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IN ADDITION, A TAX HAVEN OFFSHORE BANKING PROJECT HAS BEEN

ESTABLISHED JOINTLY BY EXAMINATION AND CRIMINAL INVESTIGATION

TO CONSOLIDATE THE VARIOUS TYPES OF THIRD PARTY INFORMATION

WHICH IS ASSOCIATED WITH TAX HAVEN ACTIVITY.

DATA FROM THIS PROJECT WILL BE USED TO SELECT SOME CASES

FOR A CONTROLLED STUDY WHICH WILL EVALUATE AND COMBINE

INFORMATION FROM THIRD PARTY SOURCES, INCLUDING CTRS, TO TEST THE EFFECTIVENESS OF THIS TECHNIQUE IN IDENTIFYING NON

COMPLIANCE. OTHER CASES WILL BE REFERRED TO THE FIELD AS A

RESULT OF CIVIL LEADS PROVIDED TO EXAMINATION, BY CRIMINAL INVESTIGATION, FROM THIS PROJECT. THESE LEADS WILL BE TRACKED

AND RESULTS ANALYZED TO DETECT COMMON PATTERNS OF MONEY

LAUNDERING TECHNIQUES.

THESE EFFORTS ARE STILL ONGOING, AND IT IS NOT CERTAIN HOW

USEFUL THEY WE WILL BE.

CONCLUSION

FINALLY, I WOULD LIKE TO POINT OUT AN INCONSISTENCY BETWEEN

THE SUMMONS AUTHORITY PRESENTLY AVAILABLE UNDER TITLE 26 AND

TITLE 31 WHICH DOES HAVE AN IMPACT ON OUR ABILITY TO ENFORCE

TITLE 31. PRESENTLY, WE CANNOT HONOR A FINANCIAL INSTITUTION'S REQUEST FOR A SUMMONS IN CONNECTION WITH A COMPLIANCE CHECK,

NOR CAN WE SUMMONS OR SUBPOENA RECORDS FROM AN INSTITUTION

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THAT REFUSES TO COOPERATE.

COOPERATING FINANCIAL INSTITUTIONS

REQUEST A SUMMONS AS A MEANS OF PROTECTING THEMSELVES FROM
THIS HAPPENS FREQUENTLY IN TITLE 26

POSSIBLE SUIT BY CLIENTS.

EXAMINATIONS AND WE ISSUE SUCH A SUMMONS TO THE REQUESTING

BANK.

WITHOUT SUCH AUTHORITY UNDER TITLE 31, INSTITUTIONS WHO REALLY WANT TO COOPERATE WITH THE IRS REFUSE TO DO SO FOR THEIR

OWN LEGAL PROTECTION.

FURTHERMORE, IF WE ARE CONDUCTING A

TITLE 31 EXAMINATION AND A FINANCIAL INSTITUTION REFUSES TO

PROVIDE US WITH APPROPRIATE BOOKS AND RECORDS TO DETERMINE IF

THEY HAVE COMPLIED WITH THE ACT, WE HAVE TO STOP OUR

EXAMINATION AND FORWARD AN INCOMPLETE CASE TO TREASURY FOR

APPROPRIATE ACTION. THIS IS WASTEFUL OF OUR RESOURCES AND IS

NOT ADMINISTRATIVELY EFFECTIVE.

IN SUMMARY, I HAVE OUTLINED THE MISSION OF EXAMINATION AND

GIVEN A GENERAL IDEA AS TO THE WIDE RANGE OF ACTIVITIES IN

WHICH EXAMINATION IS INVOLVED. I HAVE ALSO TRIED TO PROVIDE A

PERSPECTIVE OF EXAMINATION'S ROLE RELATIVE TO THE FRAMEWORK OF

THE MULTI-AGENCY RESPONSIBILITIES FOR THIS ACT. I HOPE I HAVE

ALSO EMPHASIZED THE IMPORTANCE OF OUR EFFORTS TO DEVELOP A

SUPPLEMENTAL SELECTION SYSTEM USING CURRENCY REPORTS REQUIRED
BY THE BANK SECRECY ACT AS AN INTEGRAL PART OF OUR EFFORTS TO

IMPROVE VOLUNTARY COMPLIANCE.

AGAIN, I WOULD LIKE TO THANK THIS COMMITTEE FOR ALLOWING

ME TO PROVIDE THIS INFORMATION.

STATEMENT OF

FRANCIS M. PASSARELLI, ACTING DIRECTOR

OFFICE OF EXAMINATIONS AND SUPERVISION

FEDERAL HOME LOAN BANK BOARD

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

SUPERVISION, REGULATION AND INSURANCE

OF THE

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

U. S. HOUSE OF REPRESENTATIVES

APRIL 17, 1986

Mr. Chairman and distinguished members of the Subcommittee, I am Francis M. Passarelli, Acting Director of the Office of Examinations and Supervision of the Federal Home Loan Bank Board.

Accompanying me today is Harry W. Quillian, Acting General Counsel of the Board, and Rosemary Stewart, Director of the Board's Office of Enforcement.

We are here today to testify on the Board's efforts to carry out its responsibilities under the Bank Secrecy Act. The Board recognizes the importance of vigorous enforcement of the Bank Secrecy Act and has been reviewing its activities in this area to explore steps to strengthen implementation of the Act.

In my testimony, I will talk briefly about the Board and the Office of Examinations and Supervision. Then I will provide information about our examination process in general, our Bank Secrecy Act procedures, the way the Board has carried out its responsibilities under the Bank Secrecy Act, and our plans for continuing to strengthen our Bank Secrecy Act activities. I will then address issues the Subcommittee raised with regard to other legislation and proposed legislation that have implications for the effort to combat money laundering.

The Federal Home Loan Bank Board

The Federal Home Loan Bank Board is an independent agency of the Federal government. It is the regulatory agency for all federally chartered thrift institutions and is responsible for the enforcement of the Federal Home Loan Bank Act of 1932, the Home Owners' Loan Act of 1933, and the National Housing Act of 1934. It shares with the states regulatory authority over state-chartered thrifts whose deposits are insured by the Federal Savings and Loan Insurance Corporation (FSLIC).

Examinations and Supervision

The Office of Examinations and Supervision (OES) provides direction and oversight for carrying out the Board's responsibility for examination and supervision of all institutions chartered by the Federal Home Loan Bank Board or insured by the Federal Savings and Loan Insurance Corporation. Under the guidance of OES, Bank System examiners determine the financial safety and soundness of insured institutions, check for regulatory compliance, and identify institutions that present an increased risk of loss to the FSLIC.

Examinations are the heart of the process by which the Board carries out its responsibilities to regulate the thrift industry. An examination is designed primarily to evaluate the safety and soundness of a thrift institution. The examination reviews not only financial matters, but also management capabilities and performance.

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The supervisory process is based on examination findings. When an examination reveals violations of statutes, regulations, or agreements between the institution and the regulator, the supervisory process is implemented to correct the problem through cooperative efforts with the institution or, in the absence of cooperation, through formal enforcement proceedings.

The process of examining and supervising thrift institutions is exacting, time consuming, and difficult, because of the increasingly complex array of assets and liabilities held by thrift institutions. For example, in 1975, the typical thrift had as liabilities, passbook accounts, time deposits and certificates of deposit. Its assets were principally residential mortgage loans secured by first liens. Today, liabilities can include reverse repurchase agreements (reverse REPOS), "equity participation" certificates of deposit, convertible subordinated debt, money market deposit accounts, and a variety of other accounts. Assets are similarly complex including mortgage pass-through securities such as Collateralized Mortgage Obligations (CMOS). In some states, state-chartered thrifts have virtually unlimited investment authority, and have, in fact, invested in assets ranging from windmill farms, racehorses, and fast-food restaurants to wildcat oil exploration and non investment grade ("junk") bonds. Asset/liability management employs such tools as hedging instruments and interest rate swaps.

Not only must examination and supervision deal with complex asset/liability structures at thrift institutions, they must also handle a thrift industry still experiencing great stress. The deposits of FSLIC-insured thrift institutions grew from $278 billion in 1975 to $847 billion at the beginning of 1986. However, net worth of insured institutions has not kept pace with the growth in deposits. More than 1500 institutions have disappeared through consolidation and merger since 1975. Moreover, from 1981 through 1985, the FSLIC liquidated 27 institutions, more than double the 13 institutions liquidated during the prior 47 years of the FSLIC. These difficulties have taxed our examination and supervisory capabilities.

In addition, Congress in recent years has added to the responsibilities of the Board, and consequently to the work of our examination and supervisory personnel, the detection of violations of laws which have goals other than the maintenance of financial health of the institutions we examine. For example, examination procedures provide for checking for compliance with the requirement that lenders provide home buyers with advance disclosure of real estate costs (the Real Estate Settlement Procedures Act). Examination procedures call for checking the accuracy of complex disclosures to borrowers with regard to the annual percentage rates of their loans (the Truth In Lending Act). Examiners must check for compliance with statutes that prohibit lenders from discriminating against borrowers because of their race, religion, or sex (the Fair Housing Act and the Equal Credit Opportunity Act). And they must examine for the protection of the rights of customers who use automated teller machines (the Electronic Fund Transfer Act). Further, examiners must check for