been granted. So do you think it is a question of time and/or lack of personnel?

Mr. HADLOW. Time and staffing, yes.

Chairman ST GERMAIN. Well, that is Gramm-Rudman. There it is again. It is not funny. That is why we only have three microphones for four people, too.

Mr. HADLOW. They certainly have the power to respond.

Chairman ST GERMAIN. As you know, they testified that they don't want the power.

Mr. HADLOW. I heard that.

Mr. McCollum asked a question earlier about a possibility of a penalty for negligent violation. In fact, we have that now, because in every case, other than the Bank of Boston, a bank has been fined for violation of the Bank Secrecy Act, and the Treasury concluded that the bank was not guilty of any willful violation of the law, but concurrent with this conclusion levied a fine.

They publicize that fact and then go ahead and fine you anyway. So they are fining you for a negligent violation.

Chairman ST GERMAIN. Mr. Hadlow, with all due respect, and I mean that sincerely, all of these wonderful self-analyses and reports that were rendered came after the Bank of Boston case; did they not?

Mr. HADLOW. Yes, sir.

Chairman ST GERMAIN. And absent the Bank of Boston case, I wonder how many banks would have come in and said: "Well, we haven't been filing our reports."

Mr. HADLOW. Was your question after the Bank of Boston case how many banks did that?

Chairman ST GERMAIN. Had it not been for the Bank of Boston case, I wonder how many banks would have been standing in line to say: "Mea culpa, mea culpa, we haven't filed our reports.

Mr. HADLOW. It may be a little self-serving, but I think every one of them would have done it because every one of the violationsChairman ST GERMAIN. How many did it before the Bank of Boston case?

Mr. HADLOW. None; the reason is none of the banks that failed to file were aware of this 1981 change. All of the violations were the same, by the way.

Chairman ST GERMAIN. But Mr. Hadlow, the ABA, among others, had big instructions in their journals to the banks prior to the Bank of Boston case saying that banks are supposed to report CTR's.

We had that hearing. It was very thorough. I recommend that you read it sometime if you are having trouble going to sleep. You will find it very interesting.

There was no one in that bank, no one, reporting to anyone. Everybody said, gee, the other guy is doing it but nobody, and as a result, thereof, nobody was doing it.

Now, Mr. Brown himself heads it up. I went to the Bank of Boston recently with staff and we saw what they have now implemented, their training film, et cetera. They have done a magnificent job, but don't tell us that all of a sudden-I am not saying banks are evil-but by the same token don't make saints out of them because they just hadn't reported anything until all of the

sudden in the press, they found out that the Bank of Boston had been slapped with a horrendous fine.

I am sorry for interrupting you, but that is the case.

Mr. HADLOW. Let me just pursue that one further moment. My bank, for example, had filed by the time of the Bank of Boston case, it had filed 56,000 CTR's and had set up a very expensive system where we gathered in all the data on the computer from all the branches so we could aggregate them and all that sort of thing. We had missed filing 500, all of a single type and that is when we swap our own money in, when we get an aggregate of Canadian dollars-we had too many Canadian dollars-we would swap that money with a Canadian bank for American dollars.

Prior to 1981, that was exempt. It was right on the form that it was exempt. In 1981 they removed that exemption. It took the Fed, and the Treasury 1 year to change the form and during that period of time a number of banks, failed to pick up that change in the law and everyone of these transactions that the Treasury has fined these banks for has centered around that one change when that exemption was removed.

There was no culpability in any case and the Treasury will tell you that. There was no money laundering, there was not any drug trafficking, there was not anything, but a bunch of banks failed to catch that change and that was not a well-publicized change.

There were no seminars, no special releases on it. The form was finally changed a year later and there were a couple of small releases and a lot of banks just carelessly missed it. We are not saints.

Chairman ST GERMAIN. By that, do I hear that you will sue the ABA for not having their legal counsel inform you of change?

Mr. HADLOW. We would have loved to sue somebody and blamed somebody, but we don't blame anybody but ourselves.

We were definitely negligent just like everybody else by not picking it up. We are supposed to pick it up. It is our duty under the law, but we missed it.

So there is no culpability. That is the reason I answered your original question. We filed as soon as we found out about it, went back and filed those 500. We think the Bank Secrecy Act ought to be amended to make smurfing a crime. We think you can do it quickly and easily. We don't think you need a new title 18 crime because that is a difficult thing to define.

A title 18 crime endangers innocent customers unless you are extremely careful and you get the ACLU and the American Bar Association and all the people who are concerned about the customers' privacy rights. I don't think they will object at all to Mr. Pickle's bill which just simply says anybody who knowingly comes in and attempts to avoid filing the form 4789 is guilty of a crime.

So we support that. We have suggested in our testimony that banks that uncover failures to file CTR forms through internal audits and who make a good faith effort to report these failures shall not be subject to fines.

We think that would induce more of them to do more soulsearching and would be consistent with the aims of this act.

Thank you, sir.

[The prepared statement of Mr. Hadlow can be found in the appendix.]

Chairman ST GERMAIN. Mr. Hadlow, I compliment the banks of this country through you because, since the Bank of Boston and the awareness by financial institutions of the reporting requirements, many institutions have implemented exceptionally fine plans to comply with the act. In many instances, they have gone a step further and have become very aggressive because they now agree that it is an opportunity to stem crime and to discourage drug trafficking and avoid some taxes, among other things.

So I want to compliment you. I hope there aren't any banks left that have even negligently or nonwillfully not reported because I think they are all aware of it now and are doing a great job.

Unless there is some bank out in the hills there that is still receiving its communications by Pony Express and doesn't have television and radio, I think they are all doing a good job, and coming from me that is really something.

Mr. HADLOW. Thank you.

Chairman ST GERMAIN. Now we will hear from Lawrence Pedowitz, who represents the Committee on Federal Legislation, the Association of the Bar of the City of New York. Welcome.

STATEMENT OF LAWRENCE B. PEDOWITZ, MEMBER, FEDERAL LEGISLATION COMMITTEE, ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

Mr. PEDOWITZ. Thank you very much, Mr. Chairman.

Mr. Chairman, I am a member of the Federal Legislation Committee of the Association of the Bar of the City of New York. That association consists of approximately 15,000 attorneys, most of whom practice in the New York City area.

The association-

Chairman ST GERMAIN. How many?

Mr. PEDOWITZ. 15,000, Mr. Chairman. The association very much appreciates the opportunity to testify this morning and I personally appreciate the opportunity to appear.

The Federal legislation committee of our bar association has prepared a lengthy report. I hope it is also a helpful report.

It is approximately 84 pages, dealing with the pending money laundering legislation. Since neither my brief remarks this morning nor my written statement, in which we attempted to summarize the major points in our report, cover adequately the analysis that is contained in that report, we have also requested in our written statement that our report be made part of the subcommittee's record as well.

Chairman ST GERMAIN. Very definitely.

Mr. PEDOWITZ. Thank you very much.

We of the Federal legislation committee and the Association of the Bar have concluded that new legislation is indeed needed to combat money laundering. We are concerned, however, as is the American Bar Association, that the pending proposals, in particular H.R. 2785, the administration bill, and H.R. 1367, which contains the Organized Crime Commission's proposals, are in a numbe: of important respects over-broad.

I should say before I comment, and I am going to only very briefly on the Right to Financial Privacy Act, that in arriving at our rather extensive conclusions, we had a broad consensus on our committee. I want to tell you that our committee consists of a broad range of individuals with a broad range of backgrounds. Our members include Federal prosecutors-a number of assistant U.S. attorneys, former prosecutors, and defense lawyers on the committee. There are also bank lawyers on the committee and a member of the staff of the American Civil Liberties Union.

I will tell you, for example, I spent 2 years as chief of the Criminal Division of the U.S. Attorneys' Office in the southern district of New York under Mr. Guiliani and Mr. Martin, his predecessor. In 1977, I was responsible for bringing down one of the very first Bank Secrecy Act criminal prosecutions against the Chemical Bank, and I might add, Mr. Chairman, that in 1978, as a consequence of the prosecution in 1977, we also saw a very substantial number of CTR's suddenly being filed by banks. The Chemical Bank case was also a case which made the front page of the Wall Street Journal and the other major newspapers of the United States, but the problem of noncompliance still rearose in the early 1980's.

We are very concerned on our committee that new legislation is indeed needed. The money laundering legislation that is being proposed makes a great deal of sense with certain narrowing. I was told that this committee was particularly concerned about the Right to Financial Privacy Act. I am only going to spend a minute or two on that subject and then open myself up to questions on a broad range of subjects.

The administration and the Organized Crime Commission both believe that the Right to Financial Privacy Act should be amended. They believe it should be amended to permit bank employees to let the Government know about suspected illegal activity, most particularly money laundering. That is what they are most concerned about. They are concerned that employees of banks should be permitted to do that without running afoul of the Right to Financial Privacy Act.

We agree that the Right to Financial Privacy Act should be amended, but we think the administration and the Organized Crime Commission bills go too far in trying to accomplish this purpose and farther than they need to go.

The problem, if I can state it very, very briefly, is that section 1103(c) of the Right to Financial Privacy Act seems right now to contemplate information being made available by bank employees to the Government about possible violations of law. That section provides specifically that the Right to Financial Privacy Act does not preclude financial institutions, that is banks, from notifying the Government that the institution has information that may be relevant to a possible violation of any statute. So, a bank can notify the Government that it has information that may be relevant to a possible violation of law.

The problem with the Right to Financial Privacy Act is that it does not explain what can be said to the Government when this notification occurs. For example, can a bank provide the name of the customer who is suspected of illegal activity?

That information is arguably derived from customer records, or financial records, which are covered by the Right to Financial Privacy Act and the bank could arguably, therefore, be precluded from providing that information.

Can the bank lawfully provide the number of the account that the customer is dealing with, the suspected customer is dealing with? That, too, is information derived from financial records which is covered-that is included within the definition of financial records which are protected by the Right to Financial Privacy Act. Can the bank provide specific information about the suspected illegal activity, what is going on in that account? That arguably, too, is derived directly from the customer's financial records which are covered by the Right to Financial Privacy Act.

Banks, therefore, in our view, can justifiably be concerned that this information-all of this information they would like to turn over-is derived from financial records of the customer and, therefore, covered by the Right to Financial Privacy Act and, therefore, they can be concerned about prosecution. They can be concerned about suit by customers. There are also State privacy laws to be concerned about.

Now, the administration and the Organized Crime Commission want that information turned over, that is, information that identifies a customer, identifies the bank records and gives some information about suspected criminal activity. We think that should happen.

However, the administration and the Organized Crime Commission bill would cure this problem by effectively taking totally out of the Right to Financial Privacy Act any disclosures concerning any customer which is relevant to a possible violation of law.

As a consequence, if you look at those two bills, what could happen is a bank, if those provisions were enacted, could pack up all of the customer's financial records, all of the files, and ship them directly to the Government without running afoul of the Right to Financial Privacy Act. We think that goes too far. It goes needlessly too far.

If the Government receives information identifying the customer, identifying the accounts and briefly summarizing what the suspected illegal activity is, the Government has more than enough information to then use a subpoena or use a summons to obtain the information that is needed from the bank with the protections of the Right to Financial Privacy Act that follow from that summons or subpoena.

We have many, many other concerns about the legislation which is pending. It is all specified in our report and in our written statement.

I would be prepared to answer any questions about those particular recommendations.

[The prepared statement of Mr. Pedowitz and Jeffrey Glekel on behalf of the Association of the Bar of the City of New York can be found in the appendix.]

Chairman ST GERMAIN. Let's go back to the point you just made that a bank, under the proposed legislation, could just package all the records and send them on to the Government and say, "Here it is." Unfortunately, that goes too far.