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Mr. PASSARELLI. Yes, sir.
Chairman ST GERMAIN. It stated that your examiners were given an option as to whether or not they would perform a Bank Secrecy Act examination to be done at their discretion.
Was that an accurate report by GAO?
Chairman ST GERMAIN. When did this policy change? With the
Chairman ST GERMAIN. In August 1985, I would think. If it was August of 1986, you'd have to have a crystal ball.
Mr. PASSARELLI. August 1985 and we actually strengthened our procedures in regard to the Bank Secrecy Act regulations.
Chairman ST GERMAIN. So that the Federal Home Loan Bank Board was somewhat akin to many of the banks that have since been fined. All of those banks that were fined had a cavalier attitude. Well, that's not really all that important.
Mr. PASSARELLI. Not necessarily, sir. I think what we've done is actually targeted the examination. I think the examiners, what they did, they limited the scope of their examinations and as a result of this limited scope, they didn't actually get into the details that were more
Chairman ST GERMAIN. Well, the fact of the matter is they didn't do it. You know, you're giving some doubletalk here, but what it boils down to is it's fine to hear all of this and we're happy about it. However, for a long period of time, there was obviously an attitude that prevailed not only within financial institutions, but among some of the regulators.
Mr. PASSARELLI. Yes, sir. In fact, with the increased staffing that we're getting, we're going to expand our procedures in regard to this aspect of our examination, yes, sir.
Chairman ST GERMAIN. The fact of the matter is that up until 1985, when the lid came off, the Federal Home Loan Bank Board and its examiners weren't paying much attention to the Bank Secrecy Act and its reporting requirements.
Is that a fair statement?
Mr. PASSARELLI. The subcommittee has asked our views on giving the regulators authority to impose civil money penalties on financial institutions for failure to report under the Bank Secreacy Act. It also asked to what extent supervisory powers might be extended to uncover criminal activity such as tax evasion, drug trafficking, or money laundering.
As I explained in my full written statement, it is our view that where other authorities—Treasury, Justice, or IRS—already have primary responsibility for imposing penalties under the Bank Se crecy Act, it does not appear necessary or desirable to duplicate this authority. However, if violation of the Bank Secrecy Act were added to the grounds for removal of institution officials and employees, we believe that a significant deterrent effect would result.
The subcommittee also asked our view on the right to Financial Privacy Act. The act permits our agency to transfer information from the accounts of protected customers to the Justice Department or other appropriate Federal law enforcement authority without prior notice to or approval from the customer.
Notice to the customer is required, however, within 10 days after the transfer. This has two adverse effects. First, a customer who is involved in a suspected crime may destroy evidence or disappear in response to the notice. And second, an innocent customer, such as a person who does not know that his savings account had been manipulated, may be shocked by the notice.
The administrations bill, H.R. 2785, would amend the right to financial privacy act to allow the flow of information required to combat crime without having to notify customers.
Moreover, this bill contains the provisions which we believe are necessary to make money laundering a crime if done with intent, knowingly or with reckless disregard for the origin of the unlawful funds.
We support this bill.
We'd also like to make several recommendations for amendments to the Change in Savings and Loan Control Act.
Specifically, we encourage the subcommittee to consider:
First, extending from 60 to 90 days the period for objection to an acquisition in order to give the Board sufficient time to review and process control act notices.
Second, clarifying the Board's authority to define by regulation the term "control," with respect to the power to direct the management or policies of insured institutions.
And third, clarifying the Board's authority to define further by regulation the terms "competency," "experience," and "integrity.'
The Board also suggests the elimination of a disparity between the Holding Company Act and the Control Act. The Holding Company Act provides for a criminal penalty for willful violations. It also provides for civil money penalties for violation, whether or not they are.
In contrast, the Control Act only provides for civil money penalties and then only for willful violations. In order to enhance the Board's enforcement of the Control Act and the Board's regulations, we recommend that the subcommittee consider amendments to the Control Act to clarify the Board's authority to define by regulation the term “willful.”
The Board also recommends amendments to the Control Act that would clarify that a private right of action exists under that act; Clarify that the Board may seek equitable relief for both statutory and regulatory violations; and describe procedures for the Board to follow in assessing civil money penalties.
Thank you for the opportunity to testify before you. My colleagues and I will be pleased to respond to any questions you may have.
[The prepared statement of Mr. Passarelli on behalf of the Federal Home Loan Bank Board and a report with exhibits dated April 17, 1986 can be found in the appendix.]
Chairman ST GERMAIN. Mr. Passarelli, yesterday we had a very forthcoming witness who had been a money launderer, a smurf. He cooperated with the Government. As a result of his cooperation, many convictions were obtained.
He was telling us-is AmeriFirst not a savings and loan?
Chairman ST GERMAIN. Now, are you aware of the testimony yesterday, he thought AmeriFirst was a great institution for smurfers because you can buy a money order for up to $9,000 or $10,000 at that particular institution, among others.
Did you hear about that?
Chairman ST GERMAIN. Do you know, have examinations been conducted at AmeriFirst to determine their compliance with the Bank Secrecy Act and the CTR reporting?
Mr. PASSARELLI. I would assume that
Chairman ST GERMAIN. Well, can you give me better than an assumption?
Mr. PASSARELLI. Yes, sir.
Mr. PASSARELLI. Well, what I can do, I can get you the date of the last examination. I think I can give you that for the record, sir.
Chairman ST GERMAIN. Let me ask you this. Can you give us a rough idea of the average denomination of money orders in S&Ls?
Mr. PASSARELLI. I really couldn't say. I really wouldn't know what they would be?
Chairman ST GERMAIN. They're usually not too high; are they? Mr. PASSARELLI. That's correct, no.
Chairman ST GERMAIN. What would you say, ordinarily, a ballpark number.
Mr. PASSARELLI. I-
Chairman ST GERMAIN. Anybody? You have a few staffers here with you. Does anybody have an opinion?
Mr. PASSARELLI. I really couldn't say.
VOICE. Mr. Chairman, we don't have that information readily at hand. We'd be glad to provide it for the record.
Chairman ST GERMAIN. I would like to know what the average is for institutions in various sections of the country and whether or not there has been an increase in this average over the past 5 years.
Chairman ST GERMAIN. Dudine. All right. Chief, Special Activities Section, Federal Deposit Insurance Corporation.
We'll place your entire statement in the record and you may pro ceed.
STATEMENT OF JAMES R. DUDINE, CHIEF, SPECIAL ACTIVITIES SECTION FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. DUDINE. Mr. Chairman, I am pleased to be here this morning on behalf of the Federal Deposit Insurance Corporation to report on the FDIC's enforcement of the Bank Secrecy Act and to discuss the steps we have taken and our thoughts on what still could be done to address the problems the criminal element poses to this country's financial institutions.
We have provided the committee with a comprehensive report on our efforts to improve compliance with the Bank Secrecy Act. That report reveals we are finding more violations in the banks we examine. The trend in violations is up partly because of our strategy to focus examination resources on problem banks and banks targeted specifically for having potential Bank Secrecy Act problems. Such banks would be expected to exhibit a higher incidence of violations than a cross-section of the banking population.
The great majority of the violations that we are finding are caused by inadvertent failures to follow bank procedures and represent incomplete or late CTR filings rather than actual failures to file CTR's.
Nevertheless, we're not satisfied with the level of compliance by the banks we supervise and we are continuing to improve our enforcement efforts.
Since this committee held hearings last April, the following steps have been taken.
First, the interagency examination procedures have been revised and are now awaiting Treasury's approval. They have been improved in the areas of international transactions and wire transfers and now cover peripheral bank services such as trust departments and securities dealer departments. Examiners will be required to follow a stricter regimen, look closely at exemptions granted to customers, and to document their activities at various points during the examination.
We have completely revised our educational program for examiners who conduct Bank Secrecy Act compliance examinations. The new program supplements our fundamental examiner training series and on-the-job training. It is delivered at regular intervals in Washington, and regional presentations have been added to reach a larger number of examiners. The program includes information on the latest money laundering methods and instruction on recognizing possible money laundering schemes.
We are working more closely with Treasury and IRS to improve the flow of information and to assist each other in carrying out our responsibilities under the Bank Secrecy Act.
The working group concept has proved to be successful in improving our response to bank fraud and insider crimes. We hope to make similar progress with this concept under the Bank Secrecy Act.
We are making more and better use of external targeting of institutions for Bank Secrecy Act reviews. The Customs Service's analysis of currency flows and cash shipments of individual banks and bank-to-peer group relationships provides regulators with an intelligent way to select banks for examination. We strongly support the work being done in this area.
Because the safety and soundness of insured banks is of utmost importance to the FDIC, the resources we can allocate to Bank Secrecy Act compliance are limited. Thus, the method of selecting banks to be examined for Bank Secrecy Act regulations is very critical to our overall enforcement effort.
In addition to targeting banks based on information from the Treasury Department, IRS, and the Customs Service, the idea of examining a random sample of banks each year is being considered.
FDIC usually conducts Bank Secrecy Act examinations in conjunction with its review for consumer compliance. We have recently begun reviewing Bank Secrecy Act regulations at safety and soundness examinations or conducting an independent examination as circumstances warrant. This approach adds flexibility to our program and permits us to respond quickly to potential problems.
As we have stated in the past, bank supervision and examination procedures cannot assure day-to-day compliance with currency re porting requirements. Financial institutions must install internal controls
Chairman ST GERMAIN. Mr. Dudine, I've got to say I'm happy in one way and unhappy in another. But I'm happy that you no longer tie this exam in with the consumer compliance exam be cause I don't think you have many of those.
The happy part is that you no longer tie them together, but you do tie them together with the regular exam. The unhappy part is the paucity of consumer compliance examinations.
Mr. DUDINE. Yes, sir. I'm sure you recognize that our resources are very strained these days.
Chairman ST GERMAIN. Yes. The FDIC Chairmen are always calling for expanded powers for financial institutions so they can go into other areas that really are not closely related to banking, and that would make it even more difficult; wouldn't it? Yes. That question has its own answer because if you are over-burdened already, it doesn't make much sense to take on a bigger burden.
That's a rhetorical question. You may proceed.
Mr. DUDINE. Thank you. During the past 15 months, we have given a lot of attention to improving our efforts to deal with the criminal conduct of bank insiders. We are very encouraged by the progress being made by the Bank Fraud Working Group. The group was formed in conjunction with the interagency agreement signed in April 1985 to improve cooperation between bank regulators and law enforcement agencies in responding to the criminal threat to insured financial institutions.
Similar progress in dealing with the criminal aspects of money laundering is possible under the current legal environment. However, the Government's response to the problem would be strengthened by making money laundering a Federal crime.
H.R. 2785 and other bills address this fundamental weakness and would permit prosecutors to attack organized criminals directly by making money laundering the crime rather than having to build their cases on failures to file currency transaction reports.
We support a Federal crime of money laundering and generally agree with the higher penalties and stiffer sentences contained in H.R. 2785. That bill also contains much needed amendments to the Right to Financial Privacy Act.
There is no question that the Right to Financial Privacy Act serves as a legal and psychological barrier to the flow of information from financial institutions and their regulators to Federal law enforcement agencies. Unimpeded information flows are essential to the successful investigation and prosecution of financial crimi