Mr. HUGHES. Our panel of witnesses this morning is a most distinguished one. I am very pleased to welcome once again Mr. John M. Walker, Jr., the Assistant Secretary of the Treasury for Enforcement and Operations. Mr. Walker has appeared before the Subcommittee on Crime many times over the past 4 years on behalf of the Department of the Treasury. He is a graduate of Yale University and the University of Michigan Law School. He practiced law in Botswana in Africa, served as a narcotics prosecutor, as an assistant U.S. attorney for the Southern District of New York, and has generally had a most distinguished career.

I might say that this is most likely to be one of his last appearances, if not his last appearance, as a witness before Congress on behalf of the administration. We are going to miss John.

The second member of the panel is Mr. Jay B. Stephens, the Associate Deputy Attorney General. He serves as a senior adviser to the Deputy Attorney General and the Attorney General. He is a graduate of Harvard College and Harvard Law School, where he received high honors. He has served as an assistant special prosecutor with a Watergate special prosecution force. For some 5 years, he was an assistant U.S. attorney for the District of Columbia. Since the beginning of this administration, he has been a principal aide to D. Lowell Jensen, now the Deputy Attorney General. The final member of the panel is Mr. James D. Harmon, Jr., Executive Director and Chief Counsel, the President's Commission on Organized Crime. Mr. Harmon is a graduate of West Point and Dickinson Law School. He received a Silver Star and a Purple Heart for his service in Vietnam in 1967. He has been a career prosecutor serving in the New York County District Attorney's office under Frank Hogan for some 6 years and as the assistant attorney in charge of the Organized Crime Strike Force of the U.S. Department of Justice in the Eastern District of New York. He began work with the Commission when it started its work in 1983. Gentlemen, on behalf of the subcommittee, we are happy to welcome you here this morning.

I might say at the outset that we received your statements, which are very comprehensive. Without objection, they will be made a part of the record in full. We hope that you can summarize your testimony so that we can get into the questioning.

Welcome, Mr. Stephens.

STATEMENTS OF JAY B. STEPHENS, ASSOCIATE DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE; JOHN M. WALKER, JR., ASSISTANT SECRETARY, ENFORCEMENT AND OPERATIONS, U.S. TREASURY DEPARTMENT; AND JAMES D. HARMON, JR., EXECUTIVE DIRECTOR AND CHIEF COUNSEL, PRESIDENT'S COMMISSION ON ORGANIZED CRIME

Mr. STEPHENS. Thank you very much, Chairman Hughes and Congressman Gekas.

It is a pleasure to be here this morning before the subcommittee to discuss and explore with you the issue of money laundering. I think this hearing today, as both of you have indicated, is an opportunity to delve into and explore some of the complex, complicated issues in an area which is of concern both to the committee, as

you have expressed, and to the administration certainly. The Organized Crime Commission has done an extensive study of this matter, and they have outlined a number of the issues and problems in this area.

I think it is a subject matter that we can work together on and need to work together on. It is not an area that is readily available to solutions, but we have explored a number of alternatives and possibilities. I believe, from the administration's point of view, that we have come up with a very comprehensive approach to a very difficult area and an area which really is pervasive in the criminal substructure of our country.

I would like to take a moment just to explore what we think is the scope of the problem. That really is that money laundering and the financial transactions which are involved in a number of illegal activities really are, as the Attorney General said, the life blood of traditional organized crime and narcotics trafficking. Indeed, it is the infrastructure really of extensive criminal activity in this country. What we see in terms of criminal activity is that the financial objective is not only the end of that criminal activity but is also the means by which that criminal activity is carried on.

In terms of investigating and prosecuting this type of crime, we have found that our investigative techniques focusing on financial transactions, financial flows, monetary transactions, really are a significant way of delving into and determining the sources of criminal activity and actually bringing those responsible to determination of guilt.

This is really a foundation to say that the money laundering aspect really insinuates itself into all aspects of criminal activity in our society. I think it is particularly important that we take a very comprehensive look at this.

The administration has proposed a bill which is before the Congress. I think that bill takes a very comprehensive approach. As the chairman has indicated, it is a complicated, complex issue. It is an issue, I think, that will need substantial study, but I think it is one that we have proposed some solutions which have substantial merit and which we would urge the subcommittee and committee and the Congress to adopt.

I would like to take a few moments this morning to suggest the principal outlines of the administration's proposal, particularly with regard to money laundering. I think Mr. Walker will address some of the other aspects that are particularly related to Treasury's activity. I would like to indicate from the outset that this has been a very cooperative approach on behalf of the Department of Treasury and the Department of Justice. We have been working with the Congress. We intend to continue to work with the Congress in trying to develop some legislation that we hope will be passed this session by the House and by the Senate.

As I indicated, money laundering really is and entails a variety of complex, complicated schemes. It is not something that is limited to the current situation today but really can go to the extent of the imagination of those who wish to engage in criminal activity. The use of intricate webs of bank accounts, offshore accounts, shell corporations, other types of business entities to hide money, to move money, to move money in and out of countries, really is an unlimit

ed activity that requires a sophisticated approach and a comprehensive approach in order to counteract appropriately.

As I indicated, we in the administration, in the Department of Justice, in cooperation with Treasury, have taken a comprehensive look at this. We have done a substantial amount of study. We have had an opportunity to build on the fine work of the subcommittee and a number of the bills introduced here in Congress. We had an opportunity to work with the Organized Crime Commission and their extensive work in this area. I believe we have come up with what I would consider a comprehensive approach to this.

As Congressman Gekas indicated, the administration's proposal is a comprehensive approach. It looks at both the substantive offense of money laundering, and it examines some of the other issues in terms of financial privacy, rules of evidence, et cetera, which are necessary to get some of the investigative techniques that are important in looking at money laundering and the offense of money laundering. It also deals with some of the seizure and forfeiture of funds obtained in the course of illegal conduct.

So, we have tried to take a comprehensive, full-spectrum approach to the area of money laundering.

The primary area, of course, is the substantive offense of a new statute on money laundering. What we have done in the administration's bill is to devise, as I indicated, a comprehensive approach to define what we would define as a substantive offense of money laundering. This would really be an offense where an individual conducts or attempts to conduct financial transactions involving monetary instruments or wire transfer of funds if that transaction affects interstate commerce or is made through a financial institution that affects interstate of foreign commerce, and where the government can show either, one, that the person acted with the intent to promote, manage, establish, carry on, or facilitate an unlawful activity; or, second, that the government can establish that the person either knew or acted in reckless disregard of the fact that the instruments or the funds were proceeds of illegal activity or derived from unlawful activity.

As I indicated, there are two prongs to this. This is the primary substantive offense in the administration's package. It provides penalties for 20 years, and fines up to $250,000, or two times the amount of the transaction involved. It also provides for civil penalties as well as civil and criminal forfeiture.

I would like to focus just a moment on the concept of reckless disregard, since there is a difference there in the standards that have been applied or have been sought by the Organized Crime Commission's money laundering bill as well as the proposals introduced previously here in Congress. As I indicated, the administration has two prongs. One, of course, is if we can establish that the individual acted with the intent to facilitate, to manage movement of funds in criminal activity. The second is whether or not the individual knew or acted in reckless disregard.

We think that the reckless disregard prong is a necessary addition to the actual knowledge standard which has been proposed in other legislation. It is on a continuum. It is a continuum that we see in criminal law statutes in general, a continuum from negligence to actual knowledge. There are a number of statutes that

provide for—in fact, there are some statutes that provide for strict criminal liability. There are some that provide criminal liability with a scienter of negligence. There are others that provide reasonto-know, willful blindness, and then reckless disregard and actual knowledge. So, we believe there is a continuum there. This is very close to the end of the continuum of knowledge.

We would either have to show actual knowledge or reckless disregard. Let me give you an example, or a little more definitive definition of what we would view as reckless disregard in the standard of proof which the Government would need to show in establishing this offense.

Our understanding, our view of what the term reckless disregard is would be that it is an awareness of facts and circumstances that lead the person to believe that a substantial risk exists that the monetary instruments involved in the transaction represent the proceeds of or derive from unlawful activity, coupled with a conscious disregard of the risk in a manner that constitutes a gross deviation from the standard of care that a reasonable person would exercise under the circumstances.

A reckless disregard standard would entail a substantial risk, first of all, that the proceeds are derived from unlawful activity, and then a conscious disregard of that, to the extent that it is a gross deviation from normal standards of reasonable conduct. So, that, we believe, is a significantly high standard, substantially greater than the negligence standard proposed in the Organized Crime Commission money laundering bill. It is substantially greater than the reason-to-know standard, which I believe was proffered in testimony from the American Banking Association. It is very close in many respects to actual knowledge but does permit prosecutors and the Government to establish the offense by showing reckless disregard rather than actual knowledge, which I am sure both of you recognize from your experience as prosecutors is something that is sometimes very difficult to establish even though you can show surrounding circumstances of reckless disregard or reason-to-know.

In addition to the fundamental substantive offense of money laundering, which I have just explained briefly, there are a number of other provisions in the administration's bill which we believe sort of continues along the spectrum and to make a comprehensive approach not only to get at the substantive offense but to get at the receiving of the proceeds and also to get at the other end, the facilitating, the assisting, the aiding and the abetting of the criminal offense.

With regard to the facilitation prong of the administration's bill, that provides that whoever knowingly facilitates the commission by another person of an offense against the United States by providing assistance that is in fact substantial is punishable as a principal. Now, I would like to indicate that this is directed primarily at the money laundering issue, but of course it has a bit broader application than just money laundering. It really is a clarification, of the aiding and abetting statute. It really is a codification of the Backun case, which defined aiding and abetting, although there has been some division and split in the courts on defining the aiding and abetting statute.

What the facilitation provision would do in the administration's bill is really to permit us to investigate and prosecute and get at those individuals who assist through the process of money laundering; for example, it would reach fundamental underlying criminal activity, whether it be the narcotics trafficking, organized crime. For example, if a chemist manufactures and sells a particular ingredient to a person who he knows intends to produce a controlled substance with that ingredient, it would subject the chemist who facilitates that production of illegal drugs to the principal liability for the drug offense.

What this does is moves the scale just a little bit on the aiding and abetting statute from what some courts have defined as requirement that the aider and abettor have the intent and the objective that the enterprise succeed. This would eliminate the requirement of the intent that the enterprise succeed and substitute essentially what other courts have said is an intent to facilitate the enterprise, whether or not it succeeds, but to give momentum to it, to facilitate it, to assist it in some substantial way.

The third prong of the administration's bill in terms of substantive offenses is receiving proceeds. Really, this again, as I indicated in the previous provision, applies in large part to money laundering, but it also has an application beyond the simple money laundering, narcotics, organized crime situation. There are two prongs to the receiving provision. In many respects you could analogize this, I believe, to a more traditional receiving stolen property type of offense.

The first prong is someone who knowingly receives proceeds of a Federal felony. That offense would be committed, for example, by a money launderer who received the proceeds of any Federal crime. Money is generated in the course of narcotics trafficking. That money is then delivered to an individual, perhaps for investment, perhaps for a purchase of some object or item. If that person knows that this is illegally derived funds and receives those funds, then that person would be guilty of a receiving offense with a potential 10-year penalty.

The second prong of the receiving provision applies to activity which occurred offshore of the United States. Individuals who bring money or property into the United States that was obtained in violation of, a felony statute in a foreign jurisdiction, bringing that in and knowing that it was derived in violation of a felony offense in a foreign nation, would subject that person to the receiving penalty, also, of a 10-year penalty.

So, you have both receiving domestically and also bringing into the United States, importation essentially, of proceeds of illegal activity where the individual knows that those proceeds are derived from illegal activity.

The other aspect of our proposed legislation, gets into the forfeiture area and would provide for civil and criminal forfeiture provisions in the money laundering context. It is really an extension in many respects of current forfeiture law and would be applicable here. We believe it is important that, where large sums of money are involved in a money laundering scheme, that we have and the forfeiture remedy available for that.