You could just as well be here wearing that hat. But we are very pleased that you are here wearing the one you are.

Mr. HADLOW. Thank you.

Mr. MCCOLLUM. I would like to ask the entire panel if any of you have seen the form that Governor Seger referred to regarding the right to financial privacy that supposedly has been promulgated for use by banks. Have any of you seen this particular form she is referring to?

Mr. HADLOW. Yes, sir, I have.

All the regulators have adopted forms that require banks now to report suspected criminal behavior and so we have in place now by regulatory fiat requirements on the banking industry to come forward whenever we have a suspected crime.

Mr. MCCOLLUM. Mr. Hadlow, are you concerned as counsel for a large institution that by complying with this form or filling the form out your bank might be violating the right to financial privacy and therefore subjected if not to formal Government sanctions to a civil lawsuit?

Mr. HADLOW. We spent about $25,000 getting legal opinions as to how precise we have to be in filing these forms, and just where we have to draw the line to avoid the possibility of a lawsuit in cases of unsuccessful prosecutions or violations of the Right to Financial Privacy Act.

So we are concerned that you have to be extremely cautious.

Mr. MCCOLLUM. I am concerned about two or three things with respect to this.

Mr. Harmon made a special point of saying in his testimony that we need to have preemption of the State right to financial privacy laws. May I assume that to the degree that preemption is narrow and applies only to those provisions of State laws that are more restrictive than Federal laws in the area, or Federal right to financial privacy law, that everyone on the panel would agree that preemption to protect the banks would be essential to any kind of revealing of information? Is there anyone who would disagree with the proposition we need some preemption in the law put into Federal law?

No one disagrees, the record can show.

I have another concern, and that deals with the good-faith_defense that is in the right to financial privacy law now. Mr. Pedowitz, not to diminish the others' testimony, I want to compliment you because I have heard a lot of testimony, both in the Judiciary Committee and in this committee on the issues of money laundering. I think some of what you said today is the most lucid discussion of some of the really tough questions we face in this area. I appreciate that.

Mr. PEDOWITZ. Thank you.

Mr. MCCOLLUM. Dealing with good-faith defense-I will ask since you have been so lucid on the other, I will ask you this questionas I understand the reading of the present law, a financial institution may have a good-faith defense for turning over information if that information has been requested by certificate, whatever that is, of a Government agent or agency.

As I understand also, the concern that banks and other financial institutions have is that voluntarily turning something over doesn't

give them any defense at all and even if they turn over something into the form that has been sent to them such as the one Governor Seger says, since it is not a request or specific information on a preknown instance by the Government, but rather a fishing expedition type form, that there is a concern as to whether they have any good-faith defense.

Do you have a comment on that?

Mr. PEDOWITZ. Yes, sir, in our report we actually propose specific language to amend the good-faith defense which would permit the banks to have a good-faith defense with respect to the specific information that we suggest they should be allowed to turn over.

Again, that would be the name of the customers, the account numbers and specific information about the purported violation of law that could all be derived from the financial records of the customer which are specifically covered by the Right to Financial Privacy Act.

Again, just to reiterate for a second, the definition of financial records of a customer includes information derived from the financial records which is what is creating the problem in my view.

Mr. MCCOLLUM. I really like your proposal dealing with this whole area of right to financial privacy if we can craft language that specifies the descriptive language enough so they can give us not only the name and account number, but a description of the documents they have or whatever basis there is for feeling that a crime has been created, then give them a good-faith defense for turning that information, not any record but that information over, and preempting the States.

It seems to me we may have a good package with that. That is all sort of coming together in my mind. I don't know what anyone else is thinking.

I want to thank all of you for coming and testifying on this. It is a tough question and it is a very important question for us. Thank you, Mr. Chairman.

Chairman ST GERMAIN. Mr. Wortley.

Mr. WORTLEY. Thank you, Mr. Chairman.

Mr. Harmon, you noted that Arizona recently enacted a money laundering statute. What has been the outcome of that. Have there been more prosecutions or has it served as a deterrent to money laundering or precisely what?

Mr. HARMON. I don't know the precise use to which the statute has been put, although I would point out that Arizona has adopted this reason to know standard in its money laundering legislation so that is a recognition by at least one State legislature which does have an organized crime problem-not an extensive problem-that that is the way to go with regard to a money laundering statute. Mr. WORTLEY. Are you aware of any other States that are contemplating such action, too?

Mr. HARMON. State of California. It is fairly advanced in California. It is still on the drawing boards in the State of New York. Also as I am sure you are aware, the States of Florida and Georgia have their own currency reporting systems. Those are the only ones I am personally aware of at this point.

Mr. WORTLEY. After the money is laundered and it recycles, what percentage is actually going into legitimate business pursuits would you expect?

Mr. HARMON. Well, that is very hard to say. What I would say is that that depends on which organized crime group you are speaking about. Probably with La Cosa Nostra I would say over 50 percent of it finds its way back into legitimate business. Of course La Cosa Nostra is the organized crime group most involved in this country in infiltration of legitimate business.

So I would say at least half the laundered funds involving La Cosa Nostra finds its way back into legitimate businesses of one form or another.

Mr. WORTLEY. You say "legitimate" businesses, are you thinking in terms of ongoing commercial business or are you thinking in terms of stocks, bonds, real estate, et cetera?

Mr. HARMON. All of those things. Occasionally with stocks and bonds being used not only as a way to involve oneself in hidden ownership of businesses, but also as a means to launder money.

Mr. WORTLEY. Is much of that money going into casinos, race tracks, maybe even buying banks?

Mr. HARMON. We have seen instances of that, Mr. Wortley; in the case of casinos, however, it appears more likely that casinos are used as laundering devices and is used as a means to skim, to take money out of legitimate businesses for the La Cosa Nostra's other purposes.

Mr. WORTLEY. Thank you very much.

Mr. Pedowitz, I noticed on page 23 of your testimony you say "we do not support requiring a minimum $10,000 transaction for an offense to exist.'

What do you mean by that? Would you elaborate on that a little more?

Mr. PEDOWITZ. Certainly.

We are talking specifically about money laundering, the new bill being proposed with respect to money laundering. One of our concerns has been that the way the money laundering bill is drafted by the administration that the money laundering offense would include financial transactions with nonfinancial institutions, such as lawyers, such as the local grocer, and our concern was and continues to be that if that law were to be enacted things like check forgery would suddenly become a Federal offense throughout the country through the money laundering statute.

So one of the things we toyed with in order to try to reduce the scope of this new Federal bill was the idea of putting a limit on the size of the transaction and saying no transaction less than $10,000 would be covered by a new Federal money laundering bill.

Our ultimate conclusion was that was not the way to go. The way to go was to narrow the money laundering bill to cover only transactions with financial institutions and not to cover the local grocer, not to cover the lawyer, not to cover the real estate operator. And our thought is that there has been no demonstration that the problem that the Organized Crime Commission found really extends to transactions with grocers, with lawyers and so on.

But the $10,000 reference was addressed to that particular subject and we dismissed that as a solution to the problem.

60-672 O 86 - 32

Mr. WORTLEY. When you talk about $10,000 transactions involving lawyers, are you talking about attorneys also would be coming in with cash?

Mr. PEDOWITZ. No, we had in mind specifically retainers, for example, in criminal cases. Very often these days retainers of criminal defense lawyers exceed $10,000 and certainly a very strong argument could be made under the administration bill and the Organized Crime Commission bill that that would be covered by the legislation that is being proposed.

It would also cover, for example, real estate brokers who might be selling a house to someone who is a suspected member of the Cosa Nostra. Our view was that that was not an appropriate transaction to cover.

Mr. WORTLEY. How many people you find going around with $10,000-substantial amounts of cash and putting it down as a downpayment on a house or even a retainer to their attorney?

Mr. PEDOWITZ. It is my belief that an extraordinary number of people deal in cash and an extraordinary number of these transactions occur.

Mr. WORTLEY. These are all nice, legitimate people?

Mr. PEDOWITZ. Mr. Hadlow just described 60,000 transactions involved CTR's in his banks. When we looked at the Chemical Bank in 1977 there were thousands and thousands of transactions involving cash which were not money laundering transactions. We found roughly 10 examples of washing for narcotics dealers, and we found hundreds and hundreds of transactions which were perfectly legitimate.

People go into banks, withdraw cash and pay for things with cash.

Mr. WORTLEY. Amazing. Simply amazing.

I guess I don't have any friends like that.

Mr. PEDOWITZ. No, I deal in checks myself, but an extraordinary number of people deal in cash.

Mr. WORTLEY. At least you don't have to worry about keeping your checkbook balanced.

My time is expired.

Thank you, Mr. Chairman.

Chairman ST GERMAIN. Thank you, Mr. Wortley.

Gentlemen, the administration bill would eliminate customer notification requirements when interagency transfers of personal records of an individual are requested. Obviously Mr. Harmon would agree with this since he helped draft the legislation.

But I would ask the remaining three witnesses what their reaction is to that. Mr. Buffone.

Mr. BUFFONE. I don't think I am prepared to comment, Mr. Chairman, because I am not familiar with that portion of the administration bill.

Chairman ST GERMAIN. Mr. Hadlow.

Mr. HADLOW. Would you repeat your question, please?

Chairman ST GERMAIN. It is the one that states that when there are interagency transfers of records amongst the agencies, that the customer need not be notified.

Mr. HADLOW. I do not know. So I will not comment.

Chairman ST GERMAIN. If you find the ABA does have one, would you submit one?

Mr. HADLOW. Yes, we will submit it in writing.

[The information referred to can be found in the appendix.] Chairman ST GERMAIN. Mr. Pedowitz.

Mr. PEDOWITZ. Our committee was opposed to that change, believing that if agencies are free to move the records around, the likelihood is that the sensitivity of those records and privacy concerns that we are founded on would be reduced. We feel that to the extent the Government wants to transfer them from agency to agency, notice should go to the customer, unless the agencies are going into a court and getting a court to agree that there is no need for immediate notice and that the various reasons for delayed notice are applicable.

Chairman ST GERMAIN. Mr. Buffone.

Mr. BUFFONE. I think I now understand the question a little better.

We have spoken this morning at some length about the interface between the grand jury investigative process and the administrative investigative process.

The Supreme Court in the Baggett and Sells Engineering cases decided last year, determined that it was improper for information derived in the grand jury proceeding to be shuffled around the Government without a judicial determination that there was particular need for it.

We would support that position and take the realistic approach that much of the information we are talking about is going to be grand jury information.

Chairman ST GERMAIN. Mr. Harmon, I should allow you to com

ment.

Mr. HARMON. Yes.

Chairman ST GERMAIN. As to why the provision is in the legislation that was submitted.

Mr. HARMON. Well, Mr. Chairman, it is a further recognition of what the Right to Financial Privacy Act already says which is that there are risks of flight, risk of destruction of records inherent in the notification process and merely by transferring records to trigger what would not already exist in the way of notice requirement would undercut what the Right to Financial Privacy Act already says in the way of an exemption.

Chairman ST GERMAIN. However, if it is determined that a transfer should be made, doesn't this signify that there is reason to believe that there might be criminal actions involved?

Mr. HARMON. Yes, I would agree with that.

Chairman ST GERMAIN. If that is the case, isn't it burdensome to ask that the agencies then go to the court, to a judge and go through the proper channels to obtain an exemption from the notice requirement?

Mr. HARMON. Well, I would say that depends on the circumstances, Mr. Chairman. Just so the record is clear, we, that is the Commission, did not participate in the drafting of that specific piece of legislation.

Chairman ST GERMAIN. All right.