected at
10:00 a.m., EST
Wednesday,
February 28, 1996
MONEY LAUNDERING - U.S. EFFORTS
TO COMBAT MONEY LAUNDERING
OVERSEAS
Statement of JayEtta Z. Hecker, Associate Director
International Relations and Trade Issues
GAO/T-GGD-96-84
GAO/GGD-96-84T
280131
Abbreviations
=============================================================== ABBREV
MONEY LAUNDERING: U.S. EFFORTS
TO COMBAT MONEY LAUNDERING
OVERSEAS
============================================================ Chapter 0
SUMMARY OF STATEMENT BY JAYETTA Z. HECKER, ASSOCIATE DIRECTOR,
INTERNATIONAL RELATIONS AND TRADE ISSUES
Money laundering is a global problem requiring collective
international efforts to combat. GAO's testimony describes U.S.
efforts to deter this activity, including: (1) U.S. and seven
European countries' regulation of financial institutions in regard to
money laundering, (2) U.S. bank regulators' oversight of
money-laundering controls at overseas branches of U.S. banks, (3)
U.S. law enforcement agencies' efforts to coordinate their overseas
anti-money-laundering activities with host countries' law enforcement
agencies, and (4) U.S. participation in international
anti-money-laundering arrangements.
U.S. banking regulators' previous domestic anti-money-laundering
efforts relied mainly on reporting regulations that require financial
institutions to report currency transactions above certain
thresholds. Current approaches include an increased reliance upon
reporting suspicious transactions. Also, most U.S. banks have
adopted "know your customer" policies to help identify suspicious
transactions, according to the American Bankers Association.
European countries GAO visited have relied on suspicious transaction
reports as well as on know your customer policies to combat money
laundering through financial institutions.
U.S. bank regulators may face impediments in overseeing
money-laundering controls at branches of U.S. banks abroad. These
branches are subject to host countries' anti-money-laundering laws
rather than U.S. anti-money-laundering laws. As a result, U.S.
regulators' examinations of these branches are more narrowly scoped
than comparable examinations of branches in the United States. In
addition, host country bank privacy and data protection laws may
serve to prevent U.S. regulators from performing on-site
examinations of U.S. branches in certain countries. However,
regulators can rely on other means to counteract or prevent
money-laundering activities at these overseas branches.
Several U.S. law enforcement agencies are responsible for
investigating crimes involving money laundering. Law enforcement
officials from two European countries expressed concern to GAO about
the difficulties of dealing with multiple U.S. agencies. U.S. law
enforcement agency officials, however, prefer not to designate a
single agency as a focal point on overseas money-laundering inquiries
because of jurisdictional problems. Instead, a number of U.S.
agencies have adopted a July 1994 Memorandum of Understanding that
aims to improve overseas coordination.
Also, the United States is working with other countries through
treaties and arrangements to establish global anti-money-laundering
policies, mainly through the Financial Action Task Force.
============================================================ Chapter 1
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss money laundering, a global
problem that needs to be fought collectively by the international
community. Increased attention to U.S. efforts to combat money
laundering abroad is important, particularly as U.S. efforts have
made it more difficult for individuals to launder money domestically.
My testimony today will discuss (1) U.S. and selected European
countries' approaches to combating money laundering through
regulation of financial institutions,\1 (2) U.S. bank regulators'
oversight of money-laundering controls at overseas branches of U.S.
banks, (3) U.S. law enforcement agencies' efforts to coordinate
their overseas anti-money-laundering activities with host countries'
law enforcement agencies, and (4) U.S. participation in
international arrangements to combat money laundering abroad. Our
work was designed to provide a framework for understanding U.S.
international efforts to combat money laundering rather than an
assessment of U.S. activities in this area.
My remarks today are based on the work that we performed for Ranking
Minority Member Henry B. Gonzalez over the past year and a half on
U.S. efforts to combat overseas money laundering. Most of our work
will be more comprehensively summarized in a report we plan to
release shortly. In doing our work, we obtained views and material
from (1) U.S. bank regulatory officials, including the Department of
the Treasury's Office of the Comptroller of the Currency (OCC) and
the Federal Reserve Board (FRB); (2) U.S. law enforcement officials
in the United States and abroad, including the Department of the
Treasury's Customs Service, and Internal Revenue Service (IRS), and
the Department of Justice's Criminal Division, Federal Bureau of
Investigation (FBI), and Drug Enforcement Administration (DEA); (3)
Treasury's Financial Crimes Enforcement Network (FinCEN) and the
Department of State; (4) law enforcement, bank regulatory, and
financial institution officials we visited in England, France, Italy,
Germany, Hungary, Poland, and Switzerland; (5) Interpol (the
international criminal police organization); and (6) the Secretary of
the multilateral Financial Action Task Force (FATF).
--------------------
\1 Treasury regulations implementing the Bank Secrecy Act (Public Law
91-508, Oct. 26, 1970) define the term "financial institution" to
include banks, federally regulated security brokers, currency
exchange houses, funds transmitters, check-cashing businesses, and
persons subject to supervision by state or federal bank supervisory
authorities.
BACKGROUND
---------------------------------------------------------- Chapter 1:1
Money laundering, which is the disguising or concealing of illicit
income in order to make it appear legitimate, is a problem of
international proportions. Federal law enforcement officials
estimate that between $100 billion and $300 billion in U.S. currency
is laundered each year.
Numerous U.S. agencies play a role in combating money laundering.
Law enforcement agencies within the Departments of Justice and the
Treasury have the greatest involvement in domestic and international
money-laundering investigations. FRB and OCC have the primary
responsibility for examining and supervising the overseas branches of
U.S. banks to ascertain the adequacy of the branches'
anti-money-laundering controls. FinCEN provides governmentwide
intelligence and analysis that federal, state, local, and foreign law
enforcement agencies can use to aid in the detection, investigation,
and prosecution of domestic and international money laundering and
other financial crimes. In addition, other U.S. agencies play a
role, including the State Department, which provides information on
international money laundering through its annual assessment of
narcotics and money-laundering problems worldwide.\2
--------------------
\2 See International Narcotics Control Strategy Report, U.S.
Department of State, Bureau for International Narcotics and Law
Enforcement Affairs (Washington, D.C.: Department of State, Apr.
1995).
U.S. AND EUROPEAN APPROACHES
TO COMBATING MONEY LAUNDERING
THROUGH FINANCIAL INSTITUTIONS
---------------------------------------------------------- Chapter 1:2
Until recently, U.S. banking regulators' anti-money-laundering
efforts relied heavily on regulations requiring financial
institutions to routinely report currency transactions that exceed
$10,000, primarily through filing currency transaction reports (CTR)
with the IRS. U.S. banking regulators have also relied on
approaches in which financial institutions report financial
transactions involving known or suspected money laundering.\3
According to a senior Treasury official, U.S. regulators'
anti-money-laundering efforts in coming years are expected to rely
more on the reporting of financial transactions involving known or
suspected money laundering. U.S. regulators will also be expected
to continue relying on CTRs, but to a lesser extent.
Most U.S. banks have adopted so-called "know your customer" policies
over the past few years to help them improve their identification of
financial transactions involving known or suspected money laundering,
according to the American Bankers Association. Under these know your
customer policies, which are currently voluntary but which the
Treasury plans to make mandatory in 1996, financial institutions are
to verify the business of a new account holder and report any
activity that is inconsistent with that type of business. According
to the American Bankers Association, these policies are among the
most effective means of combating money laundering, and the majority
of banks have already adopted such policies.
The seven European countries we visited have tended to model their
anti-money-laundering measures after a 1991 European Union (EU)\4
Directive\5 that established requirements for financial institutions
similar to those that financial institutions conducting business in
the United States must follow. However, instead of relying on the
routine reports of currency transactions that the United States has
traditionally emphasized, European countries have tended to rely more
on suspicious transaction reports and on know your customer policies.
These know your customer policies are somewhat more comprehensive
than comparable U.S. ones, according to European bank and regulatory
officials.
While Hungary and Poland have adopted anti-money-laundering measures
following the EU Directive, banking and government officials in these
two countries told us that the implementation and enforcement of
their anti-money-laundering measures have been hindered. They
attributed problems to such factors as resource shortages,
inexperience in detection and prevention, and in Poland, conflicts
between bank secrecy laws and recently adopted anti-money-laundering
statutes.
FinCEN and INTERPOL have recently initiated Project Eastwash, to
attempt to assess money laundering in 20 to 30 countries throughout
East and Central Europe and the former Soviet Union. According to
FinCEN officials, as of late 1995 on-site visits had been made to
five countries to assess the law enforcement, regulatory,
legislative, and financial industry environment in each nation.
Information from these visits is to be used for policy guidance and
resource planning purposes for both the countries assessed and U.S.
and international anti-money-laundering organizations, according to
these officials.
--------------------
\3 On February 5, 1996, the Treasury and banking regulators finalized
rules to require, in general, that banks and other depository
institutions file a single report, known as the suspicious activity
report, to FinCEN for suspicious transactions at or above $5,000.
\4 EU includes 15 member nations: Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, Sweden, and the United Kingdom (U.K.).
\5 Council Directive of 10 June 1991 on the Prevention of the Use of
the Financial System for the Purpose of Money Laundering
(91/308/EEC).
U.S. BANK REGULATORS'
OVERSIGHT OF MONEY-LAUNDERING
CONTROLS AT OVERSEAS BRANCHES
OF U.S. BANKS
---------------------------------------------------------- Chapter 1:3
U.S. banks had over 380 overseas branches located in 68 countries as
of August 1995. These branches, which are a direct extension of U.S.
banks, are subject to host countries' anti-money-laundering laws
rather than U.S. anti-money-laundering laws, according to OCC and
FRB officials. In some cases, U.S. banking regulators have not been
allowed to perform on-site reviews of these branches'
anti-money-laundering controls.
U.S. REVIEW OF SOME
OVERSEAS BANK BRANCHES FACES
OBSTACLES
-------------------------------------------------------- Chapter 1:3.1
According to U.S. banking regulators, bank privacy and data
protection laws in some countries serve to prevent U.S. regulators
from examining U.S. bank branches located within their borders. Of
the seven European countries we visited, U.S. regulators were not
allowed to enter Switzerland and France to examine branches of U.S.
banks because of these countries' strict bank secrecy and data
protection laws. U.S. regulators, however, have other means besides
on-site examinations for obtaining information on U.S. overseas
branches' anti-money-laundering controls, according to FRB and OCC
officials. For example, U.S. regulators can and do exchange
information--excluding information requested for law enforcement
purposes--with foreign banking regulators on their respective
examinations of one another's foreign-based branches. In addition,
FRB can deny a bank's application to open a branch in a country with
strict bank secrecy laws if it does not receive assurance that the
branch will have sufficient anti-money-laundering controls in place,
according to FRB officials.
EXAMINATIONS OF OVERSEAS
BRANCHES TEND TO BE NARROWLY
SCOPED
-------------------------------------------------------- Chapter 1:3.2
OCC and FRB officials said that in countries that allow them to
examine anti-money-laundering controls at overseas branches of U.S.
banks, such examinations are of a much narrower scope than those of
branches located in the United States. One reason is that host
country anti-money laundering measures may not be as stringent as
U.S. anti-money-laundering requirements and, thus, may not provide
the necessary information for U.S. examiners. OCC and FRB officials
also said that the expense of sending examiners overseas limits the
amount of time examiners can spend reviewing the
anti-money-laundering controls of the bank. However, according to
these officials less time is needed to conduct an
anti-money-laundering examination at some overseas branches because
of the small volume of currency transactions. FRB officials told us
that they have recently developed money-laundering examination
procedures to be used by its examiners to address the uniqueness of
overseas branches' operations and to fit within the short time frames
of these examinations. Although these procedures have been tested,
they have not been implemented and, thus, we have not had the chance
to review them.
U.S. LAW ENFORCEMENT AGENCIES'
OVERSEAS EFFORTS
---------------------------------------------------------- Chapter 1:4
Responsibilities for investigating both domestic and international
crimes involving money-laundering are assigned to numerous U.S. law
enforcement agencies, including DEA, FBI, IRS, and the Customs
Service. While European law enforcement officials acknowledged the
important role U.S. law enforcement agencies play in criminal
investigations involving money laundering, some commented about the
difficulties of dealing with multiple agencies.
Some British and Swiss law enforcement officials we spoke with said
that too many U.S. agencies are involved in money-laundering
inquiries. This overlap makes it difficult, in some money-laundering
inquiries, to determine which U.S. agency they should coordinate
with. These European officials indicated that designating a single
U.S. office to serve as a liaison on these money-laundering cases
would improve coordination.
According to U.S. law enforcement agency officials, however,
designating a single U.S. law enforcement agency as a focal point on
overseas money-laundering cases could pose a jurisdictional problem
because money-laundering cases are usually part of an overall
investigation of another crime, such as drug trafficking or financial
fraud. Nevertheless, U.S. law enforcement agencies have taken
recent steps to address overseas money-laundering coordination. In
particular, a number of U.S. agencies adopted a Memorandum of
Understanding (MOU) in July 1994 on how to assign responsibility for
international drug money-laundering investigations. Law enforcement
officials were optimistic that the MOU, which was signed by
representatives of the Secretary of the Treasury, the Attorney
General, and the Postmaster General, would improve overseas
anti-money-laundering coordination. Although law enforcement is
optimistic about improvements in coordination, we have not assessed
how well U.S. international investigations are being coordinated.
INTERNATIONAL ARRANGEMENTS TO
COMBAT OVERSEAS MONEY
LAUNDERING
---------------------------------------------------------- Chapter 1:5
The United States works with other countries through multilateral and
bilateral treaties and arrangements to establish global
anti-money-laundering policies, enhance cooperation, and facilitate
the exchange of information on money-laundering investigations.
MULTILATERAL EFFORTS TO
ESTABLISH GLOBAL
ANTI-MONEY-LAUNDERING
POLICIES
-------------------------------------------------------- Chapter 1:5.1
The United States' multilateral efforts to establish global
anti-money-laundering policies occur mainly through FATF,\6 an
organization established at the 1989 economic summit meeting in Paris
of major industrialized countries. The United States, through the
Treasury Under Secretary for Enforcement, assumed the presidency of
FATF in July 1995 for a one-year term. FATF has worked to persuade
both member and nonmember countries to institute effective
anti-money-laundering measures and controls. In 1990, FATF developed
40 recommendations that describe measures that countries should adopt
to control money laundering through financial institutions and
improve international cooperation in money-laundering investigations.
During 1995, FATF completed its first round of mutual evaluations of
its members' progress on implementing the 40 recommendations. FATF
found that most member countries have made satisfactory progress in
carrying out the recommendations, especially in the area of
establishing money-laundering controls at financial institutions.
FATF has also continued to identify global money-laundering trends
and techniques, including conducting surveys of Russia's organized
crime and Central and East European countries' anti-money-laundering
efforts. In addition, FATF has expanded its outreach efforts by
cooperating with other international organizations, such as the
International Monetary Fund, and by attempting to involve nonmember
countries in Asia, South America, Russia, and other parts of the
world.
A more recent multilateral effort involved the United States and
other countries in the Western Hemisphere. On December 9-11, 1994,
the 34 democratically elected leaders of the Western Hemisphere met
at the Summit of the Americas in Miami, Florida. At the summit, the
leaders signed a Declaration of Principles that included a commitment
to fight drug trafficking and money laundering. The summit documents
also included a detailed plan of action to which the leaders affirmed
their commitment. One action item called for a working-level
conference on money laundering, to be followed by a ministerial
conference, to study and agree on a coordinated hemispheric response
to combat money laundering.
The ministerial conference, held on December 1-2, 1995, at Buenos
Aires, Argentina, represented the beginning of a series of actions
each country committed to undertake in the legal, regulatory, and law
enforcement areas. U.S. Department of Justice officials told us
that these actions are designed to establish an effective
anti-money-laundering program to combat money laundering on a
hemispheric basis. Further, the officials told us that the
conference created an awareness that money laundering is not only a
law enforcement issue, but also a financial and economic issue,
requiring a coordinated interagency approach.
As part of another multilateral effort, FinCEN is working with other
countries to develop and implement Financial Information Units (FIU)
modeled, in large part, on FinCEN operations, according to FinCEN
officials. FinCEN has also met with officials from other countries'
FIUs to discuss issues common to FIUs worldwide. The most recent
meeting was held in Paris in November 1995, during which
issue-specific working groups were created to address common concerns
such as use of technology and legal matters on exchanging
intelligence information.
--------------------
\6 FATF consists of the following members: Australia, Austria,
Belgium, Canada, Denmark, the European Commission (representing the
EU), Finland, France, Germany, Greece, the Gulf Cooperation Council,
Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, Turkey, the U.K., and the United States.
BILATERAL AGREEMENTS TO
IMPROVE COOPERATION IN
INTERNATIONAL
MONEY-LAUNDERING CASES
-------------------------------------------------------- Chapter 1:5.2
U.S. Treasury officials said that in recent years, the United States
has relied on bilateral agreements to improve cooperation in
international investigations, prosecutions, and forfeiture actions
involving money laundering. These bilateral agreements, consisting
of mutual legal assistance treaties, financial information exchange
agreements, and customs mutual assistance agreements with individual
countries, also help to facilitate information exchanges on criminal
investigations that may involve money laundering. However, the State
Department's 1995 annual report on global narcotics crime concluded
that many countries still refuse to share with other governments
information about financial transactions that could facilitate global
money-laundering investigations.
-------------------------------------------------------- Chapter 1:5.3
Mr. Chairman, this concludes my prepared statement. I would be
pleased to try to answer any questions you or the Committee may have.