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STATEMENT OF STEPHEN S. TROTT, ASSISTANT ATTORNEY GEN
ERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE, ACCOMPANIED BY CHARLES S. SAPHOS, CHIEF, NARCOTIC AND DANGEROUS DRUG SECTION
Mr. TROTT. I am pleased to be here today to present the views-
Chairman ST GERMAIN. We have a problem with these mikes, you know, Gramm-Rudman, so please get a little closer.
Mr. TROTT. I am pleased to be here today to present the views of the Department of Justice. I am accompanied by Charles Saphos, Chief, Narcotic and Dangerous Drug Section, Criminal Division, and he was responsible for the case shown in the photograph to
The complexity of the problem can be gauged in one sense by the sheer number of bills that have been introduced on this subject, many of which are now before this committee, and upon which Í will touch in a moment.
As you know, Mr. Chairman, the bill that the administration supports is H.R. 2785, which was prepared by the Departments of Justice and the Treasury working together. It is the type of comprehensive approach that we believe is needed in this area.
And I want to thank you for introducing it, so it could be considered. The bill sets out a number of new offenses, including a new offense aimed specifically at money laundering, and also amends the Currency and Foreign Transactions Reporting Act, and the Right to Financial Privacy Act.
The administration had the advantage of reviewing the legislative proposals drafted by the President's Commission on Organized Crime when we prepared what is now H.R. 2785.
Like the Commission, we concluded that what is most urgently needed is a new offense dealing specifically with money laundering. The Bank Secrecy Act, which requires that various monetary transactions be reported on forms, and which punishes the failure to do so truthfully, is no longer adequate by itself.
A new provision must be added to title 18 of the United States Code making it an offense to conduct a transaction involving monetary instruments, or the wire transfer of funds if the transaction affects interstate or foreign commerce, or is conducted through a financial institution, the activities of which affect such commerce, provided that the Government can show either of the following:
First, that the person acted with the intent to promote, manage, establish, carry on, or facilitate an unlawful activity-defined as a State or Federal felony-or, second, that the person knew or acted with reckless disregard of the fact that the monetary instruments represent the proceeds of, or are derived from the proceeds of, an unlawful activity.
Mr. Chairman, there is an analogy here that is quite helpful. Up until the late 1960's, the Federal Government and law enforcement in general were attempting to cope with racketeering activity throughout the United States by using individual statutes to go against parts of racketeering.
If mobsters committed an assault, we charged them with an assault, and if they bribed somebody, we'd charge them with bribery, if they murdered somebody, we charged them with murder; and we were nibbling away at the edges, and, finally, Congress woke up and said what is needed is a crime, prohibiting racketeering, and the Rico statute was born.
And as everybody knows, from following the cases we have been reading, has been a thermonuclear device ending up in putting most of the major mob leaders in the United States now in Federal Court-
Chairman ST GERMAIN. Did you write this testimony yourself? Mr. TROTT. Excuse me?
Chairman ST GERMAIN. You know, what you just said: “Finally, the Congress woke up." What do you mean by that?
Mr. TROTT. What I mean was
Chairman ST GERMAIN. I want you to explain that phrase. I don't particularly like it. It is not that easy to enact legislation. I want to know what you mean by the phrase: "Finally, the Congress woke up.'
Mr. TROTT. I was attempting to describe the process by which we all woke up, including law enforcement.
Chairman ST GERMAIN. You said: “Finally, the Congress woke up.” What did you mean by that?
Mr. TROTT. Exactly what I said, and that is finally, we realized that we were nibbling around the edges-
Chairman ST GERMAIN. You mean the Congress was asleep; the Congress didn't know anything, or do you mean what I think you should mean; and that is, that the legislative process, and enacting some of these laws, is not all that easy, and that there are many difficulties involved, including the hurdles which proponents of leg. islation have to go over?
Maybe you meant to say that finally, the Congress was able to enact and to achieve, and to negotiate legislation. I don't like the phrase: “Finally, the Congress woke up.”
Mr. TROTT. You are probably correct. I understand what you are getting at, and I apologize for using that phraseology. I meant to say Congress realized that a new approach was needed to a problem. That is all I meant by "woke up,” I meant “realized”; and I withdraw that language, if you find it offensive, Mr. Chairman.
Law enforcement simply recognized, as did Congress, that a new overreaching approach was necessary to this, and the Rico statute was born.
We need the equivalent today with respect to money laundering. Instead of using the Bank Secrecy Act, a money-laundering statute as such is necessary to describe the conduct involved and make the conduct itself criminal.
That is my point.
This is the subject of the new money-laundering offense in H.R. 2785. It covers not only the person who deposits the cash, that has just arrived from an unlawful sale of drugs in a bank or uses it to buy a new car, but also the bank employee or car salesman who participated in the transaction by accepting the money, if it can be proven that the person knew or acted in reckless disregard of the fact that the money involved was derived from unlawful activity.
We think coverage of these persons is very important. These people, and in particular the employees of banks who knowingly or
recklessly help criminals dispose of the fruits of their crimes, are a vital part of the world of the drug dealers.
Drug dealers are in business for the money and corrupt or deliberately reckless bank employees allow them to get their money in a form they can use. They are as deserving of punishment as the drug dealer who brings them his ill-gotten cash or other monetary instruments derived from his cash.
We realize that many persons are concerned about the moneylaundering offense's coverage of a person who cannot be shown to have actual knowledge that the money he handles in a transaction was derived from a crime but who acts in reckless disregard of the fact that it was.
In my prepared statement, I give several examples, some actual and some hypothetical, which show that often people like bankers and lawyers who take huge sums of cash with no questions asked are ignoring an obvious substantial risk that the money involved is derived from a crime.
To ignore that risk is to act in reckless disregard of the fact that the money is "dirty.” Many times a banker or lawyer knows full well from the nature of the transaction and the surrounding circumstances that the money he is being handed was obtained illegally. He just does not know what particular crime produced it.
Without a reckless disregard standard, these people cannot be prosecuted and they will continue to profit from making themselves willfully blind to the obvious. It is a correct description of the obvious: See no evil, ask no questions, and act in gross disregard of what would be the ordinary standard in the industry today.
In addition to the new money laundering offense, H.R. 2785 adds other new offenses to title XVIII. A new criminal facilitation offense is set out. It would make one who knowingly facilitates the commission of a Federal crime by another person by providing sub
a stantial assistance guilty as a principal.
I would hope, in prosecuting people who took small denomination bills, that knew they are derived from street sales of drugs and, for a fee, changing them into more easily transportable $100 bills, or other bills or larger denominations.
H.R. 2785 also sets out a new offense of receiving the proceeds of a Federal felony, like the money derived from a cocaine sale, and a new offense of bringing into the United States any money or other property obtained in connection with the violation of the law of a foreign country proscribing narcotics trafficking.
This offense is intended to reach foreign drug traffickers who would look to the United States, and particularly its banking system, as a place in which to invest their illegal profits.
In addition to these offenses, H.R. 2785 makes amendments to two banking statutes that are within the committee's jurisdiction.
Section 3 of the bill amends the RFPA to define and clarify further the extent to which financial institutions may cooperate with Federal law enforcement authorities in providing information which is relevant to proving criminal activity.
Most of these amendments are variations of recommendations made by the President's Commission on Organized Crime.
Of greatest significance is subsection 3(a), which states that nothing in the RFPĂ shall apply when a financial institution provides financial records to a Federal agency which the financial institution believes may be relevant to crimes by or against the institution or a financial institution supervisory agency, violations of the Bank Secrecy Act in title XXXI, violations of the proposed new money-laundering statute, and certain serious drug felonies.
The effect of this amendment would be simply to allow a bank to fulfill its civic duty and provide information which it has reason to believe may be relevant to one of these very serious offenses without risking civil liability under the RFPA or having to notify the customer of its cooperation.
Section 3 also provides for preemption of this field, thus avoiding the possibility that a bank employee might incur civil or criminal liability under a more strict State bank secrecy law for cooperating with Federal law enforcement authorities.
Section 5 of H.R. 2785 amends the Bank Secrecy Act to give the Secretary of the Treasury summons authority for financial institution witnesses and documents in connection with Bank Secrecy Act violations.
Such authority was another recommendation of the President's Commission on Organized Crime. It would allow the Secretary to summon a financial institution employee who may have knowledge of a violation of one of the recordkeeping or reporting requirements of the BSA and require the production of relevant documents.
We think authority is essential to investigate civil violations of the BSA and to assess an appropriate civil penalty once a violation is discovered.
Briefly, let me now discuss some of the other bills before the committee, starting with H.R. 1367 and H.R. 1945. These bills set out the new money laundering offense recommended by the President's Commission on Organized Crime.
We examined that approach and, although the money laundering offense in H.R. 2785 is derived from it, we think there are problems with H.R. 1367 and 1945.
First, they would only reach money laundering through financial institutions. That is simply too restrictive and invites money launderers to go every place else in the country, and escape exactly what this Congress intends to set forth.
It is too restrictive and would not reach money laundering by such means as buying out legitimate businesses or purchasing jewelry for resale.
Second, H.R. 1367 and 1945 would punish one who was merely negligent in engaging in a transaction involving the proceeds of a crime. This is much broader than a reckless disregard standard and, in this context, is inappropriate for criminal liability.
Third, these bills only cover money laundering derived from some Federal felonies. They would not, for example, cover money laundering derived from espionage.
Fourth, these other bills would not reach money laundering through wire transfers. H.R. 2785, by contrast, covers wire transfers. That is important in light of such a means of moving money to and from offshore banks.
H.R. 1367 and 1945 both contain provisions giving the Secretary of the Treasury summons authority over certain bank records and personnel. They are similar to the summons authority in section 5 of H.R. 2785, but not identical.
For example, H.R. 1367 and 1945 would allow Treasury to summons records for both criminal and civil investigations. We think this authority should be limited to civil matters. Moreover, H.R. 1367 provides that Treasury may not delegate its summons authority.
As Mr. Keating noted in his testimony last week, Treasury has delegated Bank Secrecy Act enforcement authority to a number of agencies like the Comptroller of the Currency and delegating summons authority is a practical necessity in everyday matters of conducting law enforcement activities.
H.R. 2785 contains what we think are fully adequate restraints on the use of summons authority by providing that a supervisory level official of an organization that enforces the Bank Secrecy Act must approve a summons. An agent or bank examiner in the field could not issue one.
Turning now to H.R. 1474, that bill sets out a new money laundering offense that has many of the same problems as are in the offense in H.R. 1367 and H.R. 1945. It would be limited to laundering money derived from many, but not all, Federal felonies.
The laundering would have to be done through a financial transaction at a financial institution and would thus not reach money laundering through other methods.
In addition, the definition of "financial transaction" is too narrow. It would exclude such things as purchasing bank stock and placing funds in escrow as collateral for a loan.
I would also note that sections 3 through 5 of H.R. 1474 contain amendments to the Bank Secrecy Act which are of primary concern to Treasury.
Let me say, however, that Treasury feels section 3, which would require the Secretary to approve every Bank Secrecy Act reporting exemption, would be unduly burdensome.
As you know, current regulations allow the banks to exempt certain cash deposits from retail businesses from the reporting requirements. If section 3 would be burdensome for Treasury, section 4 of H.R. 1474 would be terribly burdensome for banks.
It would require the reporting of every outgoing international wire transfer. That would require financial institutions to bury Treasury in a mountain of reports, most of which would be useless.
Moreover, Treasury already has the authority to require the reporting of wire transfers and can order the reporting of classes of transfers it deems useful.
Before leaving H.R. 1474, let me mention section 6. That section deals with the problem of persons about to board international flights with large amounts of cash that they had not declared, as required under the Currency and Foreign Transactions Reporting Act.
Before 1984, 31 United States Code 5316(a) punished one who transports such cash or other types of monetary instruments. There was no attempt provision and some courts had held that no violation had occurred until the person was on the verge of boarding the plane, at which time apprehension was difficult.