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Important though these powers are, we should bear

in mind that the Federal Reserve Board is not a criminal law enforcement agency. While our examiners are trained in

detecting questionable transactions, any suspected criminal activities are referred to appropriate law enforcement authorities. Therefore, the referral process is critical to successful prosecution under Title I.

The Federal Reserve has been working diligently to improve the criminal referral process. In August 1985, the Federal Reserve distributed to the financial institutions it supervises a uniform criminal referral form.

Moreover, the

Federal Reserve recently developed and implemented procedures to ensure that criminal referrals involving activities that may affect the safety and soundness of a bank or bank holding company are submitted directly to the Fraud Section of the Department of Justice for high level attention. In addition, procedures have been established to ensure that criminal forms submitted to the Federal Reserve are properly handled.

Computer systems also have been

(Footnote Continued)

Seventh Circuit, in the Larimore v. Comptroller of the Currency case, determined last week that the Comptroller of the Currency could not use its cease and desist authority to seek monetary damages from individuals for violations of law and unsafe or unsound banking practices. This decision was

in conflict with other Court of Appeal's decisions, and it may severly limit the ability of the agencies to seek appropriate relief against individuals in matters, for example, involving unjust enrichment. In order to clarify the Federal Reserve's as well as the other bank regulatory agencies' authority in this area, it may be useful for Congress to consider legislation directed at this problem.

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developed to track and cross-check the referrals against the activities of the Enforcement Section of the Board's

Division of Banking Supervision and Regulation. In this

manner, we are better coordinating the actions that must be taken under both civil and criminal law when illegal

activity is suspected.

Title VI, Change in Control

Under the Change in Bank Control Act of 1978, bank regulatory agencies have the authority to act on notices involving changes in the control of insured banks and bank holding companies. The Federal Reserve is responsible, in particular, for notices involving state member banks and bank holding companies. must be processed in 60 days. During this period, the reviewing agency considers among other factors, the financial condition and character of the prospective owner or owners. One important objective of this process is to weed-out individuals with criminal backgrounds, either by disapproving the Change in Control or, in effect, by allowing them to disqualify themselves by withdrawing their notice.

Change in Control notices generally

Typically, supervisory authorities are familiar

with individuals who are seeking to gain control of a financial institution. Change in Control investigations in such cases proceed in a timely fashion. However, there are

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sometimes cases, such as those involving foreign individuals

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or individuals who previously have not been involved in banking, where the applicant's background is not known. These cases require the reviewing agency to draw on information from law enforcement agencies and foreign banking agencies. Such information often is not received until well into the 60-day review period, making it necessary to invoke the 30-day extension period allowed under the Change in Bank Control Act in order to make a thorough investigation. We can, however, conceive of situations in which even the 30-day extension period would not be sufficient. Thus, we would favor an amendment to the Change in Bank Control Act that would allow the Board to extend the processing period in those rare situations when it is necessary to collect and evaluate additional

information about potential criminal activity.

Title XI Right to Financial Privacy Act

The Right to Financial Privacy Act ("RFPA") was intended to protect bank customers' privacy rights, while enabling federal regulatory and law enforcement agencies to carry out their responsibilities under the law. The RFPA, among other things, prohibits access to the financial records of a customer of a financial institution by government authorities, unless the customer has authorized such disclosure, or the financial records are obtained pursuant to specified agency or law enforcement actions and the customer is given notice of such disclosure. Disclosure


also may fall within one of the other limited exceptions to the notice requirement, such as when the information is

obtained through the examination process.

The RFPA, however, does not preclude any financial institution from notifying a government authority that it has information which may be relevant to a possible violation of any statute or regulation. In August of 1985, the Board adopted a uniform interagency criminal referral form for the use of the financial institutions under its jurisdiction.

Similar forms subsequently were adopted by

the other federal regulatory agencies. The form has been carefully structured to elicit information that we were not getting before, perhaps because of perceived RFPA problems. Out of the approximately 400 referrals made by these institutions since that time, only three have lacked necessary information due to perceived RFPA problems and these instances did not involve Bank Secrecy Act violations. We believe that the adoption of these forms by all supervisory agencies will address through administrative action many of the difficulties experienced by the law

enforcement agencies in this area.


International Cooperation

I would now like to turn to the subject of

international cooperation. In general, the Federal Reserve maintains extensive contact with foreign bank supervisory authorities in order to discuss broad supervisory issues relating to banking, such as capital adequacy and liquidity. The most visible example of such contact is the Basle Committee on Banking Regulations and Supervisory Practices, which consists of representatives from the central banks and bank supervisory agencies of the major industrial countries. In addition, the Federal Reserve regularly sends a representative to regional meetings of bank supervisors from the Caribbean, Latin America and Asia.

In our view, international steps to assist enforcement efforts are best handled through initiatives such as those undertaken by the Department of Justice to institute mutual legal assistance treaties between the United States and other countries. Such treaties include specific provisions addressing the use of international

banking facilities for criminal activities.

The Federal

Reserve stands ready to assist the Justice Department by

making quick referrals of suspected criminal activity to the appropriate authorities and by providing advice on

international transactions.

At the same time, the Federal Reserve will continue efforts to heighten the sensitivity of banking authorities abroad to the problems of money laundering

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