TAX EVASION, DRUG TRAFFICKING, AND MONEY LAUNDERING AS THEY INVOLVE FINANCIAL INSTITUTIONS WEDNESDAY, APRIL 23, 1986 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS, Washington, DC. The subcommittee met, pursuant to call, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Fernand J. St Germain (chairman of the subcommittee) presiding. Present: Chairman St Germain; Representatives Annunzio, Barnard, Kaptur, Wylie, McKinney, McCollum, and Wortley. Also present: Representative Torres of the full committee. Chairman ST GERMAIN. The subcommittee will come to order. Today, the subcommittee continues its hearings on the abuse of financial institutions by tax evaders, drug traffickers, and money launderers to facilitate their illegal activities. Last week, the subcommittee heard from, among others, a former money launderer, or "smurf," now a witness for the Federal Government, who told us how easy it was to deceive banks into believing that reporting requirements under the Bank Secrecy Act were not applicable. This witness laundered as much as $100,000 per day without any questions asked, apparently with no suspicions aroused, and arguably, although there are differing opinions among the circuit courts, without breaking the law. I am sure that my colleagues on this subcommittee agree with me that this preposterous activity must be put to an end promptly, and that Congress should provide to the courts a clear statement of intent that will assist law enforcement in this regard. We have been told that while the Bank Secrecy Act has been an effective tool in exposing criminals who use this Nation's financial institutions to facilitate their crimes, this tool, in itself, is not enough. It is argued that a statute creating a crime for money laundering must be enacted. The subcommittee will examine this contention and will consider other proposals within our jurisdiction that would conceivably strengthen the current provisions of the Bank Secrecy Act. Our first witness is Stephen S. Trott, Assistant Attorney General, Criminal Division, Department of Justice, who will give us the (785) benefit of the Department's views on the various money-laundering bills, including the administration's, which have been referred to the Banking Committee. The Chair would note that the subcommittee heard last week from Assistant Secretary Keating of the Treasury Department, who also appeared as a spokesman for the administration's views. Our second witness is Alwin C. Coward, Acting Deputy Assistant Administrator for Intelligence, Drug Enforcement Administration, Department of Justice. This is DEA's first appearance before the subcommittee. Not only will we receive a briefing of that agency's functions, but, most importantly, we will be advised as to how it coordinates its drug enforcement activities with other appropriate agencies of the Federal Government. We are also looking forward to hearing how the DEA uses the financial intelligence and other data available to it to carry out its mission. Mr. Trott and Mr. Coward, welcome to the subcommittee. Prior to your beginning, I will call upon our distinguished ranking minority member, Mr. Wylie, for a brief statement. Mr. WYLIE. I want to also welcome our witnesses here this morning, and I know that they will give us valuable testimony. In testimony last week before this subcommittee, and confirmed by Assistant Attorney General Trott, in his testimony today, we learned that the drug trade generates an estimated $80 to $90 billion a year. This astounding amount of unreported income is then laundered through financial institutions and other entities into legitimatelooking funds. While the financial institution regulators and the IRS are beefing up their training enforcement and investigations in the area of money laundering and unreported earnings, we need to keep in mind the major source of these funds, and that is drug sales. We can do everything within our power to crack down on money laundering. Yet, it won't decrease the availability of illegal drugs, unless there is cooperation between regulatory agencies, the Internal Revenue Service, and law enforcement officials. Money laundering goes far beyond the failure to meet reporting requirements. Money laundering in itself masks other crimes. This $90 billion figure representing the amount of money moving through our economy attributed directly to drug trafficking is staggering. Money laundering is easy. Stopping it is hard. We have to use all reasonable means at our disposal to help stop this, and I am sure today's witnesses from the Justice Department will enlighten us further on this issue, and I do look forward to your testimony. Thank you, Mr. Chairman. Chairman ST GERMAIN. Mr. Trott and Mr. Coward, we will put your entire statements in the record. You may now proceed. STATEMENT OF STEPHEN S. TROTT, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE, ACCOMPANIED BY CHARLES S. SAPHOS, CHIEF, NARCOTIC AND DANGEROUS DRUG SECTION Mr. TROTT. I am pleased to be here today to present the views―― Chairman ST GERMAIN. We have a problem with these mikes, you know, Gramm-Rudman, so please get a little closer. Mr. TROTT. I am pleased to be here today to present the views of the Department of Justice. I am accompanied by Charles Saphos, Chief, Narcotic and Dangerous Drug Section, Criminal Division, and he was responsible for the case shown in the photograph to your left. The complexity of the problem can be gauged in one sense by the sheer number of bills that have been introduced on this subject, many of which are now before this committee, and upon which I will touch in a moment. As you know, Mr. Chairman, the bill that the administration supports is H.R. 2785, which was prepared by the Departments of Justice and the Treasury working together. It is the type of comprehensive approach that we believe is needed in this area. And I want to thank you for introducing it, so it could be considered. The bill sets out a number of new offenses, including a new offense aimed specifically at_money laundering, and also amends the Currency and Foreign Transactions Reporting Act, and the Right to Financial Privacy Act. The administration had the advantage of reviewing the legislative proposals drafted by the President's Commission on Organized Crime when we prepared what is now H.R. 2785. Like the Commission, we concluded that what is most urgently needed is a new offense dealing specifically with money laundering. The Bank Secrecy Act, which requires that various monetary transactions be reported on forms, and which punishes the failure to do so truthfully, is no longer adequate by itself. A new provision must be added to title 18 of the United States Code making it an offense to conduct a transaction involving monetary instruments, or the wire transfer of funds if the transaction affects interstate or foreign commerce, or is conducted through a financial institution, the activities of which affect such commerce, provided that the Government can show either of the following: First, that the person acted with the intent to promote, manage, establish, carry on, or facilitate an unlawful activity-defined as a State or Federal felony-or, second, that the person knew or acted with reckless disregard of the fact that the monetary instruments represent the proceeds of, or are derived from the proceeds of, an unlawful activity. Mr. Chairman, there is an analogy here that is quite helpful. Up until the late 1960's, the Federal Government and law enforcement in general were attempting to cope with racketeering activity throughout the United States by using individual statutes to go against parts of racketeering. If mobsters committed an assault, we charged them with an assault, and if they bribed somebody, we'd charge them with bribery, if they murdered somebody, we charged them with murder; and we were nibbling away at the edges, and, finally, Congress woke up and said what is needed is a crime, prohibiting racketeering, and the Rico statute was born. And as everybody knows, from following the cases we have been reading, has been a thermonuclear device ending up in putting most of the major mob leaders in the United States now in Federal Court- Chairman ST GERMAIN. Did you write this testimony yourself? Mr. TROTT. Excuse me? Chairman ST GERMAIN. You know, what you just said: "Finally, the Congress woke up." What do you mean by that? Mr. TROTT. What I mean was Chairman ST GERMAIN. I want you to explain that phrase. I don't particularly like it. It is not that easy to enact legislation. I want to know what you mean by the phrase: "Finally, the Congress woke up." Mr. TROTT. I was attempting to describe the process by which we all woke up, including law enforcement. Chairman ST GERMAIN. You said: "Finally, the Congress woke up." What did you mean by that? Mr. TROTT. Exactly what I said, and that is finally, we realized that we were nibbling around the edges-▬ Chairman ST GERMAIN. You mean the Congress was asleep; the Congress didn't know anything, or do you mean what I think you should mean; and that is, that the legislative process, and enacting some of these laws, is not all that easy, and that there are many difficulties involved, including the hurdles which proponents of legislation have to go over? Maybe you meant to say that finally, the Congress was able to enact and to achieve, and to negotiate legislation. I don't like the phrase: "Finally, the Congress woke up." Mr. TROTT. You are probably correct. I understand what you are getting at, and I apologize for using that phraseology. I meant to say Congress realized that a new approach was needed to a problem. That is all I meant by "woke up," I meant "realized"; and I withdraw that language, if you find it offensive, Mr. Chairman. Law enforcement simply recognized, as did Congress, that a new overreaching approach was necessary to this, and the Rico statute was born. We need the equivalent today with respect to money laundering. Instead of using the Bank Secrecy Act, a money-laundering statute as such is necessary to describe the conduct involved and make the conduct itself criminal. That is my point. This is the subject of the new money-laundering offense in H.R. 2785. It covers not only the person who deposits the cash, that has just arrived from an unlawful sale of drugs in a bank or uses it to buy a new car, but also the bank employee or car salesman who participated in the transaction by accepting the money, if it can be proven that the person knew or acted in reckless disregard of the fact that the money involved was derived from unlawful activity. We think coverage of these persons is very important. These people, and in particular the employees of banks who knowingly or recklessly help criminals dispose of the fruits of their crimes, are a vital part of the world of the drug dealers. Drug dealers are in business for the money and corrupt or deliberately reckless bank employees allow them to get their money in a form they can use. They are as deserving of punishment as the drug dealer who brings them his ill-gotten cash or other monetary instruments derived from his cash. We realize that many persons are concerned about the moneylaundering offense's coverage of a person who cannot be shown to have actual knowledge that the money he handles in a transaction was derived from a crime but who acts in reckless disregard of the fact that it was. In my prepared statement, I give several examples, some actual and some hypothetical, which show that often people like bankers and lawyers who take huge sums of cash with no questions asked are ignoring an obvious substantial risk that the money involved is derived from a crime. To ignore that risk is to act in reckless disregard of the fact that the money is "dirty." Many times a banker or lawyer knows full well from the nature of the transaction and the surrounding circumstances that the money he is being handed was obtained illegally. He just does not know what particular crime produced it. Without a reckless disregard standard, these people cannot be prosecuted and they will continue to profit from making themselves willfully blind to the obvious. It is a correct description of the obvious: See no evil, ask no questions, and act in gross disregard of what would be the ordinary standard in the industry today. In addition to the new money laundering offense, H.R. 2785 adds other new offenses to title XVIII. A new criminal facilitation offense is set out. It would make one who knowingly facilitates the commission of a Federal crime by another person by providing substantial assistance guilty as a principal. I would hope, in prosecuting people who took small denomination bills, that knew they are derived from street sales of drugs and, for a fee, changing them into more easily transportable $100 bills, or other bills or larger denominations. H.R. 2785 also sets out a new offense of receiving the proceeds of a Federal felony, like the money derived from a cocaine sale, and a new offense of bringing into the United States any money or other property obtained in connection with the violation of the law of a foreign country proscribing narcotics trafficking. This offense is intended to reach foreign drug traffickers who would look to the United States, and particularly its banking system, as a place in which to invest their illegal profits. In addition to these offenses, H.R. 2785 makes amendments to two banking statutes that are within the committee's jurisdiction. Section 3 of the bill amends the RFPA to define and clarify further the extent to which financial institutions may cooperate with Federal law enforcement authorities in providing information which is relevant to proving criminal activity. Most of these amendments are variations of recommendations made by the President's Commission on Organized Crime. Of greatest significance is subsection 3(a), which states that nothing in the RFPA shall apply when a financial institution provides |