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encounter transactions of uncertain legitimacy. Many are bound by secrecy laws from transmitting any such information to other than their own national law enforcement authorities. Consequently, these supervisors believe that international cooperation must take place largely between law enforcement authorities. It is in this connection that the utility of mutual assistance treaties or other forms of international agreements is particularly critical.

I know of no formal arrangements other than mutual assistance treaties that deal with the problem of enforcement. Means exist, however, for informal exchanges of information between supervisors, both in their regular activities and through discussions such as the one described.

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Question 2: On page 14 of your testimony, you state that "the Federal Reserve stands ready to assist the Justice Department by making quick referrals of suspected criminal activity to the appropriate authorities and by providing advice on international transactions."

Can you provide specific instances of when and how the Federal Reserve has assisted the Justice Department with such referrals and advice on international transactions? What input does the Fed provide to Justice and/or Treasury on the Fed's monitoring of suspected criminal activity?

Answer: A uniform criminal referral form was developed by the Justice Department/Regulatory Agency Bank Fraud Working Group for the use of each of the regulatory agencies. In August 1985, the Board distributed the form to the financial institutions subject to its jurisdiction (e.g., State member banks, bank holding companies, nonbank subsidiaries of bank holding companies, and Edge Act corporations). The new form is being used successfully, and already approximately 425 criminal referrals have been made using the form.

Senior staff in the Enforcement Section of the Division of Banking Supervision and Regulation of the Board have been assigned to monitor criminal referral activity. The staff is now responsible for reviewing every criminal referral form submitted to the Federal Reserve System. Computer systems have been developed to track the referrals and cross check the referrals with the activities of the Enforcement Section of the Division. In this manner, we are better coordinating the actions that must be taken in those instances where a suspected

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criminal activity affects the safety or soundness of a financial institution or an individual's conduct warrants both criminal referral and removal or other formal supervisory action.

Board staff cooperated with the Department of Justice in the development of procedures designed to ensure that criminal referrals involving "significant" activities that may affect the safety or soundness of a bank or holding company or otherwise involve large sums are submitted directly to the Fraud Section of the Department of Justice for appropriate high level attention by the Department, the U.S. Attorneys' Offices and the FBI. To date, about 10 matters have been referred by the Federal Reserve System to the Justice Department for action. Included in the already referred "significant" cases was a very significant matter involving several banks and savings and loan associations and numerous individuals along with their related interests, which included some off-shore entities. Federal Reserve System examiners prepared the referral and assisted in the presentation of the matter to the Justice Department and the FBI. Since this matter is under active investigation by the FBI and a U.S. Attorney's Office at this time, we cannot provide any details of the referral.

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Question 3: The 1984 Interim Report of the President's Commission on Organized Crime chronicles in detail the important roles Panama and Hong Kong play as financial centers for drug-related money laundering activities originating in the United States.

What is the Federal Reserve doing to encourage those governments and financial communities to eradicate or reduce money laundering? What steps are planned to aid those countries in cracking down in such activities?

Answer: Hong Kong has had a long standing laissezfaire policy regarding financial institutions and individual financial transactions. This policy is beginning to change, partly as a result of some recent well publicized failures of commercial banks and deposit taking companies. Increased supervisory attention is being given to commercial banks and deposit taking companies activities. More intense scrutiny over banking transactions should make the environment less hospitable to money laundering. The Federal Reserve will continue to advise the Hong Kong authorities when requested and if necessary. Hong Kong authorities are, however, initiating their own efforts to strengthen supervision over banking transactions.

Panama, on the other hand, has very rigid deposit secrecy laws which are intended to help promote its growing financial sector. It would be a long and difficult process to convince the appropriate authorities that more rigid supervision is both necessary and desirable. Nevertheless, the Federal Reserve will continue to monitor the activities of U.S. banks operating in Panama to ensure that proper internal controls and

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audits are in place that reduce the probability that money laundering is inadvertently occurring through U.S. banks.

The Federal Reserve, while not prescribing a set agenda in this regard, continues to be willing to assist any country that seeks aid in instituting measures that are designed to eradicate or reduce money laundering.