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This section would facilitate the furnishing of information obtained under the Act by the Secretary of the Treasury to other agencies.

We note that this proposal, relating to transfer of information, is in accord with a recommendation of the working group comprised of the Justice Department, the FBI and the bank regulatory agencies that was established in December, 1984, to coordinate and improve the prosecution of bank fraud cases. The group, in a supplement to its press release of April 2, 1985, recommends that financial information that is lawfully in the hands of one government agency be transferable to another agency, without notice to the customer for the purpose of enforcing a law that is within the jurisdiction of the second agency.

While we have no formal position on this proposal, it appears to be a reasonable one in light of the need, pointed out in the Crime Commission Report, for greater cooperation among law enforcement agencies.

AMENDMENTS TO THE RIGHT TO FINANCIAL PRIVACY ACT

Section 401(a) of H.R. 1367 would amend the Act to permit a bank employee or officer to provide information directly to a Federal agency if that person believes that the information may relate to a possible violation of any law or regulation. We see no reason why financial institutions should not provide law enforcement agencies with information that may be relevant to the commission of a crime. The problem, of course, with amendments of this kind is that they can lend themselves to abuse. At the very least, the provision should make it clear that the information disclosed protects the identity of the customer or customers whose records are submitted to the agency until it is determined that the agency wishes to pursue the matter further.

We support the proposal also in Section 401(a) that would amend the Act to preempt state laws, regulations, and court cases that impose more restrictive standards on disclosure of information than does the RFPA. We can understand that concern about potential conflicts between state laws and the Privacy Act discourages voluntary disclosure to law enforcement agencies of the existence of information that may be related to the commission of a crime.

Mr. Chairman, let me again express our appreciation for the opportunity to present our views to the Subcommittee on this important legislation. This concludes our statement.

Mr. HUGHES. Thank you, Mr. Albers.

Mr. Melnikoff.

Mr. MELNIKOFF. Thank you, sir.

First of all, I'm happy to be here. We appreciate the opportunity to be here and supply whatever information may be helpful.

I would like to forego my summary, if you will, and make some significant points that will indicate how the industry is treating and dealing with this major problem.

I believe one of the most important events happened approximately 42 and 5 months ago, when Assistant Secretary John Walker met with representatives from DEA, Customs, IRS, FBI, FDIC, FSLIC, and all the regulators, in addition with ABA, and we decided on a multipronged approach to the problem of money laundering.

This is going to be carried out with a series of teleconferences across the Nation sponsored by the ABA. The emphasis here, if you will, is education, educating the industry as to what money laundering really is. As the "smurf" here earlier indicated, it is a relatively easy task to launder money the way they were doing it. If one is lacking in education in that regard, it is most difficult to raise your hand and indicate you have a problem. That is point

one.

In addition to that, appropriate manuals and procedures are being prepared by the ABA and will be made available to over 14,000 banks in this nation.

Further, in our exhibits which we shared in our testimony, you will find the type of documentation that has been ongoing with the ABA to educate its members. We did not limit ourselves to banks alone. We included savings and loans, credit unions and any other appropriate financial institution. Basically, that has been our approach and that will be continue to be our approach.

I would like to make one other comment with respect to the "smurf's" allocation, if you will, sir. I'm not here to debate his comments, but he mentioned the fact that the banks put up notices to warn the "smurfs." These notices he is reporting on are the notices put out by Treasury, IRS, to help us help them in this war against drug laundering. I want to make that perfectly clear.

Mr. HUGHES. I'm glad you corrected that, because we should have corrected it right at the time. That is the case.

Mr. MELNIKOFF. Thank you.

Other than that, we will continue-if I might just share another thing with you-systems are being prepared software is being developed by the industry to aid those banks that are on line. We will have the ability to identify even smaller transactions than the compulsory $10,000. Within 2 days banks can now identify where a "smurfing" operation is occurring. In fact, that happened at the end of last year in Atlanta, GA, and banks there raised their hands and notified the authorities that "smurfing" was going on, and caused the arrest of a group of "smurfs."

So banks are not, as an industry, taking this crisis lightly. We're going to fight it, we're going to cooperate. We, too, feel that money laundering regulation is very, very important. We just ask that the proper-or what we feel appropriate and proper-wording be used, and that is "with intent and knowledge." And we will support that 100 percent.

The Right to Financial Privacy Act, on the other hand, we feel is sufficient, it gives the latitude and it gives the power to those investigatory agencies to subpoena documents and get the information that is needed. I, again, have to disagree with the "smurf” in respect to the incident with the credit card company. There is legislation in place, I believe, that speaks to 12 to 14 days prior to giving out the information under subpoena, and it does enable those agencies to suppress the banks from sharing that information with their customer. I believe that is in effect.

And that, basically, sums up our position in respect to this problem.

[The statement of Mr. Melnikoff follows:]

STATEMENT OF BORIS F. Melnikoff on Behalf of the AMERICAN BANKERS ASSOCIATION ON H.R. 1367, H.R. 1474 AND OTHER PROPOSALS RELATING TO THE BANK SECRECY ACT

Mr. Chairman and Members of the Subcommittee, I am Boris F. Melnikoff, Group Vice President and the Corporate Director of the Special Services Division of First Atlanta Corporation, Atlanta, Georgia. I am appearing here on behalf of the American Bankers Association. The combined assets of our members comprise approximately 95 percent of the industry total. While our members range in size from the smallest to the largest banks, close to 85% of them have assets of less than $100 million. I appreciate this opportunity to offer the ABA's views on H.R. 1367 and H.R. 1474 and other proposals dealing with the Bank Secrecy Act.

The ABA has a long history of supporting the enforcement of the Bank Secrecy Act. Our Association understands all too well the challenge that law enforcement

officials face in attempting to combat drug trafficking and organized crime. The use of financial institutions has havens for drug money is as abhorrent to our members as it is to the public in general. We, therefore, would like to reemphasize the ABA's position on this issue dating back to 1970.

The cooperation of the financial industry with Congress and the law enforcement community became evident in the earliest hearings on what is now known as the Bank Secrecy Act, when the former ABA President C. C. Sommer told the House Banking and Currency Committee that:

"This Association and commerical banks generally are deeply interested in the apprehension of criminals and limitation of their activities both in this country and abroad. Banks are more directly concerned than most citizens because many of them have suffered heavy losses from criminal activities with resultant increases in costs to the entire banking industry. We too are concerned with the public interest aspect of the bill and desire to do everything in our power to protect that interest." Mr. Sommer enunciated the ABA policy in 1970, the same policy that is in effect today:

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"Banks have an obligation to their customers to maintain the privacy of their personal financial affairs except in response to subpoena or other regular legal procThe Association remains committed to assisting drug enforcement efforts through the detection of money laundering schemes. However, we will continue to pursue a policy that balances the legitimate need of law enforcement officials to receive information from financial institutions for legitimate investigative purposes, which preserving our customer's privacy.

PROPOSED LEGISLATION

The proposed legislative changes being considered before this and other committees create for the first time a new crime called "money laundering." Under these proposals anyone who has "knowledge or reason to know" that the currency used in a financial transaction was derived from unlawful activities would be guilty of money laundering, and risk penalties of up to five times the value of the monetary instruments involved and/or imprisonment of up to 10 years.

Representative McCollum (R-FL) has introduced H.R. 1367, the Money Laundering Act of 1985. This proposed legislation makes the act of laundering money itself a criminal offense. Under the bill, anyone who conducts or causes to be conducted a single transaction or series of transactions involving one or more monetary instruments in, through, or by a financial institution with the intent to promote, manage, establish, or carry on any unlawful activity shall be guilty of the crime of money laundering. The act of "criminalizing" money laundering removes the differentiation between the illegal use of banking transactions and the legal use of these same transactions.

Representative Hughes (D-NJ) has introduced H.R. 1474, the The Money Laundering Control Act of 1985, which proposes to make anyone who knowlingly engages in or attempts to engage in a financial transaction involving criminal derived property guilty of the crime of money laundering and subject to a fine of $1,000,000 or up to twice the amount of the funds involved, or up to 5 years in prison, or both. Criminally derived property consists of any property constituting, or derived from, proceeds directly or indirectly obtained from a criminal offense.

There are other major differences between H.R. 1367 and H.R. 1474. H.R. 1367 contains an amendment to the Right to Financial Privacy Act that, among other things, would authorize financial institutions to relinquish information and documents to the Government, solely on their own volition, without a specific request or order from the Government, if the institution believes that the information is relevant.

H.R. 1474, would give Treasury full authority to grant exemptions from the Currency and Foreign Transaction reporting requirements eliminating the present discretion of financial institutions to grant exemptions under the Bank Secrecy Act. Persons seeking exempt statue would have to make application to the Secretary. Banks would no longer be called upon to interpret exemption qualifications. Customers would have to prove to the Treasury that their business warrants exclusion from the reporting requirements.

THE CRIME OF MONEY LAUNDERING

The ABA supports making the laundering of money a crime, provided specific criminal elements such as intent and scienter are included in the definition. Inclusion of these elements will prevent a situation similar to last year, when Congress

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passed a new criminal bank bribery statute lacking these necessary elements. The crime of money laundering must be drafted with precision so as to exact the most effective, fair result. The thrust of any newly defined crime of "money laundering" should be on the individual who initiates or causes to be initiated a transaction involving a financial institution, with the intent to promote unlawful activity or with knowledge or reason to know that the transaction represents income directly or indirectly derived from unlawful activity. This definition would affect customers and employees of financial institutions alike.

In addition, related abuses by financial institutions and their employees will continue to be covered under the civil and criminal penalty provisions found in the current Currency and Foreign Transaction Reporting Requirements. For example, the civil penalties for failing to comply with the currency and transaction reporting requirements include a fine of $10,000 for each violation, for each day the violation continues and at each office, branch, or place of business at which a violation occurs. Additional civil penalties of up to the amount of the monetary instrument for which the report was required may be imposed on any person not filing a report, or filing a report containing a material omission or misstatement. Each person who willfully violates any of the reporting requirements is also subject to criminal penalties and a fine of up to $250,000 or imprisonment up to five years, or both. If the violations are part of a pattern of illegal activity involving more than $100,000 in a 12-month period, then the criminal penalties are increased to $500,000 or imprisonment for up to five years, or both.

In light of the current civil and criminal penalties imposed for failure to comply with the reporting requirements, the addition of the crime of money laundering, as I mentioned earlier, will arm the Secretary of the Treasury with effective weapons against those persons who are willfully conducting or allowing money laundering activities to be conducted.

EXEMPTIONS FROM REPORTING

A major problem with reporting currency transactions has been the use of exemption lists. Under Title 31 of the United States Code Section 5318, the Secretary of the Treasury may "prescribe an appropriate exemption from the reporting requirements." Under current regulations, financial institutions have little discretion as to what transactions can be exempted from the reporting requirements under the Bank Secrecy Act. Financial institutions lack sufficient guidance from the Secretary of the Treasury as to what constitutes full compliance with the exemption requirements. Thus, it is clear that a regular review of the exemption lists is needed.

One possible method by which to ensure that the supervisory agencies regularly review a financial institution's exemption list would be to have financial institutions provide to the Secretary of the Treasury or his designee a list of their customers whose transactions have been exempted. The Secretary of the Treasury should also be required to review and approve or revoke the list of exemptions within 90 days after the date of receipt. If the Secretary failed to notify the financial institution within the time prescribed, the exemption list would be deemed approved. The requirement to regularly submit the list to Treasury will institute frequent review of the CTR exemption lists on the part of the Treasury and in turn will assist financial institutions in their regular review and updating of their lists. These reviews would guarantee that the lists are used only for their intended purpose: to exclude from the reporting requirements only those customers clearly intended to qualify under the regulations.

Mr. Hughes, in H.R. 1474, has proposed a novel alternative to the exemption list problem. As previously stated, this proposal would require each person who desires an exemption from the reporting requirements to apply directly to the Treasury. While this requirement may be beneficial for financial institutions, would impose a burden on the Treasury. However, if financial institutions continued to grant exemptions, subject to quarterly review by the Secretary of the Treasury, the Treasury would be better able to review and monitor the exemption list without dramatically increasing the paperwork burden.

FINANCIAL PRIVACY

Several of the proposals being considered by Congress include amending the Right to Financial Privacy Act (RFPA). As you know, the Privacy Act was designed to protect customers of financial institutions from unwarranted intrusion into their financial records while, at the same time, permitting legitimate law enforcement activity. The Association believes that the argument that the Right to Financial Privacy Act hinders law enforcement is unfounded. Our Association maintains that the Right to

Financial Privacy Act enables enforcement activity to continue unencumbered without a violation of basic customer rights occurring in the process.

Briefly, the RFPA prohibits a financial institution from disclosing information from a customer's financial records unless the institution has been served with legal process (a judicial or administrative subpoena or summons or a formal written request). Under the law, institutions must wait ten to 14 days before furnishing any information to a government authority. The government must submit a written certificate to the institution stating that it has complied with all the applicable provisions of the RFPA. This may provide sufficient protection to financial institutions from liability for wrongful disclosure of customer records.

The Act does not prohibit a financial institutions from notifying a government authority that it has information which may be relevant to a possible violation of law or regulation. While this does not allow disclosure of the particular financial records without following appropriate notification procedures, these procedures do not apply to requests for "emergency access" to financial records by the government if a determination is made that any delay in obtaining their records would create "imminent danger" of physical injury, serious property damage, or flight to avoid prosecution.

In addition, the RFPA does not apply to records sought under the Federal Rules of Civil or Criminal Procedure in litigation in which the government authority and the customer are parties. The Act does not apply to "account information" such as the name, address, account number and type of account; and gives the Justice Department the ability to use this exclusion to investigate any suspicious transactions without notification to the account holder. The exceptions to the Privacy Act give federal authorities immediate access to records essential to criminal investigations. Thus law enforcement officials successfully use the permitted disclosures in investigation of money laundering schemes. ABA is committed to upholding the safeguards to customer information already enacted by the Congress and will vigorously oppose any attempts to dismantle these basic protections.

ABA COMPLIANCE AWARENESS EFFORTS

The ABA has long been involved with educational programs designed to ensure that our members have the tools necessary to fully comply with the continually changing laws and regulations that impact financial institutions. In that connection, our Association publishes a weekly newspaper, monthly magazine and half-dozen monthly newsletters, all of which attempt to cover in detail these changes, as they occur. These publications are some of the methods utilized by the ABA to educate its members on the laws such as the Bank Secrecy and its reporting.

Our Association has had, for many years, a bank protection committee within the ABA's Security and Risk Management Division. The members of this committee are directors of corporate security for their banks. This bank protection committee is a forum for new ideas on how banks can more effectively comply with the law. In addition, the ABA publishes a quarterly magazine-Compliance (See Exhibit #1)— which, as its name suggests, is intended to meet the specialized needs of numerous bank officers whose duty it is to ensure that their institutions comply with all aspects of our nation's laws and agency regulations.

The Association also publishes The Advisor, a monthly publication for banks that contains timely case histories, information, and guidelines on security risk management.

In addition to these mechanisms for compliances, ABA has published operational guides (See Exhibits 2A, 2B, and 2C) for our members on the Department of Treasury regulations on recordkeeping and the reporting of currency transactions.

The American Bankers Association has been in the forefront of educational awareness on money laundering through major conferences and workshops. These security management seminars address in detail topics such as:

A. the scope of the drug money laundering problem;

B. the nature of the national drug crisis;

C. the regulations of the Bank Secrecy Act; and

D. the importance of the Bank Secrecy Act, and apply these topics to the institution's own operations. For example, using the available information and ABA, I have developed and instituted a method of detecting simple money laundering schemes (See Exhibit 3). The attached graph charts our a "simple" money laundering scheme. Programs at individual banks such as these are enhanced by statewide cooperative efforts as shown in the recent warning bulletin put out by the Georgia Bankers Association (See Exhibit 4).

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