knowledgeable about these requirements.

This phase also contemplates actual review of the reports submitted (4789's and 4790's), the list of customers exempted from reporting, and the volume of cash shipped to and/or received from the Federal Reserve Bank or a correspondent bank. If the financial institution's performance is found deficient as a result of this evaluation, or if the institution has an unusually high volume of cash shipments to correspondent banks or Reserve Banks, the examiner proceeds to the more exhaustive second phase procedures that involve extensive testing of actual transactions.

We believe that targeting the more intensified procedures in this way will lessen the regulatory burden imposed on those institutions in compliance with the regulations, conserve limited examiner resources, and yet still bring to light any institutions that may have circumvented the recordkeeping and reporting requirements of these regulations. An exception to this approach will be made in connection with examinations of selected institutions, particularly those located in geographic areas where there has been a reported high incidence of drugtrafficking. For these examinations, the examiner will complete both phases as a matter of routine. The procedures as I have outlined them were implemented on a Systemwide basis in February of this year, and our experience to date is that the procedures are an effective tool in monitoring compliance with the Bank Secrecy

Act.

We are pleased to note that the GAO believes the new procedures will enhance our ability to monitor compliance with the Bank Secrecy Act and that, together with actions taken by the Treasury Department, they will improve the quality, timeliness and usefulness of Bank Secrecy reports to the responsible law enforcement investigators.

In conjunction with the 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 efforts in this area and has 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 Secrecy examination procedures on those banks whose circumstances suggest a high volume of cash transactions.

The GAO report includes two recommendations whose objectives the Federal Reserve believes can be achieved in a more efficient manner than the report suggests. One recommendation calls for applying the more extensive second phase procedures to a sample of banks, which the GAO suggests might be a flat 10 percent of banks examined each year. Another recommendation would require each Reserve Bank to designate a regional or district supervisory examiner to review the results of Bank Secrecy examinations. Concerning the first suggestion, we believe that reliance on deficiencies or suspected violations uncovered by the first phase review and on the judgment and experience of Reserve Bank supervisory officials to determine which institutions or geographic areas warrant utilization of the more comprehensive procedures is a more effective use of scarce examiner resources than the across-the-board 10 percent random sample figure suggested by the GAO. With respect to the second recommendation, the Federal Reserve Banks have long had senior review examiners responsible for reviewing examination reports for violations of law, including any comments relative to compliance with the Bank Secrecy Act. We believe that these procedures and practices comport with the spirit and intent of the GAO suggestions while ensuring the most economic and cost-effective use of the System's limited supervisory resources.

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We agree with the GAO that there have over time been compliance problems with the Bank Secrecy Act. Some of these problems, as the GAO recognizes, were due to vague and imprecise regulations that left room for wideranging interpretations, unclear or overly broad exemption provisions, or to the difficulties that a number of commercial banks, particularly smaller institutions, were having in devising compliance mechanisms and understanding the requirements in light of the strains that were placed on these resources by a surge of new regulations and paperwork. Finally, some of the problems were undoubtedly due to the need for more comprehensive procedures on the part of the banking agencies to monitor and enforce compliance.

Recent amendments by the Treasury Department to the implementing regulations that tighten exemption procedures for the filing of currency transactions reports have removed many ambiguities. We agree with the GAO assessment that these revisions should result in more consistent interpretation and reporting. Moreover, we believe that these changes combined with the new examination procedures will facilitate more effective compliance monitoring.

While we agree that the new examination procedures are warranted and will improve our ability to monitor compliance, it should be noted that the Federal Reserve's past efforts to monitor compliance with the Act had evolved over time and had been expanded and adapted as our experience with enforcement broadened. The original compliance checklist was worked out in consultation with the Department of the Treasury following the issuance of the regulations in mid-1972. In March 1976, representatives from the Federal banking regulatory agencies and the Department of the Treasury designed more detailed examination guidelines which were forwarded to the examiners for implementation. In addition to consulting with Treasury to develop these procedures, Federal Reserve examiners

have responded to requests from the Internal Revenue Service and the Justice Department for technical assistance in connection with investigations of possible violations of the Bank Secrecy Act by financial institutions. A recent example of this was the Operation Greenback project in south Florida. Moreover, the Federal Reserve remains committed to assisting law enforcement agencies when necessary and feasible in the conduct of special investigations of possible violations. We believe this record and the additional steps outlined above represent a longstanding desire and commitment on the part of the Federal Reserve to cooperate with the U.S. Treasury and the primary law enforcement agencies in ensuring compliance with the Bank Secrecy Act.

With respect to the compliance commitment of the financial institutions themselves, we believe that the overwhelming majority of senior managements of the financial institutions under the supervision of the Federal Reserve would not knowlingly permit their institutions to be used as vehicles for laundering narcotics-related monies, and that compliance with the requirements of the Currency and Foreign Transactions Reporting Act is generally good. Nevertheless, in an effort to reinforce the compliance commitment of financial institutions, the Federal Reserve, on September 17, 1980, forwarded a letter to the Chief Executive Officers of the institutions under its supervision requesting a review of procedures to insure that employees were being properly trained concerning the requirements of the regulations and that adequate internal controls were in place to insure compliance with the Bank Secrecy Act.

In conclusion, I believe that the recent changes in the regulations, the steps being taken by the Department of the Treasury to make greater use of the reported data, and the new examination procedures will improve the level of compliance with the Bank Secrecy Act by financial institutions. It should be noted,

however, that compliance with the Act and the monitoring and enforcement of it are costly to both the Government and to the private financial institutions. While the Federal Reserve remains committed to carrying out and strengthening where necessary its compliance efforts, we believe that such actions should be taken in the most cost-effective and efficient manner as possible. Because of the costs associated with compliance, the Federal Reserve concurs with the GAO suggestion that the overall costs to the Government and banks of complying with the Act be studied in relation to the value of the Bank Secrecy reports to the primary law enforcement agencies that use them.