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Chairman ST GERMAIN. I think what we should do is probably listen to Mr. Wylie's opening statement, go over and cast this vote, and then return and begin with our colleague, Mr. Pickle. I will recognize him at that time. So if you want to go over and vote now and then come back, we can get started.
Mr. PICKLE. Thank you.
Last year, during our investigation into the Bank of Boston's failure to comply with the reporting requirements and other provisions of the Bank Secrecy Act, it was obvious that the bank regulatory agencies had not made compliance with the act, a priority in either their training of examiners or in the examinations themselves. In addition, it was clear to many of us that many financial institutions ignored-either intentionally or unintentionally-the requirements of the act.
However, the materials provided to this subcommittee, in response to the chairman's letter, indicate that at least the regulators have taken steps to better train examiners in their responsibilities under this act. I am also pleased to see that the industry is taking responsibility in bringing the issue to the attention of chief executive officers and other personnel. The message should be that money laundering could easily occur in any financial institution and the essential safeguard is full compliance with the reporting and recordkeeping requirements of the Currency and Foreign Transaction Reporting Act. The March issue of Credit Union magazine is a fine example of the industry's efforts. The cover story is entitled "Money Laundering: Do Not Be an Illegal Clean Machine."
It appears, from the information the committee received from the regulatory agencies this week, the regulators need some additional tools in order to upgrade their efforts to ensure compliance with the act. Now that we have the attention of the industry, we may need some modifications in the law to make the most effective use of the civil money penalties to correct continuing violations due to improper procedures or unresponsive bank officials.
In addition, we need to make every effort to pursue those who have the most interest in this, the money launderers themselves. There are several proposed bills, as the chairman has mentioned, which have been introduced in the House, including H.R. 2785, the administration's bill, which the chairman and I cosponsored, which make this activity a criminal offense with appropriate criminal penalties.
I sincerely hope that after the subcommittee has concluded its investigation and hearings into the Bank Secrecy Act, we can quickly agree on the most effective and constructive changes that need to be made in the act and in related laws. And I will pledge my assistance to you, Mr. Chairman, to convene a markup and to complete early hearings.
Chairman ST GERMAIN. I am very grateful for that.
At this time, I would ask unanimous consent that we place in the record, at the conclusion of today's hearing, reports prepared by Treasury, the Office of the Comptroller of Currency, the FDIC, and the Federal Home Loan Bank Board concerning the efforts to improve enforcement of the Bank Secrecy Act, which were prepared at my request. Without objection, so ordered. The subcommittee will be in recess for approximately 5 minutes. [Recess.) Chairman ST GERMAIN. The subcommittee will come to order.
At this time, having cast that important vote on approving yesterday's journal, we can at long last hear from our distinguished colleague, a senior Member of the House and an important member of the Ways and Means Committee, indeed a subcommittee chairman.
Now, with these kinds of credentials, we know that we will benefit from this testimony. We are looking forward to this. Chairman Pickle, we will put your statement in the record and you may proceed.
STATEMENT OF HON. J.J. PICKLE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS Mr. PICKLE. Mr. Chairman, I thank you very much. It is an honor to appear before this committee to present my testimony to you, Mr. Wylie, Mr. McKinney, Mr. Barnard, and other members of the subcommittee.
The Oversight Subcommittee of the Committee on Ways and Means has investigated problems associated with money laundering. The subcommittee held a hearing last year focusing specifically on the responsibilities of the Internal Revenue Service in this area.
In addition, several members of the committee toured the IRS training facility at the Federal Law Enforcement Training Center in Glynco, GA, to learn more about the IRS enforcement in this area.
Our subcommittee's investigation resulted in two important findings. One, we found that because of loopholes in the current law, that Government has been unable to successfully prosecute the person who puts together schemes that allow illegal source cash to be laundered.
We also found that problems existed in the ability of the IRS to seize illegal source income when a criminal such as a drug dealer launders illegal source income through domestic financial institutions.
We as a nation are losing our battle against the flow of illegal drugs. Money laundering is an intricate part of the drug trafficking process. Therefore, any efforts to try to stop the drug traffic must stop the money laundering associated with it.
Also, I should point out that businesses and individuals in the United States are laundering income from both legal and illegal activities. This problem is a growing one. As a result, I am concerned about the impact of the money laundering operation in the collection of U.S. Federal income taxes.
As members of this subcommittee are aware, the enforcement of the Bank Secrecy Act reporting requirements is the responsibility of the Secretary of the Treasury, who has delegated this authority to the Internal Revenue Service. Under current law, a domestic financial institution must report cash transactions of $10,000 or more to the Internal Revenue Service.
In a typical scheme, money launderers often break up large sums of money into transactions of less than $10,000 to avoid having the financial institution report the cash.
I asked the administration to work with my committee in drafting legislation that would close loopholes in the law that have not allowed the Government to successfully convict money launderers and will give the Internal Revenue Service adequate seizure and forfeiture authority.
The bill that I introduced yesterday, H.R. 4573, represents the results of this joint effort. This bill was drafted by the administration in close consultation with my staff. It has the approval of the Treasury, and OMB has also signed off on it.
The bill closes the loopholes in the current law which allows the money launderer to escape conviction and provides the Internal Revenue with seizure and forfeiture authority when there are violations of Bank Secrecy Act reporting requirements.
The bill as drafted is under the jurisdiction of your committee, Mr. Chairman, and I know that your committee is going to evaluate this legislation and I hope it will be helpful as you improve the Bank Secrecy Act.
Before I outline my bill, I think one thing should be made clear. The administration has developed its own comprehensive approach to address the entire area of money laundering, their proposals being actively worked on in the House and Senate Judiciary Committees, and I encourage all efforts in this area. It is a broad field that they are looking into now. This bill, H.R. 4573, specifically targets the actual money launderer, often called a smurf, and all other parties involved in the money laundering scheme.
My bill, which has administration support, is designed to complement other money laundering proposals. This bill, even if it is enacted on its own, will be useful in addition to current law in combating money laundering activities.
Now let me, Mr. Chairman, take just a couple of minutes more to outline the three sections of the bill so that you have a summary of what the bill provides.
Section 1 of the bill expressly subjects persons to criminal and civil liability where they cause or attempt to cause a financial institution to fail to file a required Currency Transaction Report, commonly referred to as a CTR, or to file an incorrect CTR. This will be helpful in not only getting the smurf who does the actual transaction but also those who plan the activity.
This would allow Treasury and IRS to act before the 15 days that the financial institution has to formally file a CTR.
Also, the bill makes it an offense to structure or to assist in structuring a transaction to evade the reporting requirements. For example, this provision would prohibit the structuring of a transaction to circumvent the reporting requirements by involving two or more financial institutions.
Section 2 of my bill allows forfeiture and seizure authority to be used by the Internal Revenue Service to seize laundered cash and property directly traceable to the laundered cash. Thus, both the İRS and the Customs Service would be able to use seizure and forfeiture more effectively to get the money or the property before it disappears.
However, there are protections in my bill for the innocent third parties. If a person proves he has acted in good faith, is a bona fide purchaser of cash or goods from a money laundering scheme or could prove that his failure to file a CTR was not a willful violation, his cash or property would not be subject to seizure or forfeiture.
Section 3 of the legislation provides a new civil penalty for violation of the Bank Secrecy Act. The amount of the penalty would be the difference between the amount forfeited under section 2 and the total amount of the laundering transaction. Again, the standard of this civil penalty would be a willful violation.
In conclusion, Mr. Chairman, I believe the need for this legislation is obvious. Federal courts have taken the position that there is inadequate legislative authority to prosecute people who are actively engaged in money laundering operations. At a minimum, this loophole should be closed forever, and under this bill, it would be.
Also, for the first time, this legislation would allow the Internal Revenue Service to seize and forfeit cash and property that is involved in the violation of the Bank Secrecy Act. As members of this subcommittee may know, laundered money cannot be seized before there is difficulty in proving that there is a nexus between the money launderer and a criminal activity. In most cases, the case involves illegal drugs.
This bill represents a careful effort to strengthen IRS enforcement authority against money laundering while at the same time protecting third parties.
I am enclosing for the record, Mr. Chairman, a copy of the bill with a detailed section-by-section explanation.
Mr. Chairman, that completes my testimony. I have with me Vanessa Clark, a member of the Oversight Subcommittee staff, to assist in any questions that might be asked by your subcommittee.
[The prepared statement of Congressman Pickle can be found in the appendix.)
Chairman ŚT GERMAIN. Thank you, and initially I would like to commend you on the actions you have taken to resolve this problem. Certainly, we need the help and support of as many Members as possible, and it is nice to see someone like you taking a lead in this area.
Now I would like to ask you one question. Forfeiture under any circumstances is a very drastic action; but nonetheless, you do make a very valid case for forfeiture provisions in your bill. Would you tell the subcommittee what safeguards are contained in your bill so that innocent individuals would not become subject to the forfeiture provisions?
Mr. Pickle. Mr. Chairman, I stated in my legislation that one section of the bill attempted to protect these innocent third parties. More specifically
Chairman ST GERMAIN. Yes, if we could have more detail on that.
Mr. PICKLE. You raise a question about what protections are in the bill to protect innocent third parties from the forfeiture provision. Well, No. 1, the bona fide purchasers are exempt from the bill. That is a person who actually gets the property, the cash, and gets it innocently and he can so prove that. If he is a bona fide purchaser, he would be exempt.
Second, the violations which are not willful are exempt from the bill. That is if a third party accidentally came into possession of this money, which could happen, and if that could be proved, that it wasn't a willful evasion, then that transaction would be exempt.
Also, the Internal Revenue procedures would allow for immediate corrections where there is an error. The intent is that if you are a third party and you are an innocent third party, you ought to be exempt, and we are trying to make that as clear as we can in the legislation.
Chairman ST GERMAIN. I would like to now recognize another distinguished member of our subcommittee, who has conducted hearings in this area with his Subcommittee on Government Operations. Those hearings addressed the Federal response to criminal misconduct and insider abuse in the Nation's financial institutions. Additional hearings were also held on tax evasion through the Netherlands Antilles, and other tax haven countries.
So we have the benefit of the assistance of another distinguished colleague who, as I say, has had his own hearings in this area. At this point, I recognize Mr. Barnard.
Mr. BARNARD. Thank you, Mr. Chairman.
Also let me express welcome to the Honorable Jake Pickle for being with us this morning and compliment Jake on what he has done in this area and also the legislation he has brought before us.
Chairman Pickle, if your bill had been into law before now and with all of the revelations of money laundering operations that we have had in the last several years, what do you think would have been the
consequences of that? Have you studied that? Mr. PICKLE. Well, we have looked at it, and it is hard to speculate. We know now that the money laundering is a wholesale operation and that these evaders, launderers, move from one part of the country to another as soon as the heat moves in on them. They go from the Florida area to the west coast, and of all things, they are about to come into the Rio Grande Valley.
I think if we had the authority to actually have seizure and forfeiture, and if we could actually move in and get a conviction on the smurf or those who are planning money laundering operations. I think we could cut the money laundering in half. I also think we could cut the violations on the drug smuggling, perhaps, in half.
Now, that is conjecture on my part. I don't know that we have got any actual figures on how much this legislation if passed, we cut money laundering.
Mr. BARNARD. What would have happened to some of those who have been negligent in reporting money laundering operations in some of the financial institutions of the country? What would have happened in some of those instances?
Mr. PICKLE. I would venture to say, Mr. Barnard, that if those individuals, had cooperated in a money laundering scheme, they would have been subject to prosecution under the law.
Mr. BARNARD. And this is one thing that your bill does, it does bring those who have been guilty from the standpoint of not reporting.