3.

4.

that appropriate entities are on such lists? Assuming there is an unqualified name or business on such a list, what types of enforcement action would your agency pursue? At present, would civil or criminal liability be possible against either the financial institution or its exempted customer for inappropriately appearing on such a list?

Should the term "monetary instruments" in the Bank Secrecy Act and its regulations be amended to include "postal money orders" in order to include them under the requirements of the Act and its regulations?

Has any thought been given to the use of the civil money penalty provisions of the Financial Institutions Regulatory and Interest Rate Control Act, with appropriate amendments, in connection with violations of the Bank Secrecy Act by financial institutions and their employees?

Present delays caused by extended negotiations and record review to determine "willfulness" possibly could be minimized.

Again, the Subcommittee is appreciative of your efforts in this area. Please submit your responses to the Subcommittee no later that May 7, 1986.

FSTG:STf

Sincerely,

erhand J. St Germain Chairman

In your April 25, 1986 letter to James R. Dudine, Chief of the Special
Activities Section, you asked the FDIC to respond to four additional questions
pertaining to the Subcommittee's review of the Bank Secrecy Act.
responses to these questions appear in the attachment.

Sincerely,

Lun

L. William Seidman
Chairman

Our

Attachment

RESPONSE TO QUESTIONS PRESENTED IN THE

APRIL 25, 1986 LETTER FROM THE CHAIRMAN, SUBCOMMITTEE

ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE.

1. Question: Both Mr. Serino, of the Office of the Comptroller of the Currency, and Mr. Woodard, of the Internal Revenue Service, in their testimony, express support for amending Title 31 of the Bank Secrecy Act via the Administration's Bill (H.R. 2785) to permit the issuance of a summons to a bank, or its employees, for a bank customer's records. This raises some questions about balancing the need for effective investigations of BSA non-compliance with a bank customer's right to privacy.

a) What criteria do you propose for use of the summmons?

b) How do you intend to prevent this power from abusing the privacy rights of the legitimate customer?

1. Answer: The summons authority provided in H.R. 2785 would be applicable to Treasury and its component agencies, the IRS and the Customs Service. Bank regulatory agencies would continue to use their supervisory authority to determine compliance with the Bank Secrecy Act (BSA). It is our understanding that the proposed summons authority would be used primarily in investigations of miscellaneous nonbank financial institutions such as casinos and foreign currency brokers. Under the proposal, a summons would be issued only by the Secretary of the Treasury or with the Secretary's approval precluding any indiscriminate use of the summons by field agents.

Since the summons authority is not directed at bank customer records, privacy rights of bank customers would not be affected one way or another. Customers of nonbank financial institutions might perceive this authority as a potential incursion into their privacy; however, customers of those institutions should have no greater expectation of privacy than customers of banks where violations of federal law are suspected and bank customer records are already subject to regulatory review.

2. Question: Concerning names and businesses which may inappropriately appear on a financial institution's exempt list, presently, how does your agency ensure that appropriate entities are on such lists? Assuming there is an unqualified name or business on such a list, what types of enforcement action would your agency pursue? At present, would civil or criminal liability be possible against either the financial institution or its exempted customer for inappropriately appearing on such a list?

2. Answer: FDIC examiners review the financial institution's exempt list during each BSA compliance examination to ensure that exempt customers meet the criteria outlined in 31 CFR 103.22 and that all required information is included on the list. Any questionable exemptions are discussed with bank

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management either directly or after conferring with the. FDIC's Regional compliance specialist. If the question cannot be resolved in this manner, the bank is asked to submit the facts of the situation to Treasury for an official ruling on the propriety of the exemption.

If an exemption is clearly improper, the bank is required to revoke the exemption; and the bank is directed to file CTRs on all reportable transactions for that customer. The improper exemption is cited in the report of examination as a violation. As a follow-up measure, the FDIC directs the violating bank to explain the corrective measures it has taken to eliminate all future violations concerning that customer and to review and correct, where appropriate, its exempt list practices. Cases of serious abuse of the exemption privilege are referred to Treasury for civil or criminal enforcement.

Under the present law, criminal action can be taken against a bank or its customers for willfully structuring exemptions to further illegal activity. Such cases are difficult to make, however, because bank management has considerable latitude under the regulations in granting exemptions; and it is easy to characterize an inappropriate exemption as an honest mistake. Since the bank makes the decision to grant an exemption, it is even more difficult to hold the customer liable for the violation.

3. Question: Should the term "monetary instruments" in the Bank Secrecy Act and its regulations be amended to include "postal money orders" in order to include them under the requirements of the Act and its regulations?

3. Answer: The term monetary instruments includes money orders in bearer form. We have always considered this definition to cover "postal money orders" in bearer form as well as those issued by financial institutions. However, in responding to this question we asked the Treasury Department for its views and were informed that "postal money orders" were not covered. According to Treasury, the term "money orders" in the BSA means only money orders issued by financial institutions. Others, including some Justice Department prosecutors, also apparently hold the view that "postal money orders" are covered by Title 31.

This is not the only technical problem with the language of Section 103.11. In order to meet the definition of monetary instrument in that section, bank checks, travelers checks and money orders cannot contain the name of the payee. It is a simple process to put the name of a fictitious payee on the instrument to avoid the reporting requirements. Obviously, to avoid loopholes in the ambit of Title 31, all money orders should be included regardless of their origin. Consideration should also be given to imposing penalties for using fictitious payees to avoid the reporting requirements.

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4. Question: Has any thought been given to the use of the civil money penalty provisions of the Financial Institutions Regulatory and Interest Rate Control Act, with appropriate amendments, in connection with violations of the Bank Secrecy Act by financial institutions and their employees? Present delays caused by extended negotiations and record review to determine "willfulness" possibly could be minimized.

4. Answer: As you are well aware, under current law, FDIC cannot assess civil money penalties for violations of the BSA. We can, however, issue cease and desist orders or enter into memoranda of understanding (MOU) with bank officials to effect correction. While MOU's have been used in a number of cases, we have issued a much smaller number of cease and desist orders for violations of the BSA. We have preferred to follow the civil money penalty procedures worked out between bank regulators and the Treasury Department. As we have previously stated, our recommendations to Treasury for assessment of CMP's to correct continuing violations due to improper procedures and to address the continuing disregard for BSA regulations by recalcitrant bank officials have not been pursued on these bases.

As was stated in testimony before your Subcommittee on April 20, 1986, the newly formed working group comprised of Treasury and bank regulatory officials is addressing the apparent ineffectiveness of the civil money referral process to deal with this problem. We believe that, with Treasury's support, an effective process can be devised to better utilize the civil money penalty power already granted to the Secretary of the Treasury. We believe that the authority to assess civil money penalties for BSA violations should remain with the Treasury. Should the working group fail to develop an effective civil money policy, one that gives bank regulators some assurance that referrals will be acted on promptly by the Treasury Department, the FDIC is prepared to make greater use of its supervisory authority, to include both informal and formal administrative action, where circumstances warrant.