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primarily to accommodate doctors, physicians, people in the medical field. We think of all of it as fraud.
What USTPS would provide to an interested customer or client was the opportunity to take false contribution deductions on their tax return or false business expenses. If we could imagine for a moment, Mr. Chairman, that you were a physician, through USTPS you could claim $30,000 or $40,000 medical malpractice insurance premium when in fact you had no medical malpractice insurance from this particular firm. But the USTPS organization in the Caymans would provide to you as a doctor a medical malpractice insurance policy, it would provide you a premium notice, and of course, you would pay the amount on that premium notice.
The fraud here was that 90 percent of your premium payment, the $30,000 that was paid to this alleged insurance company, would not be deposited to a legitimate insurance company at all, but 90 percent of that $30,000 payment would be siphoned off and be deposited on your behalf into a corporate account in the Caymans. Again, the money is offshore. Once the money is offshore in that corporate account, which you control or have a substantial interest in, you then can direct that money to be returned to you by a variety of different means, either as a loan from the corporation, or you might perhaps choose to have your children receive a scholarship from this corporation.
Chairman ST GERMAIN. Let me ask. Did you say 90 percent of the money?
Mr. WASSENAAR. Ninety percent.
Mr. WASSENAAR. Ten percent went to the promoters or the sales people that were involved in this particular scheme.
Chairman ST GERMAIN. So, as a result thereof, the doctor has not bought any medical malpractice insurance.
Mr. WASSENAAR. Absolutely. But if the doctor is audited and the auditor is zeroing in on the business deductions and asks the doctor to provide substantiation relative to this deduction, the doctor can show to the auditor an alleged insurance policy, an alleged premium notice, a real check made out to an alleged insurance company, fairly persuading evidence that the deduction on the tax return is indeed legitimate.
Chairman ST GERMAIN. But are you telling me that that doctor is taking a chance to launder, so to speak, this money and to go without medical malpractice insurance?
Mr. WASSENAAR. Well, in some cases they were taking that risk. In other cases, they had two medical malpractice insurance companies that they were dealing with.
In addition to the medical malpractice scheme, if one of these doctors wanted to take a sizable charitable contribution, they could make out a check for $20,000 or $30,000 to this alleged church, and again, that check would go over to the Caymans, again 90 percent of the alleged contribution would be siphoned off and put into the doctor's bank account or into a corporate account under the doctor's control, and again, the promoters and the salespeople would keep the remaining 10 percent.
Chairman ST GERMAIN. How does the doctor then prove that he donated that money to a church?
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Mr. WASSENAAR. Because he has a canceled check made out to the Church of Human Morality.
Chairman ST GERMAIN. The Church of Human Morality was part of the U.S. Tax Planning Service?
Mr. WASSENAAR. Right. That was all part of the scheme. They had a variety of different schemes like that that would enable you, regardless of what kind of business you were in, to take false or fictitious business expenses.
Chairman ST GERMAIN. The check was made out to the Church of Human Morality, not to Tax Planning Services.
Mr. WASSENAAR. That is right. The check was made out to the Church of Human Morality. It was then negotiated by the individuals behind the USTPS shelter promotion. It was never deposited or given to the church.
Chairman ST GERMAIN. Did any such church exist?
Chairman ST GERMAIN. What did you do, check with the church and see if they received the money?
Mr. WASSENAAR. I believe that was an offshore church.
Mr. WASSENAAR. We are not very welcome in the Grand Caymans. In fact, I think we are forbidden to travel there on official purpose.
Chairman ST GERMAIN. OK. But if Doctor So and So or John Doe here in the United States is contributing to the Church of Human Morality, that does raise a little suspicion in your mind; doesn't it?
Mr. WASSENAAR. Yes. Chairman St GERMAIN. That is not too well conceived. Mr. WASSENAAR. We certainly might be very suspicious to see a $30,000 or $20,000 contribution to the Church of Human Morality, but unless you can prove that it didn't exist, that that contribution was not made, I think for all practical purposes it would be an allowable deduction so long as indeed we could not disprove it being a church.
Chairman ST GERMAIN. If there are any doctors in the audience, you can contribute to the Church of Human Morality.
Mr. WASSENAAR. You get into some real constitutional question when you attempt to determine what is and what is not a church.
Now, the magnitude of this particular scheme, USTPS, I think can be demonstrated by the fact that this scheme was being marketed in some 12 cities throughout the United States, and upon obtaining probable cause, which enabled us to execute search warrants in most of these cities, and having executed those search warrants, we were able to determine that there were roughly 3,000 U.S. citizens investing in this USTPS scheme, and at least half of that number involved physicians or doctors throughout this country.
Mr. WYLIE. Nobody involved in this scheme was required to file a CTR report, were they?
Mr. WASSENAAR. No.
Mr. WASSENAAR. I'm just making a connection that in money laundering cases in almost all cases, it involves the use of a foreign bank. The point I'm trying to make is that the use of a foreign bank is not limited to just money laundering cases. These foreign banks are also used to commit other types of fiscal fraud upon the United States, and I use this as an example in that respect.
Mr. WYLIE. You think there are some banks which are organized for the specific purpose of money laundering; I think you said that earlier?
Mr. WASSENAAR. Oh, I think there is absolutely no doubt about that. Currently we have-
Mr. WYLIE. Not in the United States, though.
Mr. WASSENAAR. No; but of increasing and current concern to us is the fact that we have a number of investigations in process right now, and I'm not able to go into great detail, centering around money launderers or tax shelter promoters who have acquired or are acquiring, either directly or are in control of financial institutions which we know have been used or will be used to perpetrate their fraud and to commit their crimes.
I think in my prepared statement I also give an example of a case that was worked by the Drug Enforcement Administration, worked successfully in terms of prosecuting this narcotics trafficker who indeed owned a controlling interest in the Sunshine Bank in Florida.
Mr. WYLIE. I want to ask a couple more questions, but I guess you have some more of your prepared statement you want to finish.
Mr. WASSENAAR. I'm ready for questions now.
[The prepared statement of Richard Wassenaar can be found in the appendix.]
Mr. WYLIE. You have been involved in a lot of money laundering cases?
Mr. WASSENAAR. Yes; some 800 cases since 1981.
Mr. WYLIE. 800 cases. Money launderers are getting around the reporting requirement through using Smurfs who purchase less than $10,000 cashier checks. Do you think that the limit should be reduced, or would that help?
Mr. WASSENAAR. Well, that's a possibility. I would rather see what I think can be accommodated in Mr. Pickle's bill, that first of all, there be an attempt provision within the law and that it be a specific crime to structure your transactions in such a manner to intentionally avoid the Bank Secrecy Act. I think that would help in most of the Smurfing operations.
Mr. WYLIE. That would help. OK.
Mr. WASSENAAR. It would certainly limit the Smurfs to $10,000 a day, or less than $10,000 a day.
Mr. WYLIE. Do you think money laundering should be made a criminal activity?
Mr. WASSENAAR. I think it should, absolutely. You know, an analogy might be that if there were no Federal crime for armed robbery of a bank, then you force the investigators and the prosecutors to use perhaps a violation of failure to register a weapon, when the real crime is robbing the bank.
I think the same thing is true here. We have been I think, quite successful in convicting money launderers, but not on the crime of money laundering itself, but on violations of the Bank Secrecy Act.
Mr. WYLIE. Under the law, we require financial institutions, brokers, insurance companies, currency exchangers—and one of your cases involved a currency exchanger-pawnbrokers and even casinos to file currency transaction reports. Are we missing anyone, based on your experience as an investigator in money laundering cases?
Mr. WASSENAAR. Whoever we are missing under the Bank Secrecy Act, we are picking up under the Internal Revenue Code because Congress passed a law about a year ago wherein any business that is not subject to reporting under the Bank Secrecy Act must file a similar form with the Internal Revenue Service under the Internal Revenue Code, a form 8300, which calls for essentially the same type of information. That would cover automobile dealers, any type of business where a transaction in excess of $10,000 is involved.
Mr. WYLIE. Thank you.
Chairman St ĠERMAIN. Mr. Torres, do you have questions you would like to ask?
Mr. TORRES. No, Mr. Chairman, only simply to thank the witness for illuminating evidence and testimony. Thank you, sir.
Chairman ST GERMAIN. To put it another way, we thank you for the Sunshine State Bank. That was in Miami?
Mr. WASSENAAR. It was in Florida.
BANK ADDRESS The Sunshine State Bank is located at 5975 Sunset Drive in South Miami, Florida.
Chairman ST GERMAIN. Your statement says Miami. Which was the one in Largo or Clearwater about a year and a half to two years ago? You don't remember that one?
Mr. WASSENAAR. That perhaps was a Great America Bank.
Chairman ST GERMAIN. The fellow who controlled that bank had a rather salubrious past; didn't he?
Mr. WASSENAAR. Yes.
Chairman ST GERMAIN. You wonder how he ever was allowed to come into control of that bank. That is not for you to answer. That is for us to query of the regulators. I will ask my staff to obtain the exact name of the bank so we can ask the proper agency tomorrow to explain that one for us.
Mr. WASSENAAR. Thank you for getting me off the hook.
Chairman ST GERMAIN. Mr. Wassenaar, we want to thank you for your help this morning. We have a number of technical questions we will submit to you in writing. I think we have kept you here long enough. We want, in view of your caseload, you to get back to work, and continue.
Mr. WASSENAAR. Thank you. We indeed appreciate your interest.
Chairman ST GERMAIN. Thank you. The subcommittee stands adjourned until 9:30 a.m. tomorrow morning. We do have some documents that will be submitted into the record at this point.
[The documents referred to can be found in the appendix.)
[Whereupon, at 1:30 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.)
BEFORE THE HOUSE SUBCOMMITTEE ON
WEDNESDAY, APRIL 16, 1986
MR. CHAIRMAN, IT IS AN HONOR TO APPEAR BEFORE YOU TODAY TO EXPLAIN MY NEW BILL TO COMBAT MONEY LAUNDERING.
THE OVERSIGHT SUBCOMMITTEE OF THE COMMITTEE ON WAYS AND MEANS HAS INVESTIGATED PROBLEMS ASSOCIATED WITH MONEY LAUNDERING. THE SUBCOMMITTEE HELD A HEARING, LAST YEAR, FOCUSING SPECIFICALLY ON THE RESPONSIBILITIES OF THE INTERNAL REVENUE SERVICE IN THIS AREA. IN ADDITION, SEVERAL MEMBERS OF THE SUBCOMMITTEE TOURED THE IRS TRAINING FACILITIES AT THE FEDERAL LAW ENFORCEMENT TRAINING CENTER IN GLYNCO, GEORGIA TO LEARN MORE ABOUT THE IRS ENFORCEMENT IN THIS AREA.
OUR SUBCOMMITTEE'S INVESTIGATION RESULTED IN TWO IMPORTANT FINDINGS. WE FOUND THAT BECAUSE OF LOOPHOLES IN THE CURRENT LAW, THE GOVERNMENT HAS BEEN UNABLE TO SUCCESSFULLY PROSECUTE THE PERSON WHO PUTS TOGETHER SCHEMES THAT ALLOW ILLEGAL SOURCE CASH TO BE "LAUNDERED". WE ALSO FOUND THAT PROBLEMS EXISTED IN THE ABILITY OF IRS TO SEIZE ILLEGAL SOURCE INCOME WHEN A CRIMINAL, SUCH AS THE DRUG DEALER, LAUNDERS HIS ILLEGAL SOURCE INCOME THROUGH DOMESTIC FINANCIAL INSTITUTIONS.
WE AS A NATION, ARE LOSING OUR BATTLE AGAINST THE FLOW OF ILLEGAL DRUGS. MONEY LAUNDERING IS AN INTRICATE PART OF THE DRUG TRAFFICKING PROCESS. THEREFORE, ANY EFFORTS TO TRY TO STOP THE DRUG TRAFFIC MUST STOP THE MONEY LAUNDERING ASSOCIATED WITH IT. ALSO, I SHOULD POINT OUT THAT BUSINESSES AND INDIVIDUALS IN THE U.S. ARE LAUNDERING INCOME, FROM BOTH ILLEGAL AND LEGAL ACTIVITIES. THIS PROBLEM IS A GROWING ONE. AS A RESULT, I AM CONCERNED ABOUT THE IMPACT OF MONEY LAUNDERING OPERATIONS ON THE COLLECTION OF 0.9. FEDERAL INCOME TAXES.
AS MEMBERS OF THIS SUBCOMMITTEE ARE AWARE, THE ENFORCEMENT OF THE BANK SECRECY ACT REPORTING REQUIREMENTS IS THE RESPONSIBILITY OF THE SECRETARY OF THE TREASURY, WHO HAS DELEGATED HIS AUTHORITY TO THE IRS. UNDER CURRENT LAW, DOMESTIC FINANCIAL INSTITUTIONS MUST REPORT CASH TRANSACTIONS OF $10,000 OR MORE TO THE INTERNAL REVENUE SERVICE. IN A TYPICAL SCHEME, MONEY LAUNDERERS OFTEN BREAK UP LARGE SUMS OF MONEY, INTO TRANSACTIONS OF LESS THAN $10,000, TO AVOID HAVING THE FINANCIAL INSTITUTIONS REPORT THE CASH.
I ASKED THE ADMINISTRATION TO WORK WITH ME IN DRAFTING LEGISLATION THAT WILL CLOSE LOOPHOLES IN THE LAW THAT HAVE NOT ALLOWED THE GOVERNMENT TO SUCCESSFULLY CONVICT MONEY