In the spring we discussed the bills then pending, Mr. McCollum's bill, H.R. 1367, and my bill, H.R. 1474, with representatives of two major associations of banks. After the Administration sent to Congress its proposed legislation, we discussed that bill, H.R. 2786, with representatives of the Justice Department, the Treasury Department and the President's Commission on Organized Crime. This problem is a very complex one, and requires balancing sensitive interests and rights of privacy in financial transactions and records with the need to detect these very serious crimes that pose great danger to our society and to our economic institutions.

Today we are pleased to hear the views of some very distinguished prosecutors, former prosecutors, criminal defense lawyers and legal experts on the many sensitive and complex issues raised by the pending legislation. Their detailed and thoughtful prepared statements include numerous suggestions for improving the fight against money laundering and the legislation.

The subcommittee has received a request to keep the hearing record open to permit various concerned persons to submit written comments on the pending legislation. If there is no objection, the record will remain open until a week from tomorrow, Friday, Sep

tember 20.

Is there objection?

[No response.]

Mr. HUGHES. Hearing none, so ordered.

The problem of money laundering is one of the most important issues that the subcommittee will address in this session of the Congress, and we hope to begin to resolve some of the questions that have been raised in these hearings in the very near future. The chair at this time recognizes the ranking Republican, Mr. McCollum, for such opening statement as he may wish to make.

Mr. MCCOLLUM. Thank you very much, Mr. Chairman. I join you in welcoming our witnesses here today.

These gentlemen are here to assist this subcommittee in its efforts to draft meaningful, comprehensive money laundering legislation. I believe that a comprehensive money laundering proposal will be the most important and most effective product of this subcommittee during the 99th Congress. For this reason we are endebted to the witnesses here today, for their opinions and their expertise.

It isn't easy to craft this legislation and we do not approach it lightly. As a member of this subcommittee and a member of the Banking Committee, I have come to appreciate the complicated nature of the money laundering beast and the need to attack it while leaving the banking system intact.

I feel somewhat like a doctor attempting to remove cancer while not damaging the healthy tissue around it. Fortunately for patients everywhere, I'm not a doctor. However, we must defer to the money laundering legislation, Mr. Chairman, with the same surgical care, with the same healthy attitude. We must attack money laundering without injury to the banking system, itself. That is not to say that anything less than a comprehensive solution will be acceptable. The solution we craft must be complete, effective and fair. As witnesses, you bring forth opinions that we want to hear and I look forward to them.

Thank you, Mr. Chairman.

Mr. HUGHES. Thank you, Mr. McCollum.

I might say, before we begin the testimony, that we expect a very distinguished delegation from the Spanish Congress to be with us this morning, headed by Senior Vice Presidente Torres. And we're going to, at the time they appear, break briefly to introduce them and to try to explain what the hearing is about; so I hope that you bear with us.

At this time I call our first witness, Mr. Bernard S. Bailor, a member of the law firm of Caplin and Drysdale. Mr. Bailor, for many years, was a senior trial attorney with the Criminal Section of the Tax Division of the U.S. Department of the Justice, and has had very extensive experience investigating and prosecuting tax fraud cases involving offshore tax cases. In 1975, he was honored by the attorney general for his outstanding work.

Since 1977, Mr. Bailor has been in private practice, specializing in the defense of white collar prosecutions. He has been a very active member of the Criminal Justice Section of the American Bar Association and is currently chairing the Subcommittee on Money Laundering of the White Collar Crime Committee of the section.

Mr. Bailor, it really is a pleasure to welcome you this morning. We have your statement, which, without objection, is going to be made a part of the record in full, and you may proceed as you see fit.

STATEMENT OF BERNARD S. BAILOR, ESQ., CAPLIN & DRYSDALE, WASHINGTON, DC, AND CHAIRMAN, SUBCOMMITTEE ON MONEY LAUNDERING, WHITE COLLAR CRIME COMMITTEE, CRIMINAL JUSTICE SECTION, AMERICAN BAR ASSOCIATION

Mr. BAILOR. Thank you, Mr. Chairman. I appreciate the opportunity to appear here this morning. I do want to mention at the outset that while I am chairman of a white collar crime subcommittee on money laundering, I'm speaking today as a private individual and I do not represent the views of the American Bar Association.

Mr. Chairman, money laundering is simply the process used to conceal the source of illegally obtained funds. In some cases it's also used to facilitate other crimes such as bribery, smuggling and tax evasion. In the department we found that one of the most effective ways to investigate these types of crimes is to focus on the criminal profits. By investigating the use of these illicitly obtained profits, it's often possible to identify individuals who are engaged in criminal activity, who, either because of their high level in the organization or their remoteness from the activity are, in fact, crimes. This is particularly true in narcotics and in organized crime investigations. And I think the administration has recognized this, this subcommittee has certainly recognized this, and this has led to a number of the proposals that you have to deal with money laundering.

I must say, at the outset, I disagree, generally, that we need a bill specifically addressed to money laundering. The real problem, Mr. Chairman, with money laundering is detecting it, not prosecuting it once you've found it. For example, if you would analyze the

various reports we have, such as the report of the President's Commission on Organized Crime and some of the Senate hearing, then virtually every case-and, in fact, I can't cite to you any casewhere money laundering has been discovered, have they been unable to successfully prosecute the crime. That is where I feel the most effective approach this subcommittee can take in dealing with money laundering, is to take those steps that will facilitate the detection of crime.

I have set forth, in my written statement, a number of recommendations which I would like to discuss with you, which I think will accomplish this goal, but before I turn to that, I would like to point out that money laundering, essentially all cases of money laundering, are going to involve one of four steps:

The big, sophisticated transactions use a foreign element in the transaction, either the use of a foreign bank account, or, in some cases, something as simple as bagging the money offshore, depositing it over there, and then transporting it back through an ostensibly legal means. Most commonly, that would come in in the form of a loan to a business or an individual.

The second method commonly used in money laundering is the intentional or the negligent failure to comply with the reporting requirements of the Bank Secrecy Act. I know this subcommittee heard testimony from a hooded individual whose name, I believe, was Mario, who described that process to you.

The third method used to launder money is the use of a series of transactions which are below the minimum reporting amount for the Bank Secrecy Act in lieu of one transaction which would, obviously, be reported.

And the fourth method used for money laundering is to have cash transactions with individuals who are not subject to the reporting requirements.

Unless this subcommittee can deal specifically with these devices that are used to launder money, no money laundering legislation is going to be effective. For that reason, I have focused my recommendations on dealing with those methods.

The first recommendation I have made to the subcommittee is to require better and mandatory training of financial institution personnel to increase the compliance with the reporting requirements of the Bank Secrecy Act. I don't think I need to go into a lot of detail for the need for better trained bank tellers. I think Mario made the case excellently when he testified before this subcommittee.

I would like to point out to the subcommittee that the need for better education of people dealing with large cash transactions is greater today than it ever was before. Last year, on the Tax Reform Act of 1984, the Congress greatly expanded the number of people who are required to file reports involving large cash transactions. I have discussed this reporting requirement with numerous of my clients. The first thing I get is a blank stare, and then, “Oh, what does that mean for me?"

No one out there, except lawyers, I'm afraid, gentlemen, knows that they have to report large cash transactions. There is a need for a broad based educational program, not only in the financial institutions but throughout the population at large. I believe this

type of information should be put out by the Secretary of Treasury, just as we publicize other tax matters and other things of that nature-changes in the holding rates. Businesses must be notified if the provisions that this Congress adopted last year are going to be effective.

Second, I think there is a need for mandatory training programs in those types of financial institutions, primarily banks and savings and loans, which are most likely to deal with money laundering. I pointed out in my prepared statement that the American Bankers Association has an excellent training program for bank officers, but the testimony of Mario and others that have been heard by this and other subcommittees indicates that this is not getting down to the teller level. I suspect what is happening is branch managers and higher level bank employees are going to these seminars and getting a lot of information, but this information simply is not getting down to the teller level; and that's, gentlemen, where the rubber hits the road on a money-laundering situation. The tellers have to be notified. I think a mandatory program, where a teller has obtained at least certain minimal training would go a long way to prevent money laundering. Examination, particularly of the report issued by one of the Senate subcommittees last year, indicated that it wasn't an intentional violation of the Bank Secrecy Act in many of the cases, it was mere unawareness of the filing requirements.

The second recommendation I have made is to provide the Secretary of the Treasury and the Attorney General specific legislative authority to investigate violations of the Bank Secrecy Act. Again, I would like to turn to the President's Commission on Organized Crime. They have cited a case, United States v. Deak-Perera, which is recorded at 566 F. Supp. 1398. When an Internal Revenue Service agent was in conducting a bank secrecy examination, he got a list of 83, to say the least, suspicious transactions and was unable to refer this to other investigative agencies to be pursued and followed up. And the reason for this was the court construed the Bank Secrecy Act as setting up a privacy right which I don't think the Congress intended. They set up a privacy right that prevented even information of specific violations to be furnished even to the Criminal Investigation Division of IRS.

Now, Mr. Chairman, this was a situation where an IRS agent couldn't even walk down the hall and give information on a violation to his criminal investigative counterpart. This sort of thing needs to be taken care of. For any effective approach to be taken on money laundering, the Secretary of the Treasury must have the legal resources to go about it.

I will not opine one way or the other whether the court's opinion's right or wrong, we simply must realize the fact that these opinions are out here and they are restricting the ability of the Secretary to conduct an adequate investigation.

I would like to say in that regard, too, there is a need for a substantial increase in manpower to be assigned to money-laundering investigations. I dealt with money laundering as a prosecutor in the Department of Justice in a fairly large project called "Project Haven," which involved the use of offshore bank accounts, primari

ly in the Bahamas and in the Cayman Islands. Money laundering was commonly used there to facilitate tax evasion schemes.

Mr. HUGHES. What timeframe was that?

Mr. BAILOR. Mr. Chairman, that was during the period 1975 through 1977.

We had one group of IRS agents assigned to assist that grand jury investigation. The group consisted at that time of approximately 12 to 13 agents. On certain transactions all 12 or 13 agents were tied up trying to trace these cash transactions on just one individual. The money in this particular scheme was sent offshore through a phony commodity transaction with a foreign trust controlled by the U.S. taxpayer. The money then went through Panama, back to the Bahamas, and then came back into the United States in the form of a loan.

Now, to discover that type of transaction, you've got to match up transaction dates, you've got to match up transaction amounts, and you've got to spend a greater part of your working week in the bowels of banks. It is extremely labor intensive. And if you look at the problem in that regard, it is obvious that people are the most important thing you can devote to money laundering. There is no other way of doing that, if we give the Secretary the authority. But if you don't give him additional people and don't give him additional resources, you're wasting your time. Passing a law would be the functional equivalent of the D.C. Red Light Statute; unless there's a cop on the corner, it's ignored, and I think we've all experienced that.

The third recommendation I would make is that the Bank Secrecy Act should be amended to provide for faster notification of suspect transactions to the Federal Government. I would like again to turn to the so-called "smurf" type of transaction. Unless an agent gets on the scene of that transaction quickly, it can never be investigated. In most cases the smurf has come in with a fictitious name, it is a cash transaction, he has left no paper or no traces. He has got to get out of there quickly.

I have recommended that banks, at the time of the transaction, fill out the CMIR, Currency and Monetary Instrument Report, and drop it into the mail that day. I don't see any practical reason why they can't do it. We all know that if we go to the bank to purchase a cashier's check or if we go to the bank to purchase travelers' checks, we fill out the forms routinely, right then and there, when the transaction takes place. I don't see any reason, legitimate reason, why, at least within one business day, you couldn't fill out the Currency and Monetary Instruments Report and forward it in. I recommend that an 800 number be set up and the information be called in to the Internal Revenue Service or whatever other investigative agency would be assigned to the Secretary, so that that information hits the street-level agent who can deal with it promptly. Unless you can deal with it promptly, all evidence is going to be gone.

The President's Commission on Organized Crime has described, and I've outlined it in my written statement, the cumbersome, awkward procedure which Treasury goes through before information from the Currency and Monetary Instrument Report reaches the street-level law enforcement agency. Now, Mr. Chairman, this