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are still ongoing and we are not yet certain how well they will work for us.
Finally, I would like to point out an inconsistency between the summons authority available under title 26 and title 31 which does have an impact on our ability to enforce title 31.
Presently, we cannot honor the financial institutions' requests for a summons in connection with a compliance check, nor can we summons or subpoena records from an institution that refuses to cooperate. Cooperating financial institutions frequently request a summons as a means of protecting themselves from possible suits by their clients.
In title 26 examinations, we issue such a summons to the requesting bank. Without such authority under title 31, institutions who really want to cooperate with the Service refuse to do so for their own legal protection.
Furthermore, if we are conducting a title 31 examination and a financial institution refuses to provide us with appropriate books and records to reach a determination, we have to stop our examination and forward that incomplete case to Treasury for appropriate action. We feel that this is wasteful of our resources and is not administratively effective.
In summary, the real benefit to be derived from the information required by the act from the standpoint of civil tax enforcement is the use of that data in identifying returns in need of examination. I hope I have emphasized the extent of examination's efforts in developing a selection system using Bank Secrecy Act information as an integral part of our efforts to improve voluntary compliance.
I would like to thank the subcommittee for permitting me to provide this information.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Woodard can be found in the appendix.]
Chairman ST GERMAIN. Thank you, Mr. Woodard.
Now we will hear from Francis M. Passarelli, who is the Acting Director of the Office of Examination and Supervision, with the Federal Home Loan Bank Board.
Mr. Passarelli, we will put your entire statement into the record. You may proceed.
STATEMENT OF FRANCIS M. PASSARELLI, ACTING DIRECTOR,
OFFICE OF EXAMINATION AND SUPERVISION, FEDERAL HOME LOAN BANK BOARD
Mr. PASSARELLI. Thank you. Mr. Chairman and distinguished members of the subcommittee, I am Francis Passarelli, Acting Director, Office of Examinations and Supervision of the Federal Home Loan Bank Board.
Accompanying me are Harry Quillian, Acting General Counsel of the Bank Board, and Rosemary Stewart, Director of the Board's Office of Enforcement.
We are here today to testify on the Board's effort to carry out its responsibility under the Bank Secrecy Act, which I will sometimes refer to as BSA. The Board recognizes the importance of this act and in my testimony I will discuss both our BSA activities and our plans to strengthen them. I will then address issues the subcommittee raised with regard to other laws and proposed legislation.
One of the principal ways that we have carried out our Bank Se crecy Act responsibilities is by having our examiners review compliance with the act in their regular examinations. Our Bank Secrecy Act examination objectives and procedures were developed with other Federal financial regulatory agencies, the Treasury Department and the Government Accounting Office.
In 1982, in order to focus our limited examination resources on the most urgent targeted areas, mandatory usage of the EOP was suspended. But the ÆOP, examination work papers and BSA check list remain the principal guidance to examiners. Examiners continue to be responsible for meeting examination objectives.
Whenever necessary, examiners must advise institution managers of their responsibilities under the BSA regulations. The Board's supervisory agents at the 12 Federal home loan banks are responsible for taking supervisory action when necessary to obtain compliance with the act.
We refer violations that warrant civil or criminal penalties to the Treasury Department as soon as they are discovered by bank system examiners. In addition, we transmit summary reports of all violations twice a year to the Treasury Department.
Moreover, pursuant to the BSA and its regulation, OES may recommend to the Treasury Department that it impose civil penalties and make referrals for possible criminal investigations.
In 1985, we found 46 Bank Secrecy Act violations in a total of 10 of the 1,808 institutions we examined. Forty violations concerned failure to file currency transaction reports and six concerned failure to maintain the required list of exempt customers.
In all cases, we required corrective action. In one instance, we re ferred the matter to Treasury with a recommendation for a civil penalty and criminal investigation.
We hope that the small number of violations that we have de tected in our examination process indicates that most institutions we regulate comply with the Bank Secrecy Act. However, we are taking action to strengthen our examination and supervisory process in general, and those relating to-
Chairman ST GERMAIN. Excuse me. Mr. Passarelli, I hope you're going to do more than hope.
Mr. PASSARELLI. We intend to, sir.
Mr. PASSARELLI. We intend to, sir. I would like to tell you some of the actions we've taken and are taking.
Because the Bank Board recognized that its examination staff was too small to handle the increased demands we have recently faced, on July 6, 1985, the Board transferred its 747 examiners to the 12 district banks and gave the banks responsibility for conducting examinations under policies and procedures established by the Board.
Following this reorganization, the Federal home loan banks expanded their examination staffs at the direction of the Federal Home Loan Bank Board Chairman Gray
By December 31, 1985, there were 1,003 examiners in the banks, a more than one third increase over the July 6 figure. Moreover, the Chairman's goal is to reach 1,250 examiners by July 1, 1986, which will be a total increase of two-thirds in 1 year.
To ensure that substantial and material violations of law are corrected promptly, the Chairman has repeatedly directed bank system staff to take aggressive supervisory action.
On August 9, 1985, he issued a memorandum requiring that supervisory correspondence to depository institutions be firm and precise, and that formal enforcement action be initiated where violations or unsound practices cannot be resolved expeditiously.
On August 23, 1985, the Chairman called for prompt, vigorous use of formal enforcement tools for material violations and deficiencies, and required reporting to Washington whenever such enforcement was not deemed immediately appropriate.
On February 12, 1986, he directed the immediate reporting of significant problems detected during examinations.
All new examiners are required to attend the new examination training school which includes instructions on the Bank Secrecy Act.
In addition, we have provided all 12 Federal Home Loan Banks with a videotape designed in part at the board. The videotape is intended for the newly hired examiner and as refresher training for examination and supervisory staff.
During 1985, and thus far in 1986, we have issued a number of notices about the Bank Secrecy Act to institutions in the Federal Home Loan Bank System, including memoranda describing the responsibility of independent public accountants under the Bank Secrecy Act; directing each institution to establish Bank Secrecy Act employee training programs; providing information on the new role of the Internal Revenue Service in reviewing exemption lists and approving or denying individual requests for exemptions; and distributing
amendments to the Bank Secrecy Act regulations. The Federal Home Loan Bank Board has worked closely with the Department of Justice to design a revised criminal referral form to obtain information the Department needs for criminal investigations.
In 1985, board examiners filed 150 of these forms and insured institutions voluntarily filed 652.
Beginning in 1986, FSLIC-insured institutions have been required to report known or suspected criminal acts. As a result, in the first 3 months of 1986, examiners filed 27 referral forms and the institutions themselves filed 911. The Bank Board has actively participated in the Attorney General's Bank Fraud Working Group and established contacts throughout the country to communicate quickly and directly with the Justice Department.
In addition, the Board is participating in the Justice Department's new tracking system for agency criminal referrals. In addition, we are revising our Bank Secrecy Act examination procedures. We are also writing Bank Secrecy Act supervisory procedures. We are also drafting additional guidance to help auditors detect and report money laundering activities and are distributing to the staff and to insured institutions several recent issuances from the Department of the Treasury.
Chairman ST GERMAIN. Mr. Passarelli, let me ask you this. You're aware of the GAO report to us.
Mr. PASSARELLI. Yes, sir.
Chairman ST GERMAIN. It stated that your examiners were given an option as to whether or not they would perform a Bank Secrecy Act examination to be done at their discretion.
Was that an accurate report by GAO?
Chairman ST GERMAIN. When did this policy change? With the Bank of Boston situation?
Mr. PASSARELLI. I think the emphasis came in August of 1986
Chairman ST GERMAIN. In August 1985, I would think. If it was August of 1986, you'd have to have a crystal ball.
Mr. PASSARELLI. August 1985 and we actually strengthened our procedures in regard to the Bank Secrecy Act regulations.
Chairman ST GERMAIN. So that the Federal Home Loan Bank Board was somewhat akin to many of the banks that have since been fined. All of those banks that were fined had a cavalier attitude. Well, that's not really all that important.
Mr. PASSARELLI. Not necessarily, sir. I think what we've done is actually targeted the examination. I think the examiners, what they did, they limited the scope of their examinations and as a result of this limited scope, they didn't actually get into the details that were more
Chairman ST GERMAIN. Well, the fact of the matter is they didn't do it. You know, you're giving some doubletalk here, but what it boils down to is it's fine to hear all of this and we're happy about it. However, for a long period of time, there was obviously an attitude that prevailed not only within financial institutions, but among some of the regulators.
Mr. PASSARELLI. Yes, sir. In fact, with the increased staffing that we're getting, we're going to expand our procedures in regard to this aspect of our examination, yes, sir.
Chairman ST GERMAIN. The fact of the matter is that up until 1985, when the lid came off, the Federal Home Loan Bank Board and its examiners weren't paying much attention to the Bank Secrecy Act and its reporting requirements.
Is that a fair statement?
Mr. PASSARELLI. The subcommittee has asked our views on giving the regulators authority to impose civil money penalties on financial institutions for failure to report under the Bank Secreacy Act. It also asked to what extent supervisory powers might be extended to uncover criminal activity such as tax evasion, drug trafficking, or money laundering.
As I explained in my full written statement, it is our view that where other authorities—Treasury, Justice, or IRS—already have primary responsibility for imposing penalties under the Bank Secrecy Act, it does not appear necessary or desirable to duplicate this authority. However, if violation of the Bank Secrecy Act were added to the grounds for removal of institution officials and employees, we believe that a significant deterrent effect would result.
The subcommittee also asked our view on the right to Financial Privacy Act. The act permits our agency to transfer information from the accounts of protected customers to the Justice Department or other appropriate Federal law enforcement authority without prior notice to or approval from the customer.
Notice to the customer is required, however, within 10 days after the transfer. This has two adverse effects. First, a customer who is involved in a suspected crime may destroy evidence or disappear in response to the notice. And second, an innocent customer, such as a person who does not know that his savings account had been manipulated, may be shocked by the notice.
The administrations bill, H.R. 2785, would amend the right to financial privacy act to allow the flow of information required to combat crime without having to notify customers.
Moreover, this bill contains the provisions which we believe are necessary to make money laundering a crime if done with intent, knowingly or with reckless disregard for the origin of the unlawful funds.
We support this bill.
We'd also like to make several recommendations for amendments to the Change in Savings and Loan Control Act.
Specifically, we encourage the subcommittee to consider:
First, extending from 60 to 90 days the period for objection to an acquisition in order to give the Board sufficient time to review and process control act notices.
Second, clarifying the Board's authority to define by regulation the term "control," with respect to the power to direct the management or policies of insured institutions.
And third, clarifying the Board's authority to define further by regulation the terms "competency," "experience,” and “integrity.
The Board also suggests the elimination of a disparity between the Holding Company Act and the Control Act. The Holding Company Act provides for a criminal penalty for willful violations. It also provides for civil money penalties for violation, whether or not they are.
In contrast, the Control Act only provides for civil money penalties and then only for willful violations. In order to enhance the Board's enforcement of the Control Act and the Board's regulations, we recommend that the subcommittee consider amendments to the Control Act to clarify the Board's authority to define by regulation the term “willful.”
The Board also recommends amendments to the Control Act that would clarify that a private right of action exists under that act; Clarify that the Board may seek equitable relief for both statutory and regulatory violations; and describe procedures for the Board to follow in assessing civil money penalties.
Thank you for the opportunity to testify before you. My colleagues and I will be pleased to respond to any questions you may have.
The prepared statement of Mr. Passarelli on behalf of the Federal Home Loan Bank Board and a report with exhibits dated April 17, 1986 can be found in the appendix.]