STATEMENT OF EUGENE T. ROSSIDES REGARDING MONEY LAUNDERING PROPOSALS TO THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS OF THE HOUSE OF REPRESENTATIVES MAY 14, 1986 Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to express my views on the various money laundering bills now being considered by Congress. I address this issue from the somewhat unique perspective of having dealt with the Currency and Foreign Transactions Reporting Act of 1970 ("Act") from both sides of the regulatory fence. From 1969 to 1973 I served as Assistant Secretary of the Treasury for Enforcement, Tariff and Trade Affairs and Operations. In that position I presented the views of the Treasury Department and the Administration to the House and Senate Banking Committees which considered the Act when it was proposed in 1969. Following its enactment, my responsibilities included the enforcement of the Act. In my present capacity as a partner in a law firm in Washington, D.C. I represent a major U.S. banking institution. I also serve as a director of a national bank. These banks are committed to doing all they can to fully carry out their responsibilities under the Act but at the same time are concerned about protecting the trust of their law abiding customers -- a trust which is the linchpin of our domestic banking industry and which depends so importantly upon individual privacy, which has been increasingly encroached upon by government actions. I therefore appreciate the opportunity to present my views on this important issue. As the recent Congressional hearings have underscored, money laundering is an important complement to drug trafficking and other criminal activity. While efforts thus far to abate money laundering have had serious limitations, Congressional and media attention to the subject over the past year have produced a high level of vigilance in financial institutions and a high level of consciousness among enforcement officials. In general, this has been an altogether salutary development. 2 Nevertheless, I perceive as troublesome certain aspects of the current debate about money laundering legislation. First, while money laundering is a serious problem that must be vigorously addressed, it does not necessarily follow that imposing broad new requirements upon banks will solve the problem. Second, I become concerned when I see the law enforcement community shifting its focus away from drug traffickers and others in organized criminal groups and preoccupying itself with reporting failures by banks. While some banks have been less than diligent in meeting their filing obligations under the Act, I think William Nickerson, former Deputy Assistant Secretary of the Treasury for Enforcement, was directly on point recently when he observed that the government had "misenforced" the law by prosecuting bankers instead of narcotics dealers and other money launderers and that "what we've seen is a loss of understanding of the purpose of the act."1/ While the recent Congressional attention given to enforcement of the Act has been commendable, the Congress should not in the process allow the law enforcement community to escape critical review and scrutiny for its own singular failure to effectively combat drug trafficking. The Currency and Foreign Transactions Reporting Act of 1970 To understand the application of the Currency and Foreign Transactions Reporting Act of 1970, often referred to as the "Bank Secrecy Act", one must recall the purpose for which it was enacted. With direct authority over the U.S. Customs Service and Secret Service, as well as policy supervision regarding IRS criminal enforcement, I, along with other law enforcement officials, supported passage of the Act as a useful tool to augment existing criminal investigations. The data to be retained by the banks under the Act was to provide a source of information to bolster or help direct ongoing investigations of targeted suspects and future specific investigations. was created to ensure that documents relevant to a particular suspect remained available for the use of investigators and prosecutors. The Act's target was the alleged criminals being investigated, not the banks. The reporting requirement established pursuant to the Act was, in general, a continuation and alteration of then existing reporting requirements. It The Act was passed only after Congress took the time to strike a balance of the needs of law enforcement with the administrative burdens the recordkeeping and reporting requirements imposed on financial institutions. The Act was viewed by those in law enforcement, the financial industry and the Congressmen and Senators who passed it as primarily a 3 recordkeeping and record retention law. Indeed, its provisions are contained in the United States Code under the heading "Records and Reports on Monetary Instruments Transactions." The Act did not establish and was never understood to have established a relationship between financial institutions and government whereby banks would be required to conduct surveillance on their customers and report the slightest suspicious transactions to government agencies. Such a concept is alien to our system of law and justice. Application of the Act Over the Last 15 Years After conducting a thorough investigation of utilization of the data gathered under the Act, the Comptroller General reported to Congress in 1981 that "the reports required under the Act are not widely used and their potential utility as an investigative tool is unknown. "2/ The Comptroller General concluded: "After 10 years, the Bank Secrecy Act has not been used sufficiently to demonstrate whether the demands it places on the private sector, especially financial institutions, are commensurate with the benefits obtained by the Federal Government."3/ Although the Comptroller General's report put the agencies on fair notice as to the lack of adequate utilization of currency transaction reports ("CTRS") and related documents, the banking industry was not made aware of any substantial failure of compliance on its part. Thus, the Comptroller General reported that according to the bank regulatory agencies in 1981, "fewer than 2 percent of financial institutions fail to comply with the reporting requirements."4/ While the fact that the government was seemingly satisfied with the banking industry's compliance with the Act is not an excuse to become complacent about the reporting requirements, it was certainly evidence of the relative lack of importance the government placed on the reporting requirements imposed under the Act. In the intervening four years between the 1981 GAO report and public revelations of the Bank of Boston situation, the federal government did little to alert the financial industry to any serious compliance problems. As reported to Congress on October 29, 1985 by William J. Andersen of the General Accounting Office, a then recently commissioned study demonstrated that the agencies "have given Bank Secrecy examinations a relatively low priority."57 The study showed the agencies had allocated insufficient resources to this area, used relatively inexperienced examiners, failed to establish sufficient procedures for compliance examinations, and failed to adequately document their examinations. GAO found a lack of communication and coordination between the Treasury Department, charged with enforcement of the Act, and the regulatory agencies, whose task it was to determine adequate compliance. With limited exceptions, such as in south Florida, the majority of banking institutions apparently believed they were complying with the reporting requirements. By 1985, however, it became clear that the government's lack of emphasis on currency reporting requirements was apparently being mirrored by some financial institutions which were charged with filing CTRS. The recent rash of fines imposed on some of the banking industry's larger members evidences what in fact was a less than total commitment by the industry as a whole. Thus, for the first time the industry was awakened to its less than exemplary record of compliance with the Act. Present Application of the Act While there has been an obvious lack of emphasis on the reporting requirements from both government and industry, recent events starting with Operation Greenback have turned this situation around. The importance of full compliance with the reporting requirements has been brought home to financial institutions through the substantial penalties levied against several institutions as well as the heightened Congressional and media attention paid to the money laundering problem. Fortunately, both government and the financial industry have reacted positively and have instituted actions to take the steps necessary to ensure full compliance with the Act. - A large number of banking institutions recently conducted reviews of their own procedures for the filing of CTRS. This has resulted in a marked increase in the number of CTRS filed from 700,000 in 1984 to approximately 2,000,000 in 1985 and an estimated 3,000,000 in 1986.6/ The increase in filings has necessitated a 500% increase in the IRS staff required to process the forms.7/ Additionally, many institutions have implemented new procedures to train their tellers and other personnel on the completion of CTRS. A number of banks have created new internal audit procedures to ensure compliance and some have hired compliance officers to oversee their reporting operations. Officials from some 6,200 banks have viewed a Department of Justice educational tape on money laundering techniques. As pointed out by U.S. Assistant Attorney General Stephen Trott, the American Bankers' Association is actively promoting the education of bank employees regarding money laundering and compliance with reporting requirements. The agencies, too, have taken steps to ensure stepped-up compliance with the Act. For example, until recently the banks themselves decided which of their customers 5 could be deemed exempt from reporting requirements. A small number of banks routinely submitted their exemption lists voluntarily to Treasury for its review due to the uncertainty of who was entitled to an exemption. Under a regulation made effective January 1, 1986, exemptions from reporting requirements are now subject to review by the IRS.2/ Recent regulatory changes have also brought casinos under the ambit of the reporting requirement. The government has also established or put new emphasis on data retrieval programs to make more effective use of the information collected, such as the Treasury Financial Law Enforcement Center in Washington, D.C., involving specialists from the IRS, Customs, FBI, DEA, and Justice Department.10/ The agencies have instituted new examination procedures geared toward a more comprehensive review of compliance with the Act and have established an Interagency Working Group to help ensure coordination among the various agencies involved in this area. 11/ Instead, however, of taking the time to properly review the results of this new heightened enforcement of existing provisions of the Act to determine if the benefits to law enforcement justify the burdens placed upon the government and the banking industry, bills have been submitted to Congress which threaten to stretch this recordkeeping, document retention and reporting law beyond its logical limits. These bills would impose even greater demands on the industry without a correlative benefit to government. The bills presented to Congress threaten to distort the Act into something it is not, was never intended to be, and should not become. Proposed Amendments to Title 12 - Right to Financial Privacy As a former supervisor of Treasury law enforcement agencies with jurisdiction over this area, I am well-acquainted with the importance of government having reasonable access to the financial records of suspected drug dealers and other criminal elements. That is why during my tenure at Treasury I initiated efforts in 1969 to do something about Swiss bank secrecy, which led to a treaty with Switzerland to assist U.S. enforcement particularly in organized crime cases. I also initiated and supervised a federal program directed at the illegal profits of the drug traffickers, the Treasury/IRS Narcotics Trafficker Tax Program ("NTTP"), which focused on the financial and tax records of suspected drug |