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For release on delivery
Martha R. Seger
Member, Board of Governors of the Federal Reserve System
Subcommittee on Financial Institutions Supervision,
Committee on Banking, Finance and Urban Affairs
United States House of Representatives
May 14, 1986
I appreciate the opportunity to appear before the
Subcommittee today on behalf of the Federal Reserve Board to discuss whether existing laws to protect our nation's financial institutions from becoming havens for tax evaders, drug traffickers and other money launderers can be strengthened and whether new laws should be enacted.
I shall begin by focusing on the Bank Secrecy Act and on the various legislative proposals to strengthen the Act. As requested, I will then discuss whether certain titles of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRICA) need to be amended to provide the banking agencies with more effective means of curbing the use of financial institutions by criminal elements for illegal gains. Finally, I will offer the Federal Reserve's views on what might be done, in cooperation with foreign central banks and international organizations, to curtail money laundering activities.
Bank Secrecy Act
The Federal Reserve, together with the other banking agencies, has the responsibility for monitoring financial institutions to determine their compliance with the Bank Secrecy Act. In this regard, the Federal Reserve monitors state member banks and Edge Act corporations, a responsibility delegated to it by the Department of the Treasury, which has primary responsibility for enforcement of the statute.
Enacted in 1970, the Bank Secrecy Act,
among other things, requires financial institutions to report certain currency transactions in excess of $10,000 to the Treasury Department. As you know, the reporting and record-keeping requirements of the Bank Secrecy Act were designed to frustrate criminal activities that generate large sums of cash, such as drug trafficking, by putting the spotlight on large currency transactions.
As the Subcommittee is aware, in recent years
there have been an unfortunate number of instances, including some involving large banking organizations, where financial institutions neglected to report currency transactions as required by law. In most cases these violations were not due to criminal intent on the part of financial institutions, but rather to their failure to put in place or enforce controls designed to ensure that transactions covered by the Act would be properly reported. The widespread publicity surrounding these
reporting failures heightened the awareness of financial institutions as to the importance of complying with the Bank Secrecy Act. Many banks conducted in-house compliance
audits to find transactions that should have been reported under the law. Many of those that did find them voluntarily admitted their failure to report the transactions and paid substantial fines. These and other institutions have since made special efforts to tighten their compliance controls. As a matter of fact, the volume of Currency Transaction Report (CTR) filings has increased dramatically.
Therefore, in my view, it is time to consider
streamlining and modernizing the reporting process-
especially for large institutions that must submit a high volume of CTRS to the IRS. This could include, for example, the use of computer-generated tapes and other technology to minimize the avalanche of paper. An additional benefit of such an approach might be improved compliance.
Federal agencies have also recognized that their enforcement procedures needed to be strengthened and, as a result, have made a concerted effort to improve compliance under the Bank Secrecy Act.
Specifically, they have
expended additional time and effort to increase the
awareness of both financial institutions and examiners as to the requirements of the Bank Secrecy Act. An interagency working group, composed of representatives of federal banking and law enforcement agenices, has been strengthening enforcement procedures and improving communication and coordination among government agencies. Among other things, the group agreed recently to adopt uniform Bank Secrecy Act examination procedures. The group meets on a regular basis and will continue to explore methods to enhance the
agencies' abilities to carry out their responsibilities
under the Act.
In addition, the Federal Reserve has instructed its examiners to implement in-depth assessment procedures for Bank Secrecy Act compliance during all full-scope examinations.
Previously, examiners conducted an in-depth
review only when a preliminary assessment of a bank's internal systems revealed some reason to intensify the investigation. The Federal Reserve has also expanded
coverage of the Bank Secrecy Act in its training program for bank examiners.
Proposed Money Laundering Bills
Despite improved compliance with the Bank Secrecy Act, we know that better record-keeping alone will not put an end to money laundering in this country. Those engaged in money laundering are a resourceful lot and have incentives to circumvent even the most carefully crafted rules and regulations. Indeed, the ability to circumvent the law is an essential requirement for success in drug trafficking and other such activities. The use of "smurfs" to circumvent the existing law is a case in point. (Smurfs, or "runners," are couriers who convert funds derived from illicit activities into multiple transactions each less than $10,000 in order to evade the currency reporting
requirements of the Bank Secrecy Act.)
Yet efforts to curtail money laundering by making it more difficult and risky are clearly in the public interest and should continue. At present, however, the burden of the Bank Secrecy Act clearly falls more on depository institutions than on those directly involved in money laundering. While the reports required under the Act have been recently utilized to more effectively target money