While our experience with the new examination program is too limited at this time to accurately project its increased cost or assess its merits, we are certain that examination hours and FDIC's costs dedicated to bank secrecy compliance will increase in the current as well as future examination cycles. Because of the tightened reporting requirements (more reports are now required and more customers are covered by the regulations) compliance costs to the banking industry will also be increased; perhaps significantly.

We trust that over the next two or three years our efforts will at least assist in providing a better framework to accurately assess the benefits and usefulness of these reports in containing criminal activity in relation to the overall costs of the regulatory program. It is in this spirit that we support GAO's recommendation that Congress amend the Bank Secrecy Act by inserting a provision to require reauthorization of the reporting requirements in 1984.

Chairman MINISH. Thank you.

Mr. Ryan, you may proceed with your statement, or whatever you care to do.

Mr. RYAN. I will make a few brief remarks and ask that the full statement be included in the record.

STATEMENT OF JOHN E. RYAN, DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. RYAN. I appreciate the opportunity to appear before your subcommittee to discuss the GAO's final report.

At the outset, let me say that the Federal Reserve is fully committed to taking and strenghtening, whenever necessary, appropriate measures to insure compliance with the Bank Secrecy Act and to provide accurate and timely information for ultimate use by the law enforcement agencies.

We are pleased to know that the GAO believes new procedures implemented by the Federal Reserve will enhance our ability to monitor compliance with the Bank Secrecy Act and that, together with actions taken by the Treasury, they will improve the quality, timeliness, and usefulness of the Bank Secrecy Act reports.

In conjunction with their procedures, the Federal Reserve has taken a number of other actions to contribute to these objectives. In particular, the Federal Reserve has increased the number of examiner days devoted to bank secrecy, expanded training in this area, and improved the timeliness and detail associated with the information on possible violations that is provided to the Treasury on a quarterly basis.

In addition, the Federal Reserve is continuing to explore ways in which the study of cash flows between member banks and Reserve banks can be effectively used in targeting the bank's secrecy exam procedures to those banks whose circumstances suggest a high volume of cash transactions.

In conclusion, we believe that the recent changes in the regulation, the steps being taken by the Department of the Treasury to make greater use of the reported data and the new exam_procedures, will improve the level of compliance with the Bank Secrecy Act.

We believe, however, that compliance with the act and the monitoring and enforcement of it are costly to both the Government and to the financial institutions.

Because of these costs, we concur with the GAO in its suggestion that the overall cost to the Government and the banks complying with the act be studied in relation to the value of the banks' secrecy reports to the primary law enforcement agencies that use them.

[Mr. Ryan's prepared statement, on behalf of the Federal Reserve, follows:]

Statement by

John E. Ryan

Director, Division of Banking Supervision and Regulation Board of Governors of the Federal Reserve System

before the

Subcommittee on General Oversight and Renegotiation

of the

Committee on Banking, Finance, and Urban Affairs

United States House of Representatives

July 23, 198!

I appreciate the opportunity to appear before this Subcommittee on behalf of the Federal Reserve to discuss the GAO's final report on the Currency and Foreign Transactions Reporting Act ("Bank Secrecy Act"). The GAO report. addresses the investigative use made of Bank Secrecy reports by responsible law enforcement agencies and the value of the reports to these agencies, the level of compliance with the Act's reporting requirements and the steps taken by Federal bank regulatory agencies to monitor compliance in financial institutions. At the outset, let me say that the Federal Reserve is fully committed to taking and strengthening whenever necessary appropriate measures to ensure compliance with the Bank Secrecy Act and to providing accurate and timely information for ultimate use by the responsible law enforcement agencies. As background to my discussion of issues raised by the GAO, I would like to briefly describe the scope of the Federal Reserve System's supervisory role for commercial banking

organizations.

The Federal Reserve System has primary supervisory authority over approximately 1,000 State member banks and 150 Edge Corporations, domestic subsidiaries of banks that are licensed to engage exclusively in international banking. The System is charged by Congress for ensuring that these commercial banking organizations are operated in a safe and sound manner and for determining their compliance with U.S. banking laws and regulations, including the Bank Secrecy Act. The Federal Reserve discharges its safety and soundness and compliance responsibilities largely through the conduct of supervisory examinations and through the referral of possible violations of law to the designated agency with primary responsibility for enforcing the relevant statute.

The Federal Reserve believes that the GAO report represents a reasonably accurate and well-balanced assessment of the major issues pertaining to monitoring compliance and enforcement of the Bank Secrecy Act. My testimony today will focus on the performance of the Federal banking agencies and, in particular, the Federal Reserve, in monitoring compliance with the Bank Secrecy Act since this is the role that has been delegated to the agencies by the Department of the Treasury. The Department of the Treasury itself has primary responsibility for implementing the reporting requirements, for reviewing, evaluating and following up on violations, and for overall enforcement of the Act.

In order to improve our ability to monitor compliance with the Bank Secrecy Act and to provide Treasury with better information on possible violations, new and more comprehensive examination procedures, based on those in place at the Federal Reserve Bank of New York, were developed last year by staffs of all the Federal regulatory agencies working under the aegis of the Federal Financial Institutions Examination Council. These revised procedures (which are appended to my testimony) were initially field tested by the agencies late last year and reviewed by staffs of both the Department of the Treasury and the GAO, whose comments resulted in some modifications to the procedures.

The new examination procedures are comprised of two separate phases or modules that are progressively extensive in scope. This approach was designed to determine compliance in a manner that minimizes undue burden on the bank while making maximum efficient use of limited examiner resources. In the first phase the examiner must establish that the financial institution has appropriate internal operating and auditing standards to ensure compliance, and determine that the institution has established a program of employee education with regard to the requirements of the regulations and that operations personnel are sufficiently