Mr. Walker, we welcome you once again to the subcommittee. We received your written statement, which will remain a part of the record in full, and you may proceed as you see fit. Welcome.

TESTIMONY OF HON. JOHN M. WALKER, JR., ASSISTANT SECRETARY OF THE TREASURY (ENFORCEMENT AND OPERATIONS), U.S. DEPARTMENT OF THE TREASURY

Mr. WALKER. Thank you very much.

Mr. Chairman, there are some slight changes between my written statement and the statement that I have come up here with today which can be noted.

Mr. HUGHES. They will be so noted.

Mr. WALKER. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear today to present testimony concerning the use of casinos to launder money from drug trafficking and other illegal activities and to report on the progress which the Treasury Department is making with regard to currency reporting requirements in an effort to discourage such money laundering.

When former Deputy Assistant Secretary Robert Powis testified last before this subcommittee on February 10, 1984, to discuss this subject, he submitted a complete opening statement dealing with a review of the Bank Secrecy Act and the implementing of regulations under which it operates.

Background information was furnished on a number of compliance and enforcement efforts that have been put into effect in recent years.

He also provided information regarding the nature of financial services provided by casinos and the volume of cash handled by these establishments.

Summaries were provided on a number of cases in which drug traffickers and other criminals had used casinos to launder cash. Other witnesses who testified at that hearing also furnished examples of money laundering at gambling casinos in Nevada and New Jersey.

Mr. Chairman, the hearing which you held in Atlantic City on February 10, 1984, was useful in that it clearly established the fact of the existence of a problem involving money laundering at gambling casinos and that steps were required to protect this problem, and I really appreciate the efforts of this committee and of you, Mr. Chairman, in holding those hearings in Atlantic City at that time.

Several witnesses, including Mr. Powis, stated that in most cases casinos have been unwitting victims of money launderers. This committee was advised that the Treasury Department was considering the issuance of regulations that would designate as financial institutions under the Bank Secrecy Act.

The Powis testimony accurately reported that the casino industry had a number of legitimate concerns with respect to regulation and that the Treasury Department intended to listen to the legitimate concerns of the industry and to take these concerns into account in formulating a regulatory framework.

Since the February 10 hearing, Treasury Department representatives have had a number of meetings with the representatives of the Nevada casino industry. The industry representatives have made a number of proposals regarding actions which they would be willing to take, which would both tend to preclude the possibility of money laundering and provide, in certain circumstances, reports of certain cash transactions. These reports would be furnished to the State Gaming Control Board and then to the Treasury Department. Mr. Chairman, I must tell you that I have been sincerely impressed by the sincerity of the industry representatives in representing their commitment to take positive steps to preclude money laundering, recognizing that it gives the industry a black eye and that the money launderer is basically using the industry, as opposed to being an individual who seeks to gamble for pleasure or profit, and that if money laundering occurs, the reputation of the industry suffers.

We have reviewed the industry proposals in considerable depth. I am confident that if they are energetically and vigorously enforced, these proposals will go a long way toward the prevention of money laundering at casinos.

I also believe that the industry proposals could provide the framework for a comprehensive State regulatory system that would substantially deal with the problem of money laundering at casinos and provide reports of unusual cash transactions.

Mr. Chairman, in the next few days, the Treasury Department intends to issue a notice of proposed rulemaking to address the problem of money laundering at casinos, and, in fact, I have already signed that notice.

This notice would add gambling casinos to the definition of "financial institutions" under Public Law 91-508, commonly referred to as the Bank Secrecy Act.

The notice of proposed rulemaking will, however, recognize that the regulation of the gambling industry has historically been the responsibility of the States. Accordingly, it will indicate that the Department will grant full exemptions from the reporting and recordkeeping requirements of the act to those States and to the casinos in those States that establish a comprehensive, acceptable system of State regulation that meets the criteria for Federal enforcement.

The issuance of this rulemaking proposal recognizes that a loophole currently exists with respect to the use of casinos for money laundering. We intend to grant exemptions to casinos in any State which, through its own regulatory mechanisms, implements requirements that are designed to effectively close this loophole.

After exemptions are granted, we will of course continue to monitor the effectiveness of the State regulatory system. If, for any reason, the State regulatory system fails to meet the objectives of the Federal rule, the Secretary will, after notice in the Federal Register, rescind the exemption.

Mr. Chairman, I would submit that this notice of proposed rulemaking will give a considerable amount of flexibility both to the Treasury Department and to those States that regulate casino gambling.

Under this rule, a State may elect to opt for Federal regulation and undertake to fulfill recordkeeping and reporting requirements similar to those applied to banks under the Bank Secrecy Act.

In the alternative, a State will have the option of preparing a comprehensive regulatory scheme that would substantially meet the objective of the proposed rule. In this regard, I believe that the proposals developed by the Nevada casino industry, which will be spelled out in other testimony today, particularly by Congressman Reid, have the potential to provide the framework for a comprehensive State regulatory system that would accomplish the goals of the Bank Secrecy Act. New Jersey and Puerto Rico may or may not adopt a similar approach. The choice would be theirs.

In the meantime, Mr. Chairman, I want to bring you up to date on some of the measures which we have recently taken with regard to money laundering and the Bank Secrecy Act.

On April 5, 1984, the Treasury Department issued a notice of proposed rulemaking that would amend the current regulations of the Bank Secrecy Act to establish procedures under which the secretary could require specified U.S. banks to report financial transactions with foreign financial agencies.

This proposed rule is designed to identify money transfers to and from foreign financial facilities by drug trafficking organizations and other criminal enterprises.

Under this regulation, Treasury would require certain domestic banks that do business with certain foreign financial agencies to begin reporting transactions with those agencies for a limited period, generally not to exceed 3 weeks.

The foreign agencies would be selected on the basis of information indicating unusual financial transactions that may be connected with drug trafficking, tax evasion, or other criminal activity.

The reporting requirements resulting from this proposed rule would, at a relatively small cost, greatly improve our ability to focus limited resources on highly defined and, therefore, more useful information, in order to learn more about the nature of suspicious financial activity.

Recently the Greenback Operation in Florida culminated a lengthy investigation into drug money laundering by making a series of arrests of individuals belonging to an organization that used a novel scheme to evade the Bank Secrecy Act and to launder millions of dollars in illegal moneys.

This new scheme involved the purchase of large numbers of cashier's checks and money orders in amounts less than $10,000 at banks across the country. The cashier's checks and money orders were then transported to Miami and deposited in Miami banks.

During one 9-day period in April of this year, this group laundered more than $7 million. Couriers working for this organization purchased cashier's checks at banks in Atlanta; Phoenix; Denver; Omaha; and Lincoln, NE; Portland, OR; San Jose and Palo Alto, CA; and numerous cities in Florida.

This case demonstrates the ingenuity of money launderers. In previous times, money launderers, particularly in Miami, walked into banks with shopping bags and shoe boxes full of cash.

The pattern has changed because of a crackdown on this type of activity across the country, and this newest case simply indicates

the kind of activities that is a constant challenge to law enforcement.

Mr. Chairman, I cite the above incidents to indicate that this administration and the Treasury and Justice Departments are working hard to keep pace with drug money launderers and unusual cashflows through heightened investigative activity and necessary changes in the Bank Secrecy Act regulations.

The proposal with respect to casinos represents another step in our efforts to identify and close existing loopholes.

Mr. Chairman, at this time I would be pleased to answer any questions which you or other members of the subcommittee might have.

[The statement of Mr. Walker follows:]

STATEMENT OF HON. JOHN M. WALKER, JR.

Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear today to present testimony concerning the use of casinos to launder money from drug trafficking and other illegal activities, and to report on the progress which the Treasury Department is making with regard to currency reporting requirements in an effort to discourage such money laundering.

When former Deputy Assistant Secretary Powis last appeared before this subcommittee on February 10, 1984, to discuss this subject, he submitted a complete opening statement dealing with a review of the Bank Secrecy Act and the implementing of regulations under which it operates. Background information was furnished on a number of compliance and enforcement efforts that have been put into effect in recent years. He also provided information regarding the nature of financial services provided by casinos and the volume of cash handled by these establishments. Summaries were provided on a number of cases in which drug traffickers and other criminals had used casinos to launder cash. Other witnesses who testified at that hearing also furnished examples of money laundering at gambling casinos in Nevada and New Jersey.

Mr. Chairman, the hearing which you held in Atlantic City on February 10, 1984, was useful in that it clearly established the fact of the existence of a problem involving money laundering at gambling casinos and that steps are required to correct this problem. Several witnesses, including Mr. Powis, stated that in most cases casinos have been unwitting victims of money launderers. This committee was advised that the Treasury Department was considering the issuance of regulations that would designate casinos as financial institutions under the Bank Secrecy Act. The Powis testimony accurately reported that the casino industry had a number of legitimate concerns with respect to regulation, and that the Treasury Department intended to listen to the legitimate concerns of the industry and to take these concerns into account in formulating a regulatory framework.

Since the February 10 hearing, Treasury Department representatives have had a number of meetings with representatives of the Nevada casino industry. The industry representatives have made a number of proposals regarding actions which they would be willing to take, which would both tend to preclude the possibility of money laundering and provide, in certain circumstances, reports of certain cash transactions. These reports would be furnished to the State Gaming Control Board and then to the Treasury Department. Mr. Chairman, I must tell you that I have been impressed by the sincerity of the industry representatives in representing their commitment to take positive steps to preclude money laundering-recognizing that it gives the industry a black eye and that the money launderer is basically using the industry as opposed to being an individual who seeks to gamble for pleasure or profit and that if money laundering occurs the reputation of the industry suffers. We have reviewed the industry proposals in considerable depth. I am confident that, if they are energetically and vigorously enforced, these proposals will go a long way toward the prevention of money laundering at casinos. I also believe that the industry proposals could provide the framework for a comprehensive State regulatory system that would substantially deal with the problem of money laundering at casinos and provide reports of unusual cash transactions.

Mr. Chairman, in the next few days, the Treasury Department intends to issue a notice of proposed rulemaking to address the problem of money laundering at casinos. This notice would add gambling casinos to the definition of financial institu

tions under Public Law 91-508, commonly referred to as the Bank Secrecy Act. The notice of proposed rulemaking will, however, recognize that the regulation of the gambling industry has historically been the responsibility of the States. Accordingly, it will indicate that the Department will grant full exemptions from the reporting and recordkeeping requirements of the act to those States that establish a comprehensive, acceptable system of State regulation that meets the criteria for Federal enforcement. The issuance of this rulemaking proposal recognizes that a loophole currently exists with respect to the use of casinos for money laundering. We intend to grant exemptions to casinos in any State which, through its own regulatory mechanisms, implements requirements that are designed to effectively close this loophole. After exemptions are granted, we will of course continue to monitor the effectiveness of the State regulatory system. If for any reason the State regulatory system fails to meet the objectives of the Federal rule, the Secretary will, after notice in the Federal Register, rescind the exemption.

Mr. Chairman, I would submit that this notice of proposed rulemaking will give a considerable amount of flexibility both to the Treasury Department and to those States that regulate casino gambling. Under this rule, a State may elect to opt for Federal regulation and undertake to fulfill recordkeeping and reporting requirements similar to those applied to banks under the Bank Secrecy Act. In the alternative, a State will have the option of preparing a comprehensive regulatory scheme that would substantially meet the objective of the proposed rule. In this regard, I believe that the proposals developed by the Nevada casino industry which will be spelled out in other testimony today have the potential to provide the framework for a comprehensive State regulatory system that would accomplishd the goals of the Bank Secrecy Act. New Jersey and Puerto Rico may or may not adopt a similar approach.

In the meantime, Mr. Chairman, I want to bring you up to date on some of the measure which we have recently taken with regard to money laundering and the Bank Secrecy Act. On April 5, 1984, the Treasury Department issued a notice of proposed rulemaking that would amend the current regulations of the Bank Secrecy Act to establish procedures under which the Secretary could require specified U.S. banks to report financial transactions with foreign financial agencies. This proposed rule is designed to identify money transfers to and from foreign financial facilities by drug trafficking organizations and other criminal enterprises. Under this regulation, Treasury would require certain domestic banks that do business with certain foreign financial agencies to begin reporting transactions with those agencies for a limited period, generally not to exceed three weeks. The foreign agencies would be selected on the basis of information indicating ususual financial transactions that may be connected with drug trafficking, tax evasion or other criminal activity. The reporting requirements resulting from this proposed rule would, at a relatively small cost, greatly improve our ability to focus limited resources on highly defined and, therefore, more useful information in order to learn more about the nature of suspicious financial activity.

Recently the Greenback Operation in Florida culminated a lengthy investigation into drug money laundering by making a series of arrests of individuals belonging to an organization that used a novel scheme to evade the Bank Secrecy Act and launder millions of dollars in illegal moneys. The new scheme involved the purchase of large numbers of cashiers checks and money orders in amounts less than $10,000 at banks across the country. The cashiers checks and money orders were then transported to Miami and deposited in Miami banks. During one 9-day period in April, this group laundered more than $7 million. Couriers working for this organization purchased cashiers checks at banks in Altanta, Phoenix, Denver, Omaha and Lincoln, NE; Portland, OR; San Jose and Palo Alto, CA and numerous cities in Florida. This case demonstrates the ingenuity of money launderers. In previous times money launderers, particularly in Miami, walked into banks with shopping bags and shoe boxes full of cash. The pattern has changed because of a crackdown on this type of activity across the country. Mr. Chairman, I cite the above incidents to indicate that this administration and the Treasury and Justice Departments are working hard to keep pace with drug money launderers and unusual cash flows, through heightened investigative activity and necessary changes in the Bank Secrecy Act regulations. The proposal with respect to casinos represents another step in our efforts to identify and close existing loopholes.

At this time I will attempt to answer any questions which you or other members of the subcommittee might have.

Mr. HUGHES. Thank you very much, Mr. Walker.