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STATEMENT ON

BANK SECRECY ACT ENFORCEMENT,
MONEY LAUNDERING AND CRIMINAL ACTIVITY
IN INSURED FINANCIAL INSTITUTIONS

PRESENTED TO

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND INSURANCE

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES

BY

JAMES R. DUDINE

CHIEF, SPECIAL ACTIVITIES SECTION
DIVISION OF BANK SUPERVISION
FEDERAL DEPOSIT INSURANCE CORPORATION

Room 2128, Rayburn House Office Building

April 17, 1986

9:30 a.m.

Mr. Chairman, I am pleased to be here this morning on behalf

of the Federal Deposit Insurance Corporation (FDIC) to report on the FDIC's enforcement of the Bank Secrecy Act and to discuss, from the FDIC's perspective, the steps we have taken and our thoughts on what still could be done to address the problems the criminal element poses to this country's financial institu

tions.

We have provided the Committee with a comprehensive report on our efforts to improve compliance with the Bank Secrecy Act. That report reveals we are finding more violations in the banks we examine. The trend in violations is up partly because of FDIC's strategy to focus examination resources on problem banks. In the past three years, problem banks and banks targeted specifically for potential Bank Secrecy Act problems made up a greater proportion of examinations. Such banks would be expected to

exhibit a higher incidence of violations than a cross-section of the banking population. The great majority of the violations on which the statistics in our report are based represent inadvertent failures to follow bank procedures and incomplete or late CTR filings rather than actual failures to file CTRS.

Nevertheless, we are not satisfied with the level of compliance by the banks we supervise and we are continually improving our enforcement efforts. Since this Committee held hearings last

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April, the following steps have been taken:

First, the interagency examination procedures have been revised
and are awaiting Treasury's approval. They have been improved
in the areas of international transactions and wire transfers
and now cover peripheral bank services such as trust departments
and dealer departments. Examiners will be required to follow

a stricter regimen, look closely at exemptions granted to customers, and document their activities at various points during the examination.

We have completely revised our educational program for examiners
who conduct Bank Secrecy Act compliance examinations. The new
program supplements our fundamental examiner training series
and on-the-job training. It is delivered at regular intervals
in Washington, and regional presentations have been added to
reach a larger number of examiners. The program includes infor-
mation on the latest money laundering methods and instruction
on recognizing possible money laundering schemes.

We are working more closely with Treasury and IRS to improve the flow of information and to assist each other in carrying out our responsibilities under the Bank Secrecy Act. The Working Group concept has proved to be successful in improving our response to bank fraud and insider crimes. We hope to make similar progress with this concept in the Bank Secrecy Act area.

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We are making more and better use of external targeting of institutions for Bank Secrecy Act reviews.

The Customs Service's analysis

of currency flows and cash shipments of individual banks and bank-to-peer group relationships provides regulators with an intelligent way to select banks for examination. We strongly support the work being done in this area.

Because the safety and soundness of insured banks is of utmost importance to the FDIC, the resources we can allocate to Bank Secrecy Act compliance are limited. Thus, the method of selecting banks to be examined is very critical to our overall enforcement effort. In addition to targeting banks based on information from the Treasury Department, IRS or the Customs Service, the idea of examining a random sample of banks each year is being considered.

FDIC usually conducts Bank Secrecy Act examinations in conjunction with its review for consumer compliance. We have recently begun reviewing Bank Secrecy Act regulations at safety and soundness examinations or conducting an independent examination, as circumstances warrant. This approach adds flexibility to our enforcement program and permits us to respond quickly to potential problems.

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As we have stated in the past, bank supervision and examination

procedures cannot assure day-to-day compliance with currency reporting requirements. Financial institutions must install internal controls and systems. They must also train and re-train their employees and audit for compliance. Even under the best of conditions, employees can be corrupted into circumventing the controls and violating the laws.

During the past fifteen months, we have given a lot of attention to improving our efforts to deal with the criminal conduct of bank insiders. We are very encouraged by the progress being made by the Bank Fraud Working Group. The Group was organized under the interagency agreement signed in April 1985 to improve cooperation between bank regulators and law enforcement agencies in responding to the criminal threat to insured financial institutions. Similar progress in dealing with the criminal aspects of money laundering is possible under the current legal environment. However, the government's response to the problem would be strengthened by making money laundering a federal crime. H.R. 2785 and other bills address this fundamental weakness and would permit prosecutors to attack organized criminals directly--by making money laundering the crime--rather than having to build their cases on failures to file currency reports. We support a federal crime of money laundering and generally agree with the higher penalties and stiffer sentences contained in H.R.

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