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financial institutions are complying with all provisions of the Bank Secrecy Act. The Subcommittee would be most interested in hearing what additional manpower and other resources the Department has allocated to this effort.

The report should be submitted to the Subcommittee no later than February 10, 1986.

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Dear Mr. Chairman:

The Secretary has asked me to respond to your letter
dated January 14, 1986, which requested a written report
concerning the activities of the Office of Enforcement and
Operations to promote the compliance of financial
institutions with the provisions of the Bank Secrecy Act
(the Act).


Since March 5, 1985, when former Assistant Secretary Walker testified before the Subcommittee, the Office of the Assistant Secretary (Enforcement and Operations) has substantially increased its efforts to improve compliance with the Act. There has been an increased commitment of staff resources in the office itself, as well as by the IRS. In addition, bank supervisors and other agencies that have compliance responsibilities have focused their attention on the Act. This increased commitment has permitted us to make regulatory changes, shift administrative responsibilities, draft procedural changes, and place greater emphasis on the identification of violations and the settlement of related civil liabilities.

In July, 1985, the Treasury Department established the Office of Financial Enforcement to assist in implementing and administering the Bank Secrecy Act regulations. The establishment of this office provided a focal point for Bank Secrecy Act related activity within the Treasury Department and acknowledged the increasing importance of the Act in Treasury's law enforcement efforts. The office has broad responsibilities for the compliance activities of all agencies that have been delegated responsibilities under the Act, including the Federal bank supervisory agencies, the Federal Home Loan Bank Board, the National Credit Union Administration, the Securities and Exchange Commission, the Internal Revenue Service, and the U.S. Customs Service.

The Office of Financial Enforcement is currently staffed with an Acting Director, a Bank Secrecy Act Compliance Specialist, an Acting Data Systems Specialist, and two secretarial staff members. This represents an increase in staffing for the Bank Secrecy Act area since


March, 1985 of 150%. In addition, the Office of the General
Counsel has provided the equivalent of more than one full-
time staff attorney to provide assistance with drafting
regulations and legislative proposals, reviewing potential
civil penalty cases, and other legal work relating to the

The increased emphasis within the office of Enforcement and Operations has not been limited to the staff level. The former Assistant Secretary and the Deputy Assistant Secretary (Enforcement) have made the Bank Secrecy Act a high priority issue. During 1985, they made trips to Hong Kong, Panama, and Switzerland in order to meet with foreign officials and bankers to promote international cooperation in combatting the money laundering activities that often involve violations of the Act. Both officials accepted a number of invitations to speak to bankers and legal groups on money laundering and the enforcement of the Bank Secrecy Act.

As a result, in part, of the hearings which the Subcommittee on Financial Institutions Supervision, Regulation and Insurance held in April, 1985, concerning the Bank of Boston violations, an unexpectedly large number of major domestic banks have been identified as having violated the Bank Secrecy Act. The side effects of this unanticipated development included a very unusual increase in the number of currency transaction reports filed and the emergence of many violations that appear to warrant civil penalties. The number of filings increased from about 700,000 in 1984 to an estimated 1,700,000+ in 1985, which included a substantial number of reports of transactions that occurred in prior years. There have been approximately 136 banks identified as possible violators. If, however, the subsidiaries of holding companies are grouped by holding company, the number is much smaller, about 66.

While the Office of Financial Enforcement has been monitoring the processing and computerization of the huge increase in currency transaction reports, the IRS has felt the major impact of the increased workload. Although the IRS has been attempting to keep up with the increase by allocating additional resources, there currently is a backlog, which together with the normal work-in-process inventory amounts to more than 900,000 reports.

As of February 10, twelve banks or holding companies have entered into civil settlements with the Treasury Department and have paid almost $10 million. A list of these entities and copies of the twelve settlement agreements are enclosed.


We currently are in the process of extracting data from the Bank Secrecy Act data base to identify additional banks that appear to have violated the currency transaction reporting requirements. Within a few days, we expect to receive a listing of reports that were filed in 1985 concerning transactions that occurred in 1984 and prior years. Since the data base appears to be complete through August, 1985, the list should identify all of the banks that filed delinquent reports including those banks that failed to bring their violations to our attention. Preliminary estimates indicated that about 70,000 reports have been filed late. Our analysis of the data base information should result in a considerable number of additional penalty


Late in 1985, the IRS agreed to assume the day-to-day responsibility for reviewing exemptions from the currency transaction reporting requirements and approving special exemptions under the provisions of 31 CFR 103.22(a). In January, 1986, the transfer was completed. We have been assisting the IRS during the transition stage. Their assumption of this responsibility has permitted us to devote more time to civil penalties and the improvement of bank examination procedures.

Over a period of several months, we have been meeting with the Federal bank supervisory agencies and others who have an interest in improving the procedures used by examiners for checking the compliance of financial institutions with the Bank Secrecy Act. As many of the civil penalty cases and the Bank of Boston case demonstrated, the procedures being used by the examiners did not detect the failure to report international bank-to-bank transactions. The gap in their instructions had to be closed, and a number of other issues also had to be considered in order to make compliance examinations more effective. These issues included the maintenance of detailed workpapers, the sharing of informa- tion among bank supervisory agencies, and the uniform application of the examination procedures. On January 8, 1986, we transmitted our recommendations to the supervisory agencies. A copy of Deputy Assistant Secretary (Enforcement) Queen's letter to the Division of Banking Supervision and Regulation, Federal Reserve System, is enclosed for your information. We plan to hold additional meetings with the agencies and develop a consensus on what the procedures should be. It is expected that the process will be completed within 60 days.


In addition, we have been working with the IRS to develop guidelines for bank examiners and others to use in reviewing a bank's retained copies of currency transaction reports (IRS Form 4789) for completeness. Since the Bank of Boston case, bank examiners generally have paid increased attention to the way in which the reports are prepared. With thousands of examiners in the field, there is a need to develop uniform standards to help them in evaluating the reports.

we are also assisting the IRS in their efforts to provide their staff members with written instructions and guidelines covering the review of bank exemption lists and the approval or denial of requests for special exemptions from the currency transaction reporting requirements. The guidelines for the review of exempt lists will also be made available to the bank supervisory agencies for the use of bank examiners in reviewing exemption lists as part of their compliance examinations. The IRS (Examination Division) is currently in the process of circulating a draft of those guidelines to the supervisory agencies for comment.

In an effort to streamline the initiation of criminal investigations of financial institutions, the IRS has been delegated authority to open criminal cases without obtaining approval from the Office of Enforcement and Operations. The IRS has agreed to review all requests for authority to open a case in its National Office. This should help to ensure the application of uniform standards and avoid unwarranted negative impact on the soundness of financial institutions.

We also worked with the IRS to develop a revision of IRS Form 4789, which financial institutions use to report currency transactions. The new form includes a number of improvements designed to require additional review by the preparing institution and to clarify the method for reporting currency transactions between financial institutions. We believe that the use of the revised form will improve the quality of the reports and focus accountability within the filing bank. It will also result in more accurate descriptions of transactions and consequently, it will facilitate our analysis of the data base and increase the value of the output. We expect that the form will be in use by the second half of 1986. A copy is enclosed for your information.

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