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CONTENTS

Page

WITNESSES

APRIL 16, 1986

Friedberg, Herb, former money launderer; accompanied by Assistant U.S.

Attorney Ted E. Bandstra, Southern District of Florida, Department of

Justice

79

Pickle, Hon. J.J., a Representative in Congress from the State of Texas.

68

Wassenaar, Richard C., Assistant Commissioner for Criminal Investigation,

Internal Revenue Service (IRS) .......

109

MATERIAL SUBMITTED FOR INCLUSION IN THE RECORD

Wassenaar, Richard C., response to questions of Chairman St Germain 120, 123,

128

APPENDIX

Articles from the Boston Globe, Wall Street Journal, and Washington Post

regarding "money laundering

195-238

Bandstra, Ted E., letter dated April 30, 1986, responding to questions of

members of the subcommittee....

159

Keating, Francis A., II, letter dated February 14, 1986, responding to Chair-

man St Germain on behalf of Treasury Secretary James A. Baker request-

ing a written report concerning the activities of the Office of Enforcement

and Operations to promote the compliance of financial institutions with the

provisions of the Bank Secrecy Act.

488

Letters of invitation to witnesses of this day's hearing

132-153

Prepared statements:

Friedberg, Herb

154

Pickle, Hon. J.J.....

129

Wassenaar, Richard C.

161

St Germain, Chairman Fernand J.:

Letter to Hon. James A. Baker III, Secretary of the Treasury, dated

January 14, 1986.......

486

Reports requested of regulatory agencies concerning efforts to improve

enforcement of the Bank Secrecy Act:

Comptroller of the Currency.

493

Federal Deposit Insurance Corporation

609

Federal Home Loan Bank Board ....

239

Treasury

488

627

TAX EVASION, DRUG TRAFFICKING AND

MONEY LAUNDERING AS THEY INVOLVE FINANCIAL INSTITUTIONS

WEDNESDAY, APRIL 16, 1986

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

SUPERVISION, REGULATION AND INSURANCE,
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS,

Washington, DC. The subcommittee met, pursuant to notice, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. Fernand J. St Germain (chairman of the subcommittee) presiding.

Present: Chairman St Germain; Representatives Annunzio, Barnard, Kanjorski, Wylie, McKinney, Parris, Wortley, and Bartlett.

Also present: Representative Esteban E. Torres of the full committee.

Chairman ST GERMAIN. The subcommittee will come to order.

Today the subcommittee begins hearings on proposals to protect against financial institutions becoming havens for tax evaders, drug traffickers, and money launderers.

Following the committee's hearing last April on the Bank of Boston case, and the bank's guilty plea to Bank Secrecy Act violations, scores of banks have approached the Treasury Department to work out an agreement for similar violations, a process which has been described by some as “Dial-a-Confession.” Approximately 65 bank holding companies or banks are under consideration for possible civil penalties. Since the Bank of Boston plea, 14 banks have been fined in amounts ranging from $121,000 to the largest fine of $4.75 million, imposed on the Bank of America, and it is anticipated that many more will be announced over the next several months.

Subsequent to last year's hearings, Mr. Wylie and I introduced by request H.R. 2785, the administration's "Money Laundering and Related Crimes Act of 1985.” Since then, other bills dealing with this problem have been introduced and have been referred to the Banking Committee.

The purpose of these hearings are to, No. 1, review the egulatory actions that the banking and other related agencies have taken since last April to ensure that the financial institutions of this Nation are in compliance with the reporting requirements and other provisions of the Bank Secrecy Act; and No. 2, to seek legislative means, if necessary to help law enforcement efforts in stopping criminals from using our Nation's financial system to carry out

(1)

their illegal activities. We must be ever mindful, however, that an equitable balance be maintained between attaining the goal and preserving the financial privacy and other precious rights of individuals.

Fifteen years ago, the Bank Records and Foreign Transactions Act was enacted into law. Titles I and II of the law constitute what is commonly known as the Bank Secrecy Act. The primary purpose of the reporting requirements of that act is to identify the sources, the amount, and movements of U.S. currency which is transported into or out of the country, or deposited in financial institutions in order to give law enforcement officials the basic tools to detect and investigate criminal tax and regulatory violations.

The Bank Secrecy Act, together with other titles of the Bank Records and Foreign Transactions Act, is a product of the House Banking Committee. As passed by our committee, the legislation was designed to stop the use of secret bank accounts for illegal practices such as the evasion of taxes, the taking over of legitimate businesses by organized crime, the financing of narcotics traffic, and other illegal purposes. It should be emphasized that while a great deal of our efforts will be spent on issues involving money laundering as they relate to drug trafficking, we should be mindful that the Bank Secrecy Act was also intended to cover, as well, other forms of illegal activity, including tax evasion.

Also, while recently the focus of attention has been and continues to be on compliance with the reporting provisions by financial institutions, we should be aware that the original purpose of the Bank Secrecy Act was also to catch those individuals who use financial institutions as a means to keep from the Federal Government sources of taxable income.

There is no question that money laundering is now more pervasive than it ever was, and that it is becoming more difficult for law enforcement officials to connect the money laundering scheme per se with the crime from which such funds are obtained. Criminal elements in our society are becoming more sophisticated in their illegal operations. This sophistication has led to the creation of a new position, the professional money launderer.

The subcommittee intends to pursue these actions to learn more about the sophistication of money laundering and the schemes de veloped by so-called professional money launderers.

As a matter of fact, we have with us today an individual who was a money launderer. His identity was purposely not disclosed in the notice of hearings recently announced, in order to protect him from undue publicity which might have posed some difficulties for him.

In analyzing the various legislative proposals, the subcommittee will revisit not only the Bank Secrecy Act, but will also review the Right to Financial Privacy Act, the Change in Bank Control Act, and other provisions of FIRICA, otherwise known as the Safe Banking Act of 1978.

Tomorrow, we will hear from the Department of the Treasury, the civil side of the IRS and the banking regulators, who will review these various issues with us.

Today, it is my pleasure to introduce to you our lead-off witness in these hearings, the Honorable J.J. Pickle. Mr. Pickle, a senior Member of the House Ways and Means Committee, has today introduced a bill that has been referred to this committee, the purpose of which is to deal with the subject of money laundering and seizure and forfeiture provisions of title 31 of the Bank Secrecy Act.

Following Mr. Pickle's testimony, we will hear from Mr. Herbert Friedberg, who will tell us about his experiences as a money launderer. He will be followed by Mr. Richard Wassenaar, Assistant Commissioner-Criminal Investigation of the Internal Revenue Service, who will brief us on the various offshore tax shelter schemes, the various money laundering schemes which have been discovered and successfully prosecuted by the IRS and the Department of Justice, and the problems law enforcement agencies still encounter in tracking down this type of criminal activity.

I would like to also mention the fact that, as I stated, Mr. Wylie and I have cosponsored the administration bill. Legislation has also been introduced, that I have cosponsored with Mr. Torres. Other legislation has been introduced by Mr. McCollum, who also has worked on this in the Judiciary Committee. Mr. Wortley of New York has also been very active in this area and has introduced legislation, and Congressman LaFalce on the committee has also had previous interest in it. And of course, we will be hearing from Mr. Pickle.

[The texts of H.R. 1367; H.R. 1474; H.R. 1945; H.R. 2785; H.R. 3892; H.R. 4280; and H.R. 4573, all related to these hearings, follow:)

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