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knowledgment that the interests of society do require a change of the Right to Financial Privacy Act and some additional specificity be provided to law enforcement.
However, I think there is an important issue and an intermediate step that is missed here in the process. That is, when we are talking about launderers, we are talking about highly flawed, very flexible type of operations.
Smurfs can move from place to place, as you know. They don't go to the same bank every day and they use different people at different times.
The intermediate step that I would envision is communication, open communication back and forth between law enforcement and financial institutions without the need for a grand jury subpoena.
It may be that in many, many cases that there is actually no need physically for the records themselves. There is nothing I think, and I think Mr. Pedowitz would agree to this, that a prosecutor relishes less than going through file cabinets and sometimes truckloads full of documents.
So I think the omission that might be present here, although it is an important acknowledgment there should be a flow of information, is this less formal step in the process.
I think what the bar association has pointed out here is that we will give you a little bit more information than the law now seems to permit, but we won't really give you enough to be able to move on or to do anything about until you serve a grand jury subpoena.
Now, in many, many cases, as I say, the actual records themselves may not be important and all that may be important is a lead, the ability to conduct surveillance, whether physical or electronic.
Chairman ST GERMAIN. Let's get back to my first question now that I have the act in front of me.
Section 3409, delayed notice: Upon application to the government authority, the customer notice required under Section 3404 of this title may be delayed by order of an appropriate court if the presiding judge or magistrate finds that, number one, the investigation being conducted is within the lawful jurisdiction of the government authority seeking the financial record; two, there is reason to believe the records being sought are rele vant to a legitimate law enforcement inquiry; and, three, there is reason to believe such notice would result in the following: endangering the life or physical safety of any person, flight from prosecution, destruction or tampering with evidence, intimidation of potential witnesses, or otherwise seriously jeopardizing an investigation or official proceeding, or unduly delaying a trial or ongoing official proceeding to the same extent as the circumstances in the proceeding subparagraphs, A, application for delay must be made with reasonable specificity.
Now, here is the point I was trying to make and was making very poorly earlier. The delay notice requirement has been utilized in very few instances since 1978; as a matter of fact, perhaps only 30 times, 10 of them in Nebraska. When we inquired of the counsel for the Comptroller's Office as to why, this was the reply: "Because they have circumvented this by going through the grand jury subpoena process, and as a result, therefore, perhaps abused the grand jury subpoena process rather than going the route where you have to demonstrate that which is required." I just read this to you.
Mr. PEDOWITZ. I think two things are going on that are very important to understand with respect to those statistics. One, since a grand jury subpoena is exempt from the Right to Financial Privacy Act altogether, that particular delayed notice provision has no applicability to grand jury subpoenas, and therefore, if you are getting statistics they probably do not apply to grand jury instances. That is No. 1.
No. 2, to the extent a grand jury subpoena is being served for customer records, the bank would be free, absent an order from a Federal district court judge, to notify the customer nonetheless that the grand jury subpoena had been served.
Therefore, the statistic that you should be looking for is how many orders are being issued by Federal district court judges to banks that the grand jury subpoena should not be disclosed to the customer.
Now, that information is probably not available to the Comptroller. I don't know whether the information is available in any particular organization.
Chairman ST GERMAIN. Thank you.
Mr. MANTON. It seems to me that Mr. Harmon from his vantage point of having concluded the work of the President's Commission on Organized Crime recommends very strict and tough new legislation making money laundering a substantive crime, whether it be with bank involvement or otherwise. It seems that the rest of the panel agrees to some extent that money laundering is a large problem, particularly in the area of drug trafficking, but would not go so far as Mr. Harmon proposes.
So there is a recognition that we need some kind of legislation. However, there are differences among the panelists as to what shape this legislation should take, and how far we should go in limiting personal and financial privacy rights.
The issue of recklessness, the issue of blind or willful blindness is something that I would like to explore. It seems to me that we do not want to prosecute innocent people. But there are some instances in which one would have to be an imbecile not to recognize that something is wrong when people bring cartons of small bills or travel bags of small bills into a bank.
How far should we go in terms of mens rea or knowledge, and where should the limits be? Anyone on the panel.
Mr. HARMON. Mr. Manton, the Commission's proposal and I think the administration's also in large measure recognizes existing law that knowledge sometimes means deliberately closing your eyes to what you know to be the case.
Frankly, the Commission's proposal came from what I saw in New York, the way in which, and the experience from which, I saw people transporting narcotics through Kennedy Airport, for example, and also airports in Florida, I am told, the way in which mules are prosecuted.
Essentially they always claim they really didn't know it was narcotics that they were transporting in one fashion or another. As you look at the law on this point, you will see that essentially this conscious avoidance of knowledge principle is used in large measure in those kinds of cases.
All the Commission did was recognize that the interdiction of money is as important as the interdiction of drugs, and therefore, the same kinds, the same standard of conduct should find expression in efforts to go after the money of organized crime.
So that is the parallel that the Commission drew in recommend ing, and the administration does also, recommending the codification of what is essentially already the case and giving everybody fair notice of what the law would require in this area.
Mr. MANTON. It seems to me there are two approaches. One, is to define money laundering as a crime, whether that involves banks or not. The other is how we relate this specifically to financial institutions.
Mr. Pedowitz agreed that we have to make some changes in the Right to Financial Privacy Act, that would require a bank to turn over only limited information such as the depositor's name, account number, and a brief account summary instead of complete financial records.
However, couldn't a Federal prosecutor go to the grand jury with this limited information and get a subpoena for the complete financial records.
Mr. PEDOWITZ. I would say the following in response to that: I would very much like to have a professional prosecutor making a judgment about whether or not a matter ought to be pursued before my records are turned over to the U.S. Government by a banker. I don't understand why we should permit bankers to simply pack up a customer's financial records and turn them over to a prosecutor before the prosecutor makes a judgment about whether or not it is a matter that should be pursued.
I spent 2 years running the criminal division of the U.S. Attorney's Office in New York. We prosecuted perhaps 25 percent of the allegations that are made about individuals. Seventy-five percent of them either lack merit or are not severe enough to excite the interest of a Federal prosecutor.
In those circumstances, I would rather have a Federal prosecutor making a judgment about whether it ought to be pursued before the records get turned over.
Mr. Hadlow. May I interject from a banking--
Mr. Hadlow. From a banking point of view, we certainly don't covet any sort of power that we should turn over on simply a phone call voluminous records to prosecutors. We look at it from the other side of the fence, and that is, a very aggressive prosecutor will call us up and ask us to send over virtually all the records in the bank sometimes, notwithstanding he has got to look through a card file or so.
Sometimes he will take them over there and stack them up in the corner and they will sit there for weeks. We are certainly at his mercy so we would like that power controled so we can operate the bank.
Chairman ST GERMAIN. Mr. Wylie.
This last discussion here indicates somewhat the dilemma that we face on this panel as to where we should come out.
Mr. Pedowitz, you state in your testimony on page 6, and Mr. Manton referred to this, it is unfair to prosecute someone for what they should have known but didn't, and then you state on page 7 that a party can be prosecuted if he or she has suspicions about which he then omits further inquiries, about which he then doesn't follow up on, for example.
Now, the dilemma, as I see it, is that this is often a substantive determination on the part of the bank official and we ought to give them some leeway to let us know or to let officials know if there is suspicious activity.
If a person comes in with a bag of money and said, "I just sold a boat," that could be suspicious activity, wouldn't you agree?
Mr. PEDOWITZ. Yes, I agree. I think in those circumstances the bank ought to be permitted to turn the information over in a limited way, as I have described before, to the Government if they care to. But I think the pages that you are referring to also deal with this mens rea concept that Congressman Manton was referring to and what our position is on that.
Our view is that the mens rea standard in the new money laundering bills ought to be simply knowing, that there is no need to start adding in reckless disregard or should have known concepts which are generally seen in the civil area.
The term “knowing" has been defined by 10 circuits and the Supreme Court of the United States to include the concept of conscious avoidance and willful blindness-the very concepts that the administration and the Organized Crime Commission seem to be trying to encompass within the terms they are using, “reason to know" or "recklessness.'
We see absolutely no reason to expand the scope of mens rea when the word "knowing" is more than adequate. I think all an expansion would do is confuse the law and open up the possibility that an individual would be convicted for negligence-not for what he knew but rather for what he should have known, applying some sort of objective standard, and I think that would be a terrible mistake.
Mr. WYLIE. Your testimony has been helpful and you have made some suggestions, and this is obviously a very knowledgeable panel. I want to compliment each of you for your testimony.
Does that state your position, Mr. Buffone?
Mr. BUFFONE. I only reiterate that we at the American Bar Association criminal justice section view mens rea as one of the most fundamental aspects of the law. As Mr. Pedowitz has indicated, the jury is often instructed that willful blindness is a component of their determination and that they can use circumstantial evidence to establish intent. To make a leap from that to a negligence standard and reckless disregard is a significant change in the law that we strongly oppose.
Mr. WYLIE. Mr. Harmon, in his statement, Mr. Hadlow, of the American Bankers Association, supports making money laundering a crime, but he does not feel the time is right for Congress to tackle this new criminal orfense.
Part of his argument is that the process of criminalizing money laundering demands broad-based discussion on its possible ramifications and so forth.
How do you respond to that position?
Mr. HARMON. I can't imagine any more discussions that have been any more broad based than before this subcommittee and before the public at large. I respectfully submit the issue is ready and that the scope of organized crime activity really almost de mands some sort of response to the ease with which money can be moved.
Mr. WYLIE. Another area which has been difficult for me to sort out this morning is that the ABA, Mr. Hadlow, has suggested the civil penalties for noncompliance with the reporting requirements be waived for institutions that discover violations and promptly discloses them to the Treasury Department.
Would you have a comment on that?
Mr. Hadlow. I would submit that kind of issue is one that is best left with the discretion of the Secretary of the Treasury who can take into account all factors in determining whether or not a penalty should or should not be imposed.
There may be other factors in mitigation and in aggravation that the Secretary may wish to consider, for example, a past record of CTR violations. That is one best left to a case-by-case analysis by the Secretary of the Treasury.
Mr. HADLOW. I would like to submit, sir, that the Secretary of the Treasury's record has been 100 percent in favor of penalizing the bank, fining them anyway. That is the reason we are not
Mr. WYLIE. Whose record?
Mr. WYLIE. Let me ask you this. You suggest that we not have this civil penalty or it not be imposed on financial institutions, but doesn't it make more sense to prevent the crime before it takes place, and isn't there likely to be more surveillance or isn't that likely to act as a deterrent to violations of this sort of crime if we have this civil penalty provision?
Mr. Hadlow. We have not suggested doing away with the civil penalty. We just simply would say if there has been a good-faith on the part of the financial institution to comply, and then an internal audit uncovers inadvertent failures to file banks ought to be encouraged to come forward by not imposing a fine.
Mr. WYLIE. You say it ought to be waived.
Mr. Hadlow. So far the Treasury has not shown any willingness not to fine when people come forward. Every one of us came forward voluntarily.
Mr. WYLIE. Thank you, Mr. Chairman.
At the beginning I would like to especially welcome Earl Hadlow, my friend from Florida. I don't know if the chairman is aware, though he is wearing his hat as a counsel for one of the larger institutions in the banking field, that Mr. Hadlow is a very distinguished practicing attorney and has been very active in the organized bar.