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insured institutions, ought to be treated differently than
repeatedly recommended the Act be amended to correct this flaw. (4) The requirement to notify customers whose accounts have been
manipulated by an insider represents another flaw in the way the RFPA is being administered. Where a customer is not a target of an investigation, but rather a potential victim, notification can be
unduly alarming to the customer.
information contained in reports of examination to federal
The amendments to the RFPA contained in H.R. 2785 reflect the suggestions of the Bank Fraud Working Group on which the FDIC is represented. These amendments would correct the flaws in the RFPA mentioned above and would free financial institutions from the restrictions and uncertainties now affecting their ability to make informative criminal referrals. We strongly urge the Congress to adopt these amendments.
TAX EVASION, DRUG TRAFFICKING AND
MONEY LAUNDERING AS THEY INVOLVE FINANCIAL INSTITUTIONS
THURSDAY, APRIL 17, 1986
HOUSE OF REPRESENTATIVES,
SUPERVISION, REGULATION AND INSURANCE,
Washington, DC. The subcommittee met at 9:32 a.m., in room 2128 of the Rayburn House Office Building, Hon. Fernand J. St Germain (chairman of the subcommittee) presiding.
Present: Chairman St Germain; Representatives Cooper, Kaptur, Wylie, McKinney, McCollum, and Wortley.
Also present: Representative Esteban E. Torres of the full committee.
Chairman ST GERMAIN. The subcommittee will come to order. Yesterday, the subcommittee heard testimony from witnesses who described various money-laundering schemes in which financial institutions were used. The subcommittee heard how under certain circumstances the reporting requirements of the Bank Secrecy Act could be avoided by certain criminal elements in our society.
Today, we will hear from the Department of Treasury and the banking regulators who will report on regulatory actions taken since last April to ensure that the financial institutions of this Nation are in compliance with the reporting requirements and other provisions of the Bank Secrecy Act.
We are especially interested in learning how Treasury's negotiation procedures with banks charged with civil violations of the reporting requirements of the Bank Secrecy Act work; are they timely, effective, and are they a deterrent to future abuses?
In addition, the witnesses will also give us the benefit of their analysis of the legislative proposals dealing with money laundering that have been referred to the Banking Committee.
The question has been raised as to whether the Bank Secrecy Act, in and of itself, as important as that act is, fully addresses the grievous problems that currently exist regarding the use of financial institutions for the purposes of tax evasion, drug trafficking, and other money-laundering activities.
Therefore, the subcommittee will examine other banking statutes that may be of assistance. We look forward to the testimony of our witnesses today to help us in determining whether there is any
merit to giving regulators additional civil money penalty powers to include the Bank Secrecy Act as another law which would be covered under their jurisdiction for civil enforcement.
The subcommittee will also explore whether the change in the Bank Control Act can be strengthened to help detect criminals who seek to obtain control of financial institutions.
At this time, we would like to have welcomed to the subcommittee Hon. Francis A. Keating II, who is the Assistant Secretary of the Treasury for Enforcement and Operations as our first witness today.
Is he here? [No response.] Obviously, he's enforcing or doing something exciting. He is on his way right now? Well, we're going to put the panel on because the hearing was scheduled to begin at 9:30. The chairman was here and I think Mr. Keating could have been here.
I will ask, therefore, the panel to approach the table: Mr. Woodard, Mr. Passarelli, Mr. Dudine, and Mr. Serino.
We welcome the panel. We will put your statements in the record and we will ask you to make your presentations at this point.
The first witness will be Percy P. Woodard, Jr., Assistant Commissioner for Examination of the Internal Revenue Service.
STATEMENT OF PERCY P. WOODARD, JR., ASSISTANT COMMISSIONER (EXAMINATION), INTERNAL REVENUE SERVICE Mr. WOODARD. Thank you, Mr. Chairman.
I would like to summarize examination's role in supporting the Service's mission and provide a synopsis of our role under the Bank Secrecy Act and our efforts to use currency transaction reports to maintain voluntary compliance.
Examination's mission is to identify and cost effectively allocate resources to those returns in need of examination and to conduct quality examinations on those returns identified.
To accomplish this, we have a limited amount of resources which must be spread across a variety of returns, such as income, estate, gift, employment and excise taxes, and also a variety of tax abuse problems, such as tax shelters and tax protesters.
Since the early 1980's, our resources have remained fairly constant, while return filings have increased. The result has been de clining examination coverage. Thus, the selection of those returns with the highest probability of noncompliance has become extreme ly important to maintaining the public's confidence in the tax system's integrity, fairness, and efficiency.
Before I discuss the importance of information required by the Bank Secrecy Act in accomplishing our mission, I would like to review the Service's responsibilities under the act.
The Service is responsible for ensuring compliance with the reporting and recordkeeping provisions of the act by any financial institution not under the regulatory supervision of Federal banking agencies or the Securities and Exchange Commission. These functions have been divided within the Service between examination, to
perform civil compliance checks, and criminal investigation, for investigating criminal violations of the act.
Institutions under examination's jurisdiction for compliance checks include check-cashing services, if such services are a primary business, and other currency exchange operations, except coin dealers; issuers, redeemers or cashiers of travelers checks, money orders, or similar instruments; licensed senders or transmitters of funds abroad for others; telegraph companies which transfer funds domestically or internationally; licensed gambling casinos having gross annual gaming revenue in excess of $1 million; and the domestic branch, agent, or agency of a foreign bank which is not supervised by one of the Federal banking agencies, such as a law firm acting as an agent for a foreign bank.
As a result of Treasury Order 105-13, examination also has responsibility for enforcing the civil aspects of the exemption provisions of the Bank Secrecy Act.
In addition, we have responsibility for assuring compliance with the filing of currency transaction reports-for those banks not currently examined by any of the other Federal supervisory agencies—for safety or soundness, such as State chartered banks, savings and loan associations, or credit unions.
Compliance checks are necessary to ensure integrity with the filing requirements. However, another real benefit to be derived from currency transaction information will be their use in identifying returns in need of examination for those who are not complying with the income tax requirements. In this sense, a major role of the examination function is as the end-user for all of the information generated by this act.
Therefore, examination is studying how best to utilize currency transaction information and our efforts can be described as a multilevel approach.
First, we have placed in process a system that associates currency transaction information with the tax returns that are selected for examination and with the returns that are part of our information document-matching program.
Next, and, I might add, a much more difficult part of the process, is to develop a selection system that effectively uses this information to cause returns to be examined.
Therefore, we must be able to discriminate among the large volume of these reports to identify those that have the greatest potential for noncompliance.
Before I describe some of the studies that we have undertaken to do this, let me say that it is difficult to use the CTR as the sole indicator of noncompliance, although it may be a very vital piece of information with respect to a particular case.
Our research efforts in this area have taken a novel approach in trying to solve this problem and to build a return selection system.
Traditionally, we have approached building return selection systems using data that appears on filed income tax returns. The studies which I am about to describe focus not only on tax return information, but in a significant way, they also focus on information not appearing on the tax returns and the CTR and the CMIR's are components of that nonreturn information.
We have a Florida tax haven study which is attempting to establish a profile of individuals involved in money laundering so that we can build from this profile a supplemental selection system. Data for this study is being drawn from cases in south Florida involving a major money laundering scheme.
The case involved a Florida tax preparer arrested for various currency and narcotics violations. As a result of that arrest, a large volume of client files and related information was acquired by the Internal Revenue Service. A preliminary reconstruction of income using currency monetary instrument reports [CMIR's] that were filed by this preparer indicates more than $38 million was laundered by his office through a tax haven and returned to Florida during 1982 and the first 5 months of 1983.
Examinations of clients to date indicate that two basic laundering schemes were utilized. One of the methods used involved the physical delivery of cash to the local agency of a foreign bank for the purpose of wiring these funds to a foreign country. Wiring funds, however, established a paper trail due to the Bank Secrecy Act reporting requirements. Therefore,
to circumvent this, in a majority of the cases, the preparer personally transported the cash in a chartered plane to the tax haven country. Of course, this represents noncompliance with the CMIR provisions which should have been reported to the Customs Service.
Data was collected from the examination of those clients who had failed to report part or all of their income. Of approximately 135 cases closed to date, examiners have discovered more than $49.5 million in unreported income and proposed in excess of $37 million in additional tax and penalties.
CTR's were used in conjunction with other sources of information, such as CMIR's and bank records, to uncover about $16 million of the unreported income. However, the CTR's alone accounted for less than $500,000 of the unreported $16 million.
This indicates that CTR's are a valuable tool when used with other information sources. The CTR alone in many of these cases did not assure that the person was an underreporter or that the amount represented unreported income.
We are now attempting to use data from the study to identify individuals who possess the same characteristics as those found to be concealing income in the Florida case. This would give the Service an additional return selection system for identifying returns in need of examination.
The tax haven offshore banking project has been established jointly by the examination and criminal investigation functions to consolidate the various types of third-party information which is associated with tax haven activity. Data from this project will be used to select cases for a controlled study which will evaluate and combine information from third-party sources, including CTR's, to test the effectiveness of this technique in identifying non-compliance.
Other cases will be referred to the field as the result of civil leads provided to examination by the criminal investigation division. These leads will be tracked and the results analyzed to detect common patterns of money-laundering techniques. These efforts