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RISK MANAGEMENT AND REGULATORY

FAILURES AT RIGGS BANK AND UBS:

LESSONS LEARNED

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 2, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–91

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

STEVEN C. LATOURETTE, Ohio 

MARK GREEN, Wisconsin 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

LUIS V. GUTIERREZ, Illinois 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

JOSEPH CROWLEY, New York 

CAROLYN B. MALONEY, New York 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 2, 2004 ...................................................................................................... 1

Appendix: 

June 2, 2004 ...................................................................................................... 31

WITNESSES 

WEDNESDAY, JUNE 2, 2004

Baxter, Thomas Jr., General Counsel and Executive Vice President of the 

Federal Reserve Bank of New York, accompanied by Katherine Wheatley, 

Assistant General Counsel, Federal Reserve Board and Michael Lambert, 

Financial Services Cash Manager, Federal Reserve Board .............................. 6

Stipano, Daniel, Deputy Chief Counsel, Office of the Comptroller of the Currency ...................................................................................................................... 5

APPENDIX 

Prepared statements: 

Kelly, Hon. Sue W. ........................................................................................... 32

Oxley, Hon. Michael G. .................................................................................... 34

Baxter, Thomas Jr. ........................................................................................... 36

Stipano, Daniel ................................................................................................. 54

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kelly, Hon. Sue W.: 

Bank Secrecy Act: OCC Examination Coverage of Trust and Private 

Banking Services, U.S. Department of the Treasury ................................. 74

(1)

RISK MANAGEMENT AND REGULATORY 

FAILURES AT RIGGS BANK AND UBS: 

LESSONS LEARNED 

Wednesday, June 2, 2004

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:13 p.m., in Room 

2128, Rayburn House Office Building, Hon. Sue W. Kelly [chairwoman of the subcommittee] Presiding. 

Present: Representatives Kelly, Gutierrez, Moore, Maloney, and 

Matheson. 

Chairwoman KELLY. The subcommittee on Oversight and Investigations will examine risk management and regulatory failures at 

Riggs Bank and UBS, lessons learned this afternoon. 

Two weeks ago, this subcommittee explored proposals to streamline and federalize our current system to prevent money-laundering 

and terror financing. The recent cases involving Riggs Bank and 

UBS reveal regulatory and risk-management breakdowns that also 

must be examined in order to strengthen our Government’s ability 

to enforce our anti-money laundering laws. 

This afternoon, the subcommittee will investigate the noncompliant and inexcusable behavior of these two banks, along with the inadequate response of our regulators. In the OCC’s oversight of the 

Riggs Bank’s case, we find no better illustration of the inherent 

weaknesses of a fragmented regulatory regime. 

We find a regulator that was reportedly aware of noncompliance 

by Riggs with high-risk foreign clientele as far back as 1997, perhaps even earlier, and does nothing about it. We find a regulator 

that was slow to act even after the September 11 terrorist attacks 

inside our borders made the threat posed by terror-funding networks all too clear. We find a regulator with credibility so diminished that Riggs shamelessly continued to violate the Bank Secrecy 

Act even after a full-time OCC examiner was placed on the bank’s 

premises following last summer’s consent order. 

I am very interested in hearing directly from the OCC about how 

this happened. I am also deeply concerned that we are combating 

illicit funding networks inside our country with the regulatory 

structure that was not designed to be part of our arsenal in a war 

on terror. 

Though a lot of great strides forward have been taken, particularly with the creation of the Office of Terrorism and Financial InVerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\95062.TXT FIN1 PsN: MICAH
2

telligence, the TFI, and with an elevated focus on improving 

FinCEN’s capability, it is evident that this is still a work in 

progress. The time has come to replace slow-footed regulatory systems with one that is centralized, multi-dimensional and focused 

intentionally on preventing our financial institutions from being exploited by criminals and terrorists. 

Therefore, this subcommittee will continue to pursue proposals 

that centralize our examination and compliance assets, that establish a criminal enforcement authority, that will restore the credibility of our regulators. Such reforms should establish clear lines 

of oversight, improve our ability to quickly detect and respond to 

suspicious activity and will make clear to financial institutions 

that, from now on, brazen violators are going to be going to jail instead of just paying a civil fine. 

Our hearing today also focuses on UBS’s contract with the Federal Reserve Bank of New York to serve as an extended custodial 

inventory which facilitates the international distribution of U.S. 

Currency. Beginning with its contract in 1996, UBS was in violation of its agreement to repatriate old U.S. banknotes and distribute—re-distribute new banknotes on behalf of the Federal Reserve. The bank knowingly traded U.S. currency through the ECI 

with countries subject to restrictions from the Office of Foreign 

Asset Control, including Cuba, Iran, Libya, and Yugoslavia. The 

most serious and disturbing violation has been the discovery that 

officers and employees at UBS intentionally falsified documents to 

side-step detection by U.S. authorities. 

Though these actions and the company’s failure to implement internal controls made it exponentially more difficult to detect suspicious activity, it is also important to examine how and why routine oversight by the Federal Reserve and the OCC didn’t raise any 

concerns. In fact, this subcommittee is deeply concerned that contract violations would likely still be occurring today had our military not been in a position to find U.S. dollars from the Federal Reserve Bank of New York on the ground in Iraq. As such, I believe 

that we must investigate all ECI contracts to ensure that foreign 

governments and financial institutions are cooperating with our 

Government. 

While Riggs Bank and UBS illustrate two distinct regulatory 

meltdowns, they both speak clearly to the need for improving our 

efforts to stop terrorist financing. It may create new and unfamiliar 

responsibilities for financial institutions, but it is a moral and ethical responsibility and a license required to do business in this 

country. 

We thank our witnesses for their testimony and hope that they 

can shed some light on these issues. I look forward to continuing 

this discussion in the subcommittee’s hearing next week regarding 

the oversight of the Department of Treasury and the agency’s antimoney laundering efforts. 

I turn now to Mr. Gutierrez. 

[The prepared statement of Hon. Sue W. Kelly can be found on 

page 32 in the appendix.] 

Mr. GUTIERREZ. Thank you Madam Chairwoman. Thank you for 

calling this hearing today. It is important, especially given recent 

events, as we closely examine our anti-money laundering efforts 

3

and whether they are sufficient. I am pleased we will be looking—

we will hear from the regulators about how these problems occur 

and what steps have been taken to prevent their re-occurrence. 

The last time Congress was this concerned with the actions of 

UBS was when the Senate Banking Committee was investigating 

the sources of Holocaust financing and UBS attempted to shred 

documents which showed the extent of its involvement. I would 

have hoped that UBS would have learned from the experience to 

take U.S. law and the U.S. Congress much more seriously. I also 

recall the reluctance of Swiss banking authorities to cooperate at 

that time. While I understand that the Swiss Federal banking 

economist was much more helpful in this effort, most foreign bank 

supervisors simply lack the supervisory tools and authority of our 

regulators here in the U.S. 

I think, perhaps, this extended custodial inventory, ECI, business should be restricted to U.S. Institutions so that we can ensure 

no dealings with OFAC nations, and nations’ activities can be 

closely supervised by U.S. Regulators who need to take an active 

role in monitoring these activities. 

While this fine of a $100 million seems very large, it is merely, 

I believe, a drop in a bucket of a $1 trillion institution. It is a onetime penalty that may not have the deterrent effect against misconduct that we may have hoped for. In this case, the ECI business 

wasn’t particularly profitable for the bank—or they say—so the termination of the contract and the exclusion from the part of their 

business isn’t likely to hurt their financial bottom line very much. 

It might make more sense to punish an institution of the size of 

UBS by restricting their conduct in a more profitable area, such as 

their ability to operate in the United States or making them sell 

off certain aspects of their business which we know to be profitable. 

I am also deeply troubled by the Riggs situation. It represents 

not merely a failure of one institution’s internal controls, but a fundamental flaw in its regulation. It is my understanding that the 

flaws in Riggs systems were long outstanding and systematic, dating well before the Patriot Act. The recent consent order is something that should have happened 2 years ago, if not earlier. I don’t 

understand why the OCC was not more vigilant on this front and 

why it took them so long to take these actions. 

I also understand that Rigg’s problems were initially discovered 

by the FBI, rather than the OCC, and that the irregularities in 

New Guinea were discovered by the bank itself and not the OCC. 

I don’t understand, in a risk-based supervisory system, why the 

OCC was not more closely monitoring Riggs and why these actions 

were not brought to light much sooner and appropriate action 

taken. 9/11 was a wake up call for the industry and should have 

been for all regulators as well. Our safety depends on banks and 

bank regulators to be on the front lines to prevent terrorists from 

using international financial systems to fund their activities. 

I am gravely concerned that the regulator has not made this responsibility a higher priority, and their resources may be spread 

too thin to fulfill their obligations. I have previously expressed this 

concern about the OCC’s attempt to broaden their portfolio into 

areas the Congress has not authorized. And I think, in fact, the fiVerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\DOCS\95062.TXT FIN1 PsN: MICAH
4

nancial services committee is on the record in agreeing with me on 

this point. 

One final point which I mentioned at our May 18 hearing, the 

OCC issued, its fine, late on a Thursday. On that Friday, a Maryland woman called her Congressman. She was very concerned 

about her bank account at Riggs Bank. She was referred to the 

Banking Committee staff. And she said that she wanted to talk to 

the regulator. My staff supplied the phone number for the OCC’s 

Customer Assistance Group. But unfortunately, they don’t operate 

on Fridays. They only talk to consumers 4 days a week and then 

only from 9 to 4, so that woman had to wait from Thursday night 

till Monday before she could possibly reach someone at the OCC. 

I would like to know what consumers are supposed to do when 

the OCC is not operating its call center. I think this agency is not 

concerned about consumers, and I have to doubt its commitment to 

an anti-money laundering effort. 

Thank you again, Chairwoman Kelly, for calling this hearing, on 

this hearing, on this issue. 

Chairwoman KELLY. Thank you, Mr. Gutierrez. 

Ms. Maloney? Whoops. Mr. Moore? 

Mr. MOORE. Madam Chairperson, I will simply welcome the witnesses here today. 

I want to listen and learn, and I appreciate your convening this 

hearing. 

Chairwoman KELLY. Thank you. 

Mr. Matheson? 

Mr. MATHESON. I will just reiterate what Mr. Moore said. I am 

looking forward to the hearing. Thank you, Madam Chairwoman, 

for calling it. 

Chairwoman KELLY. Thank you. 

I am going to just simply say that, without all objection, all 

Members’ opening statements will be made part of the record. One 

of the reasons for this is that we have a very busy schedule right 

now, and we were going to, with unanimous consent, we will just 

make them all part of the record. 

Chairwoman KELLY. Now, I would like to introduce our panel. 

With us today are the representatives from the Office of the Comptroller of Currency and the Federal Reserve Bank of New York. 

Our first witness, Mr. Daniel Stipano, was appointed deputy 

chief counsel of the OCC in December of 2000. He is also a member 

of the Treasury Department’s Bank Secrecy Act Advisory Group 

and the National Interagency Bank Fraud Working Group. Prior to 

this appointment, Mr. Stipano served as director of the OCC’s Enforcement and Compliance Division since 1995. 

Our second witness is Mr. Thomas C. Baxter, Jr., general counsel 

and executive vice president of the legal group at the Federal Reserve Bank of New York. Mr. Baxter has assumed this role since 

1995 and also serves as its deputy general counsel of the Federal 

Open Market Committee. His principal responsibility is to supervise the day-to-day operation of the New York Fed’s legal group. 

That is a big job. We thank you. 

And we thank you for being here. We thank you for your testimony today. And without objection, your written statements will be 

made part of the record. 

5

If you have not testified before a committee before, you will be 

recognized for a 5-minute summary of your testimony. There are 

lights there that will come on the boxes. The green light means you 

have 5 minutes. The yellow light means, please sum up in 1 

minute, and the red light means, if you haven’t already summed 

up, please try to do that as quickly as possible. Thank you very 

much. 

And we will begin with you, Mr. Stipano. 

STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF 

COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. STIPANO. Chairwoman Kelly, Ranking Member Gutierrez 

and members of the Subcommittee, I appreciate this opportunity to 

discuss the OCC’s supervision of Riggs Bank N.A. and particularly 

our efforts to bring Riggs into compliance with the Bank Secrecy 

Act. The OCC and FinCEN recently assessed a $25 million civil 

money penalty against Riggs for violations of the BSA. The OCC 

also took a separate cease and desist action to supplement the 

Order issued against the bank in July 2003. 

The OCC first identified deficiencies in Riggs procedures several 

years ago. Beginning in the late 1990s, we recognized the need for 

improved processes at Riggs and for improvements in the training 

in, and awareness of, the BSA’s requirements and in the controls 

over their BSA processes. Prior to 9/11, the OCC visited the bank 

at least once a year and sometimes more often to either examine 

or review the bank’s BSA compliance program. 

Over this time frame, OCC examiners consistently found that 

Riggs’ program was either satisfactory or generally adequate, 

meaning it met the minimum requirements of the BSA, but we 

nonetheless continued to find weaknesses and areas of its program 

that needed improvement. We addressed those weaknesses using 

various informal supervisory actions. 

After 9/11, the OCC escalated its supervisory efforts to bring 

Riggs’ compliance program to a level commensurate with the risks 

that were undertaken by the bank. In 2002, the OCC conducted a 

series of anti-terrorist financing reviews at our large or high-risk 

banks, including Riggs. As a result of these reviews and other internal assessments, plus published reports of suspicious money 

transfers involving the Saudi Embassy accounts, our concerns regarding Riggs’ anti-money laundering program were heightened. 

Thus we conducted another examination of Riggs in January 2003. 

The focus of that examination was on Riggs’ embassy banking 

business and, in particular, the Saudi Embassy accounts. The examination lasted for approximately 5 months and involved agency 

experts in the BSA and anti-money laundering area. It disclosed 

serious BSA compliance program deficiencies that resulted in the 

bank’s failure to identify and report suspicious transactions occurring in the Saudi Embassy accounts. 

The finding from the January 2003 examination formed the basis 

for the July 2003 cease and desist order. 

Throughout this examination, there was regular contact with the 

FBI investigators. We provided the FBI with voluminous amounts 

of documents and information on the suspicious transactions, and 

we hosted a meeting with the FBI to discuss these documents and 

6

findings. Throughout this process, we provided the FBI with expertise on both general banking matters and on some of the complex 

financial transactions that were identified. 

The OCC began its next examination of the bank’s BSA compliance in October 2003. The purpose of this examination was to assess compliance with the Order and the USA PATRIOT Act and to 

review accounts related to the Embassy of Equatorial Guinea. The 

examiners found that, as with the Saudi Embassy accounts, the 

bank lacked sufficient policies, procedures, systems and controls to 

identify suspicious transactions concerning the bank’s relationship 

with Equatorial Guinea. The findings from this examination as 

well as from previous examinations formed the basis for the OCC’s 

recent civil money penalty and cease and desist actions. 

In retrospect, as we review our BSA-compliance supervision of 

Riggs during this period, we should have been more aggressive in 

our insistence on remedial steps at an earlier time. We also should 

have done more extensive probing and transaction testing of the 

Embassy accounts. As described more fully in my written testimony, we have reevaluated our BSA supervision processes in light 

of this experience, and we will be implementing changes to improve 

how we conduct supervision in this area. 

While not to be minimized, the Riggs situation must be put in 

broader context. Unlike other financial institutions which have 

only recently become subject to compliance program and suspicious 

activity reporting requirements, banks have been under such requirements for years. Not surprisingly, banks are widely recognized 

as the leaders among the financial services industry in the antimoney laundering area. The role of the OCC and the other Federal 

banking agencies is not that of criminal investigators, but rather 

to ensure that the institutions we supervise have strong antimoney laundering programs in place. As a consequence of our supervision, most banks today have strong anti-money laundering 

programs, and many of the largest national banks have programs 

that are among the best in the world. 

In conclusion, the OCC is committed to preventing national 

banks from being used wittingly or unwittingly to engage in money 

laundering, terrorist financing or other illicit activities. We are 

ready to work with Congress, the other financial institutions regulatory agencies, law enforcement and the banking industry to continue to develop and implement a coordinated and comprehensive 

response to the threat posed to the Nation’s financial system by 

money laundering and terrorist financing. 

[The prepared statement of Daniel P. Stipano can be found on 

page 54 in the appendix.] 

Chairwoman KELLY. Thank you very much. 

Mr. Baxter. 

STATEMENT OF THOMAS BAXTER, JR., GENERAL COUNSEL 

AND EXECUTIVE VICE PRESIDENT, FEDERAL RESERVE 

BANK OF NEW YORK, ACCOMPANIED BY KATHERINE 

WHEATLEY, ASSISTANT GENERAL COUNSEL, AND MICHAEL 

LAMBERT, FINANCIAL SERVICES CASH MANAGER 

Mr. BAXTER. Chairwoman Kelly, Representative Gutierrez and 

Members of the subcommittee, my name is Thomas Baxter, and I 

7

am the general counsel and executive vice president of the Federal 

Reserve Bank of New York. 

At the New York Fed, I have responsibility for the Legal Department, Security and the Court Secretary’s Office. With me today are 

two representatives of the Federal Reserve Board, Katherine 

Wheatley, assistant general counsel, and Michael Lambert, financial services cash manager. 

Chairwoman KELLY. We welcome their presence. Thank you very 

much, Mr. Baxter. 

Mr. BAXTER. We appreciate your invitation and are privileged to 

appear before you to discuss the Federal Reserve’s operation of the 

extended custodial inventory, or ECI program, and our responses 

to UBS’s misconduct in operating one of our ECI facilities. 

The U.S. dollar is the most desired form of money in the world. 

In many ways, our dollar represents the strength of the American 

economy. The dollar is so desired around the world because it is 

a stable, always-reliable medium of exchange and store of value. 

Today, I will be speaking about the Federal Reserve’s operation of 

the ECI program, and I should start by describing that program. 

In operation since 1996, when the Treasury, Secret Service and 

Federal Reserve collectively decided to launch it, the ECI program 

has been a great success. The program sustains the quality of the 

U.S. dollar banknote, helps to deter counterfeiting and provides an 

efficient and effective mechanism for the distribution of those notes 

in our largest market, the market outside of the United States. We 

estimate that up to two-thirds of our currency, or over $400 billion, 

circulates outside of the United States. 

The ECI program involves the use of financial institutions, mainly commercial banks, that are highly active in the international 

currency distribution business as Federal Reserve contractors. 

These institutions agreed to extend the Federal Reserve’s reach 

into major financial centers of other countries and hold inventory 

of our most popular product, that is the Federal Reserve note. They 

do this by holding in custody for us in their vaults U.S. dollar notes 

that we expect to distribute abroad or old and unfit notes that we 

wish to repatriate. The, quote, ‘‘extended custodial inventory,’’ unquote, facility, helps to assure the quality of our product and its efficient distribution. 

With respect to quality, the ECI facility performs two important 

functions. First, it positions us to better monitor and control the 

quality of our product by identifying counterfeit notes. The ECIs 

are well situated to detect such notes, to remove them from circulation, to provide intelligence to law enforcement authorities, both 

here and abroad, and to distribute new authentic notes. They perform similar functions with respect to what we at the Federal Reserve call unfit notes, which is a cash-processing codeword for worn 

and dirty. 

As for the efficiency of our distribution network, through our ECI 

contract partners, we are positioned in high-volume, wholesale 

banknote markets. Currently, these markets are located in London, 

Frankfurt, Zurich, Hong Kong and Singapore. At the present time, 

we have ECI contracts with American Express Bank, Bank of 

America, HSBC Bank USA, the Royal Bank of Scotland and United 

Overseas Bank. Our ECI contractors bring into the markets they 

8

serve new fit notes quickly, and with similar expedition, they repatriate unfit or old-design notes to the United States for destruction. 

They have ready a substantial inventory of notes to satisfy the 

periodic spikes in supply and demand encountered in a world full 

of uncertainties. Because these notes are Federal Reserve property, 

the ECI contractors do not have to finance the inventory when it 

is not needed. This leads me to my first point. 

The experience that we have had with UBS does not change the 

fact that the ECI program is a success, nor should it detract from 

the importance of the program to the Federal Reserve, the Treasury, and the Secret Service. I hasten to add that I am in no way 

trying to minimize what UBS did. The breach by UBS of our contract was wrongful, and the concerted acts of deception by UBS 

carried out over a long period of time, violated our laws. 

The Federal Reserve terminated the contract with UBS in October of 2003. And we assessed a $100 million civil money penalty 

against UBS on May 10, thereby remedying the breach and punishing UBS’s deception. This leads to my second point, which looks 

at how we respond when someone doing our business performs 

badly. 

The prompt corrective action taken to terminate the Federal Reserve’s contractual relationship with UBS and to punish deception 

by UBS with a large monetary penalty demonstrates a resolve that 

Federal Reserve operations will be conducted to the highest standards and in full compliance with U.S. legal requirements. In this 

regard, it is noteworthy that our ECI contracts in essence export 

U.S. legal requirements, including OFAC restrictions, to offshore 

facilities. The U.S. sanctions regime generally cannot be applied 

extra-territorially. 

When the Federal Reserve learned that UBS breached its contractual obligations to abide by the restrictions of the U.S. sanctions program and engaged in U.S. dollar transactions with impermissible jurisdictions, we acted swiftly and surely. We terminated 

our contract with UBS and debited UBS’s account with us for the 

entire inventory maintained in the Zurich vault. 

In a day, UBS lost an entire business line that had been profitable throughout the 8 years that UBS served as an ECI contractor. 

The forfeiture of profitable business is a financial consequence. 

UBS also suffered a reputational injury. Through the related action 

of our colleagues at the Swiss Federal Banking Commission, UBS 

is forbidden from reentering the wholesale external banknote business without the permission of the commission. This leads to my 

third point. 

The Federal Reserve will not tolerate deception. We will not tolerate deception from those banking organizations that we supervise, and we will not tolerate deception from those with whom we 

contract to execute important Federal programs. The ECI program 

is one such program. To transact business out of the Zurich facility 

with Iran, Cuba, Libya, and Yugoslavia, as UBS did, UBS personnel needed to act covertly and to hide their activity from the 

Federal Reserve. The people who engaged in such conduct in Switzerland have lost their jobs. The business franchise is no more. In 

the civil money penalty that we announced on May 10, UBS paid 

9

a heavy price for the deceit of the banknote personnel which it formally employed. 

Turning for just a moment back to the ECI program, the imposed 

penalty gave our remaining ECI operators 100 million reasons to 

be truthful. And on top of all of that, the Swiss Federal Banking 

Commission issued a formal, public, quote, ‘‘reprimand,’’ unquote to 

the largest bank in Switzerland. The banknote personnel of UBS 

deceived people at the Banking Commission just as they deceived 

us. Our colleagues at the Banking Commission joined with us in 

finding such deception inexcusable and warranting that reprimand. 

This brings me to my fourth and my final point. 

At the Federal Reserve, we are dedicated to continuous improvement, and we know that all internal controls can be bolstered 

through the lessons of experience, including our own unfortunate 

experience in the UBS matter. That experience has shown that our 

primary control for compliance with the country restrictions in the 

contract, namely, truthful monthly reporting of currency transactions by country, was just not sufficient. With the country reports 

that we received from UBS, we did not follow the old audit admonition, quote, ‘‘trust but verify,’’ unquote. Since February of this year, 

our ECI contracts have a number of new features that enhance the 

control environment and provide for the necessary verification. One 

is the requirement that management of our ECI contractors attest 

yearly on contract compliance and accurate reporting and that an 

independent public accounting firm certify to the Federal Reserve 

that the management attestation is fairly stated. This SarbanesOxley inspired change shows our commitment to continuous improvement. 

Another new feature is a 17-point procedural program that spells 

out the ECI contractor’s responsibilities for OFAC and anti-money 

laundering compliance. This program provides for OFAC risk-assessments, requires the implementation of ECI program internal 

controls, establishes operational responsibility for compliance and 

specifies internal and external audit requirements. Moreover, each 

ECI operators policies and procedures directed at OFAC’s compliance will be reviewed by a team of experts from both the New York 

Feds and OFAC. 

Let me conclude by summarizing my four points. The ECI program is important and successful because it fosters the excellent 

quality of U.S. currency, and it has efficient distribution outside 

the United States. When someone performs poorly in the ECI program, you can be assured that the Federal Reserve will respond 

with prompt force, full corrective action. If there is deception in addition to poor performance, as was the case with UBS, the consequences will be severe. Finally, we will strive to continuously improve our internal controls and the ECI program by borrowing the 

best ideas and by learning lessons from our experiences. Thank you 

for your attention. And I look forward to answering any questions 

you may have. 

[The prepared statement of Thomas Baxter Jr. can be found on 

page 36 in the appendix.] 

Chairwoman KELLY. Thank you Mr. Baxter. I am sure there will 

be questions. 

10

I am going to turn to you, Mr. Stipano. I have seen news reports 

that indicate that your agency was aware of compliance problems 

at Riggs as far back as 1998, 1997 or 1999 and I see your testimony says late 1990s. When exactly, what month and year, did the 

OCC recognize problems and violations were occurring at Riggs? 

Mr. STIPANO. Well, I can’t give you the month, but I can give you 

the year. As far back as 1997, we cited the bank for deficiencies 

in its Bank Secrecy Act compliance program. The types of deficiencies that were flagged at the time tended to have to do with 

the individual elements of a compliance program, in other words, 

with training, internal controls, testing, et cetera. Those deficiencies were somewhat technical in nature and were not really at 

a level that would normally require use of formal enforcement action to correct. 

Chairwoman KELLY. Is there—Mr. Stipano, I am going to ask 

you this again. 

Mr. STIPANO. Okay. 

Chairwoman KELLY. I would like to know a month. If it was 

1997, what month? 

Mr. STIPANO. I don’t have that information at my fingertips. We 

would be happy to provide it to you though. 

Chairwoman KELLY. I would appreciate if you will do that.

[Subsequently Mr. Stipano advised Mrs. Kelly that the month was August of 

1997.]

Mr. STIPANO. We will do that. 

Chairwoman KELLY. I think that is important for us to know. 

Mr. STIPANO. Understood. 

Chairwoman KELLY. The problems you just outlined, training, 

testing, internal controls, why did it take 6 years for the SAR reports, that problem not to come to light? Your agency knew that 

there were violations at Riggs. It took an unusual step in 2003 to 

put a full-time examiner on-site, but it wasn’t until 2004 that you 

took some action by assessing a fine. 

I think you would agree that eradicating terror financing is one 

of the most time-sensitive issues that has ever faced our financial 

regulatory system. I want to know why the agency dawdled before 

taking any real action if you knew about these problems. You knew 

about them 3 years before 9/11. But even after that wake-up call, 

it took another 2 years before you got a full-time examiner on site, 

and the violations were still continuing with your full-time examiner. 

I just—you know, I just—it boggles my mind. I am sure it probably boggles yours. But I would like to know why the agency dawdled in not taking any real action here. 

Mr. STIPANO. I don’t know that I would characterize us as having 

dawdled. 

But I would agree that, with hindsight, there certainly were 

judgments that we made that turned out not to be the correct ones. 

Let me go back a little bit in time because I think it is useful to 

look at our supervision of Riggs, both pre-9/11 and post 9/11. Pre9/11, we did many examinations of the bank focusing on the adequacy of their BSA compliance program, which is our charge. The 

bank had a program and was in compliance with the regulation. In 

11

other words, the regulation requires that all banks have a program 

in place and that it cover four areas. The bank had that. But it 

didn’t perform on each of those elements as well as it needed to. 

There were deficiencies. The training needed to be better. The controls needed to be beefed up. What we did not know at that time 

were the types of substantive violations of the BSA that were discovered as a result of our examination in 2003. 

I think there are a couple of reasons for that. And I will be very 

up front with you. The first is that we trusted management too 

much to get the problems fixed. In the vast majority of cases where 

you have these types of violations, the examiners bring them to the 

attention of management and the board, and the problems get 

fixed. And that is usually the end of it. That didn’t happen at 

Riggs. There was an effort made to fix the problems, but the effort 

took a long time. It took longer than it should have, and we were 

willing to give management too much slack. 

The other error in judgment that was made during that time 

frame was that we under-estimated the risk in the Embassy accounts. Pre-9/11, embassy accounts were not viewed by the OCC or 

anyone else that I know of as high-risk accounts. The types of 

things that we were focusing on for in-depth examinations were 

foreign private banking, foreign correspondent, accounts, accounts 

with Russian entities, accounts with countries that are on the Financial Action Task Force list, but not embassy accounts. As it 

turned out, there was a lot of risk in those embassy accounts, but 

it did not come to light until after 9/11. 

Chairwoman KELLY. I am looking now at an OCC examination. 

It is entitled Bank Secrecy Act, the OCC Examination Coverage of 

Trust and Private Banking Services issued by the Office of Inspector General, November 29, 2001. In there, there is a chart that lists 

your rate of coverage and testing high-risk transactions for foreign 

correspondent banking at 0 percent. In other words, in November 

of 2001, the IG’s report says you weren’t even looking at this stuff. 

And that’s November of 2001. You still weren’t looking at this. 

With unanimous consent, I am going to insert this into the record. 

[The following information can be found on page 74 in the appendix.] 

Chairwoman KELLY. But that, sir, begs the question about what 

those people were doing between 2001, November, and 2003, when 

you finally put somebody in the bank. I am not asking you a question. I am simply making a statement here that there had to be 

some knowledge somewhere, institutionally within the OCC I suspect, that would have brought to bear some more information gathering and better oversight on foreign transactions. 

What kind of an interaction did you have with bureaus like 

FinCEN and the Fed after the OCC became aware of the Riggs 

problems? When did the law enforcement get involved? And I 

would like to know what—it was a result of the investigation into 

the report of the financial link between the Saudi ambassador’s 

wife and the 9/11 hijackers. Was that what triggered this? What 

triggered this? 

Mr. STIPANO. Maybe it would be useful for me to walk you 

through the chronology, post 9/11. You are absolutely correct; 9/11 

turned the world on its head, including our world in the regulatory 

12

agencies. Our immediate response in the aftermath of 9/11 was to 

work with law enforcement to identify where the accounts of the 

9/11 hijackers were, as well as where the accounts of other individuals and entities that were linked with the hijackers were. 

A process was put into place 5 weeks after 9/11 whereby the FBI 

could provide us with the names of suspected terrorists and people 

who were linked to terrorism, and we would blast it out by e-mail 

to every one of our financial institutions, who would then be obligated to report back and identify the account. So that was something we did immediately after 9/11. 

Another major initiative at that point was to implement the PATRIOT Act, which was passed a few weeks after 9/11. It put some 

requirements in place very quickly. But very little of that statute 

was self-effectuating. It required that regulations be written. So we 

worked on various work teams with the Treasury Department and 

the other Federal financial institutions regulators to write regs to 

implement the PATRIOT Act. 

Another step that had to be taken was to write new exam procedures. Pre-9/11, our focus in this area was on money laundering. 

Post-9/11, now we are looking at something relatively new, terrorist financing. So we needed new exam procedures. These were 

all things that were done in the immediate month after 9/11. 

In the summer of 2002, we embarked on a series of anti-terrorist 

financing reviews at most of our large banks and our other highrisk banks, including Riggs. The purpose of those reviews was to, 

determine the extent of compliance with the PATRIOT Act requirements that were in place as of that time, and to see what the 

banks were doing to deter and prevent terrorist financing. And to 

the extent that we discerned weaknesses, we would then follow up 

with a more full-scope exam. 

Riggs was, as I said, part of that group that was examined with 

these anti-terrorist-finance exams. And it disclosed weaknesses. So 

that was part of our impetus for doing the January of 2003 exam. 

Now, in the meantime, that fall, there were published accounts 

of Riggs accounts related to the Saudi Embassy that may have 

been used to funnel information to people associated with the hijackers. Obviously, became aware of that and that caused us to 

focus with particularity on the Saudi Embassy accounts. Up to that 

point, other than the normal types of supervisory interactions that 

we would have with the Fed on any bank that has a holding company, there was not extensive contact with other agencies. There 

was not with FinCEN, and to my knowledge, there was not with 

the FBI. 

Once that examination began, that all changed. The exam we did 

in January of 2003 involved some of our best agency experts. It 

went on for 5 months. It was an intensive drill-down type of look 

at the Saudi accounts, and it discovered all kinds of problems, 

mainly a lack of sufficient know-your-customer documentation and 

a failure to file suspicious activity reports in noncompliance with 

the BSA. 

This information was provided to the FBI. We had many meetings with the FBI. I shared a lot of information with them, and at 

the conclusion of the examination, we made a referral to FinCEN 

13

for the assessment of civil money penalties under the Bank Secrecy 

Act. 

Chairwoman KELLY. Okay. I think that we can talk about that 

further because it brings questions in my mind about when you say 

that there was no contact between your agency, FinCEN, FBI and 

the Treasury prior to this. It just—I hope that that has changed. 

Mr. STIPANO. But at that point, there really wouldn’t have been 

a reason to. I mean, we would normally make a referral to FinCEN 

under guidelines that FinCEN and the banking agencies agreed to 

many years ago. Prior to that January 2003 exam, systemic BSA 

violations had not been discovered, so there would not have been 

a basis for a referral to FinCEN. And we were unaware of any 

criminal violations that would have necessitated a contact with the 

FBI. 

Chairwoman KELLY. Well, in 1997, there were some areas of concern. And it didn’t improve, and it continued to not improve. I 

think we should—I think we should maybe get into another dialogue about this, and I will have some further follow-up questions 

on it as I think. 

But the report that was—a report that was issued by the Treasury Inspector General found that you really lacked, as I pointed 

out, sufficient testing of the high risk transactions that were commonly associated with money laundering or lacked review and evaluation of critical BSA reports that banks are required to file. Now, 

that is—I am quoting from the inspector general’s report that I put 

into the record. Specifically, examiners did not test wire transfers, 

transactions with foreign correspondent banks, currency transaction reports or suspicious activity reports. In fact, when they 

looked at that, you had a 0 percent score. 

The report concluded that the OCC should ensure that examiners 

complete transactional testing of high-risk BSA areas, and this was 

November 2001. And it notes that the OCC management concurred 

with that recommendation. So the management, the OCC knew in 

2001 that there were shortcomings there. And, you know, if you—

the OCC scored 0 percent in high-risk areas. You wonder then, 

there are some other things on that chart. You wonder about some 

of these other areas. And if you thought you were performing at a 

certain standard, you think that you maybe now might be overstating your ability to handle the issues? I was adding up this—

your testimony, the number of people who worked for the OCC. 

You have taken on a lot. And I am wondering if you are overstating 

your ability to handle the issues. 

In the Riggs case, that bank is located just a couple miles from 

its own regulator, the OCC, in a high-threat area with the largest 

embassy banking clientele. You begin to wonder how many warning signs it takes, how many IG reports it takes. And you begin to 

wonder that—how can the American people have any confidence to 

handle this financial oversight? You know, banking regulators have 

had every warning and every opportunity, and I am not so sure we 

can win any longer. 

On a scale of 1 to 10, how would you rate banking regulators’ 

ability to oversee the BSA compliance right now? 

Mr. STIPANO. 9. This is not a new area for us, Chairwoman Kelly. 

This is something that we have been doing for decades. And I am 

14

not saying that we are perfect and that—I am not saying that the 

supervision that we did in Riggs was perfect. But our job is to ensure that banks have strong anti-money laundering programs, and 

banks have been under that requirement for 17 years. 

The OCC has been very aggressive and vigorous in this area. For 

example, since 1998, we have taken 78 formal enforcement actions 

against banks and their institution-affiliated parties that were 

based in whole or in part on violations of the Bank Secrecy Act. 

Some of those cases are among the most significant money-laundering cases that the United States Government has ever brought, 

and the OCC played a key role in those cases. 

As a consequence of our vigilance in this area, most banks have 

excellent BSA compliance programs, and some of the largest national banks have programs that are among the best in the world. 

They are the model that nonbanking financial institutions are trying to achieve. 

And, frankly, I think the real area of concern and one of the best 

things that the PATRIOT Act did was it extended the types of requirements that banks are under, like the compliance program requirement and the SAR filing requirement, to a whole host of industries that previously had not been subject to those requirements: money transmitters, pawn brokers, broker-dealers, et 

cetera. And the task now is to get those industries up to the level 

where the banks are. 

Chairwoman KELLY. Finally, I look inside here, and you say you 

have nearly 17,000 examiners in the field. It seems to me that 

what happened with Riggs may not be an isolated case. I think 

that there may be difficulty in communications with other agencies. 

I think that maybe it might be time, for the sake of the American 

people’s trust in our financial system, to let the agency egos be put 

aside and start recommitting to working together so that you can 

share information. 

I am very concerned that information has not and may still not 

be shared between agencies. The problem is, one, when a regulator 

goes in and begins to look at the things they are charged to look 

at, they get very involved in the paper work, the appropriate forms 

filled out, the appropriate forms filed and the appropriate filing 

cabinets. It does us no good, in terms of bank regulation and enforcement, to have everything go into a filing cabinet and not be 

enforced. And I am very concerned that we maybe think about not 

only civil but criminal enforcement and possibly think about ensuring that compliance is assisted by a criminal enforcement program 

within the Treasury. 

Do you think it would have made a difference last year, if 

Riggs—when Riggs was kind of shamelessly flaunting all your regulations in your face—-if someone had been able to pick up in 

Treasury, at that moment, and had criminal enforcement powers 

for the BSA? I mean, right now, the IRS is the only one that has 

that power. Wouldn’t it be helpful that maybe we have criminal enforcement capability with people who are familiar with the controls 

and the systems of the financial institutions to put it all together? 

When your reports come in and say, wait a minute, this is a red 

flag, something needs to happen. What do you think about that? 

15

Mr. STIPANO. I think it would be very, very difficult for another 

agency or group of agencies to duplicate or improve on the job that 

the banking agencies do when it comes to assessing the adequacy 

of a BSA compliance program for a couple of reasons. One is that 

we have at our disposal thousands of bank examiners who are 

skilled experts at doing this, and that would not be true with another agency. And the type of work that is involved, assessing controls, assessing training, testing, is within the particularized skill 

sets of most bank examiners. So handing that function to another 

agency, in my view, would be a step backward and would not improve compliance in the anti-money laundering area. 

That said, I agree with you that there is room for improvement 

when it comes to coordination among Government agencies and information-sharing. One area where I think that the Government is 

lacking is that information-sharing often is a one-way street from 

the banks and from the banking agencies to criminal law enforcement. There has been improvement since the PATRIOT Act. The 

process that I described to you previously, of sending out the control list, has now been codified under Section 314 of the PATRIOT 

Act. That is a significant development that has made it much easier for law enforcement to target accounts of potential terrorists. 

But that is relatively new. 

What I think would help the banking agencies probably more 

than anything would be for the Treasury Department and FinCEN 

in particular to better utilize the data that they have to provide us 

with analytical reports that would allow us to be better at identifying the risks and concentrating our resources on the high-risk 

banks and the areas within the banks that pose the greatest degree 

of risk. That is something that I understand is a very high priority 

with FinCEN presently and something that they hope to accomplish. 

Chairwoman KELLY. Well, right now, FinCEN doesn’t have the 

ability to enforce anything. They are collecting. And they are collecting information. Streamlining and centralizing. 

I heard you talk about streamlining, but I think also maybe we 

need to think about centralizing information so that it can be appropriately examined with one oversight and be responded to, so 

we don’t have another instance where it has taken since 1997 before people throw up their hands and said, ‘‘Oh my goodness, there 

is something happening here.’’ that is—streamlining and centralizing might be good. It is not necessarily always one of the things 

that we do with the Federal Government, but in this instance, it 

might be a good thing. So maybe we can talk about that also. 

Mr. STIPANO. I just want to be clear on this point though because 

our view is that, while errors in judgment were made on Riggs, 

Riggs was an anomaly and the system as a whole presently functions very well. It can be improved, and we hope to improve it. And 

the way to improve it is through better coordination among agencies and increased information-sharing. The solution, in our view, 

is not to junk the present system and replace it with something 

else, because I don’t believe that you will replace it with a system 

that is better than the one you have right now. 

Chairwoman KELLY. Well, Mr. Stipano, I am not interested in 

junking the present system, but I am interested in making sure 

16

that we don’t walk out of here this afternoon and find that, on the 

front pages of the newspapers tomorrow morning, there is another 

Riggs situation. 

I think it is very important that we look at how the examinations 

are being done, how information is being collected, how it can be 

better collected in a place so that it can be reacted to by the people 

who have the enforcement capability. And if there is not an appropriate enforcement capability at the agency in charge, which in this 

case is the Treasury, then the Treasury probably should have that 

enforcement capability. And it may be something that we want to 

think about. 

It is just—I am just throwing this out here, because I think it 

is clear there was a break down in the system. And when that happens, we need—it is right and appropriate for us to take a look at 

how to better that system so that doesn’t happen again. 

Mr. Baxter, I would like to ask you a couple of questions. There 

are indications that the Fed saw hints of OFAC related problems 

at UBS early in the ECI program and had some conversations with 

the bank. Please tell us if those concerns were ever communicated 

to OFAC. Also, please tell us why there was not much more stringent attention to the problem if there was even a hint of OFACrelated problems. 

Mr. BAXTER. Chairwoman Kelly, first, with respect to whether we 

had an early warning of a problem at UBS involving OFAC, the answer is no. 

In 1998, following the merger between UBS and Swiss Bank Corporation, Federal Reserve officers felt it was appropriate to remind 

the UBS management that came in at the time of the responsibilities for OFAC compliance under the contract. But that was triggered not by concern that there was a compliance failure. It was 

a concern about management change that attended the merger of 

Swiss Bank Corp and UBS. 

With respect to notification to the office of foreign assets control, 

we first learned of an OFAC problem on June 25 of 2003 when an 

officer who was visiting the Zurich facility learned that there had 

been transactions of cash with Iran, which of course was not permitted under the contract in early July. All of that information was 

communicated to our colleagues at OFAC, and I should emphasize 

that we communicated the information that we had at the time, information that was not correct in several different respects, but the 

information was timely communicated by the Federal Reserve to 

OFAC as soon as we learned that we had a problem. 

Chairwoman KELLY. Did the Fed send correspondence after the 

UBS merger to warn them of interaction with OFAC-listed countries? 

Mr. BAXTER. I wouldn’t characterize it as a warning. I would 

characterize it as a reminder, and the concern was specifically generated by the fact that anytime there is a merger, particularly a 

merger of the dimension of the UBS-Swiss Bancorp that with management change come new people, and the new people might not 

be mindful of the special contractual requirements that we exported through our contract to Switzerland. And in Switzerland 

there were no prohibitions on transactions by Swiss banks with 

Cuba, with Iran; there were restrictions with Libya and YugoVerDate 0ct 09 2002 11:07 Oct 05, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\DOCS\95062.TXT FIN1 PsN: MICAH
17

slavia. So it was appropriate for us to remind periodically not only 

UBS, but other ECI operators that there were special restrictions 

exported from the United States by contract. 

Chairwoman KELLY. I just turned to Mr. Gutierrez, because earlier in his opening statement he talked about whether or not the 

ECI should be with American-owned banks only. 

Why wouldn’t some aggressive steps, having been taken in 1996, 

make certain that ECIs around the world were operated by U.S. 

banks? Why wouldn’t they, by definition, have to observe the OFAC 

sanctions? Is there some reason why that didn’t happen? 

Mr. BAXTER. First, with respect to the point about U.S. institutions—and it is a very good point because, as U.S. persons, 

branches abroad of U.S. banking organizations are subject to OFAC 

requirements, so they would not need to be reminded or they would 

not need to be required in a contract. But there are also specific 

reasons why the Federal Reserve looks to foreign institutions in 

certain locations. And let me give you a case in point, and the case 

in point happens to be UBS. 

At the time we started our ECI program, we were particularly 

concerned about replacing a $100 note with a new note, and one 

of the places that the old $100 note was very, very popular was in 

the former Soviet Union. At that point in time, there was an American bank called Republic National Bank that was serving the 

former Soviet Union. That American bank decided that it was no 

longer interested in the Russian business. And so we were in the 

position of wanting to reach into Russia to deal with the replacement of the $100 note, and we needed to find an ECI contractor 

who could do that. 

UBS was the contractor who stepped forward. So in that particular case, we looked to a foreign institution to fill in for a U.S. 

institution that no longer exists, but at the time it was withdrawing voluntarily from that particular business, business that 

the Federal Reserve, the Treasury, and the Secret Service and the 

American ambassador at the time felt was very important to pay 

attention to with respect to the replacement of that $100 note. 

So there are reasons that we look to particular foreign institutions to extend our reach into certain jurisdictions, like Zurich back 

in 1996, like Singapore with respect to United Overseas Bank; and 

those are reasons to look to foreign institutions to service us. And 

what we do with the foreign institutions is, we basically apply 

through the contract the OFAC restrictions. 

Chairwoman KELLY. Thank you. 

Mr. Gutierrez. 

Mr. GUTIERREZ. Thank you very much. Welcome to you all and 

thank you for your testimony. I want to go back to Mr. Stipano. 

The chairwoman and you, through her questions, spoke a little 

bit about the Riggs situation in 1998 and 1999. Now, I will put 

words in your mouth, so you can correct anything that you said, 

that one of the reasons was that your auditors believed what was 

being said by the answers that were given by Riggs employees back 

to your regulators and auditors; is that what you said? 

Mr. STIPANO. I don’t know if I would characterize it exactly that 

way. 

18

Mr. GUTIERREZ. Why don’t you recharacterize it, because I want 

to know exactly what happened. 

Chairwoman Kelly said, well, what happened, you were there for 

1 year, 2 years, 3 years; and you said, well, one of the reasons 

was—I understood that they lied to you. And you kind of phrased 

it a little nicer and said, they didn’t quite—we kind of believed 

them. 

Mr. STIPANO. I wouldn’t say that they lied to us, but I think that 

what was going on in that pre-9/11 period was that our examiners 

were finding deficiencies with the bank’s BSA compliance program 

at every exam. They weren’t the kinds of deficiencies that were 

flagged in the 2003 exam where we looked in depth at the Saudi 

Embassy accounts, but there were problems, and we brought these 

problems to the attention of bank management and the board. 

They were discussed during the exams. They were written up in 

the exam reports, and we secured what we believed was a commitment from bank management to fix them. 

What would happen is really what I would term more accurately 

as ‘‘foot dragging.’’ The changes that we wanted to have made were 

made, but they were made slowly. There was not a real responsiveness. And looking back at this with hindsight, I think that——

Mr. GUTIERREZ. You trusted them. 

Mr. STIPANO. We trusted them. And in hindsight, we shouldn’t 

have done it. 

Mr. GUTIERREZ. I guess we finally found a word to describe why 

it might have taken the OCC as long, because you trusted them. 

But it seemed to me that an organization such as yours, which is 

safety and soundness and is the regulator, there shouldn’t be issues 

of trust. I mean, you know, was it trust but verify? And I don’t 

think you were verifying, because similar things popped up later 

on. 

It should have been caught earlier. And just so that we don’t 

think it is the chairwoman and I who have decided, because they 

sent you down here—they usually send one of the counsels down 

here. Mr. Hawke is good at doing that, but he acknowledged, and 

these are his words in the New York Times, he says ‘‘We should 

have gotten tougher earlier, and I don’t make any excuses for it. 

It’s a fair criticism of our supervision of Riggs that we let things 

go on too long.’’

So when you describe a situation, which is a 9, in which Mr. 

Hawke, who I would characterize as a very self-assured person—

I wouldn’t say arrogant, but self-assured person, doesn’t take much 

from anybody, right, tough—says, we took too long and which his 

deputy counsel, yourself, said, we trusted them too much, I think 

you can start wondering. 

I mean, if the FBI came and said, yeah, we talked to the terrorists, but we trusted them and so the buildings came down, I think 

people might think it wasn’t a 9-out-of-ten system that was working there. I mean, just understand that from our point of view 

that—just we trusted them, they took too long, there was foot dragging. You are the boss. I mean, when a regulator sends down bank 

examiners, I want them to shake up that bank. I want them to go 

all the way up the chain of command and say, we have a problem 

and we have to clean it up or—I think you know what the problem 

19

is, Mr. Stipano, it is always the ‘‘or.’’ Maybe they take the risk of 

getting caught and the fines and the penalties, which was one of 

my earlier questions. 

We have to think of new fines and new penalties. I mean, this 

is like risk: What is my risk as a financial institution if I foot drag? 

What is the most that the OCC—maybe we need tougher penalties, 

and we have been doing some of that. 

So it just seems to me that to say we trusted them, especially 

in this new age after we passed the PATRIOT Act, you can’t trust 

anybody anymore. We can’t trust the Riggs. We can’t trust UBS. 

I am sure the folks at the Federal Reserve Bank trusted them. 

They said, what a great company, they are really going to come on 

and do this job. And we can’t do that. We need to monitor them, 

don’t you think? 

So 9 out of ten, I don’t think in this particular case to say that 

this is just one. Which are the other cases in which you are trusting people today that tomorrow we are going to find out that that 

trust was ill conceived? 

Mr. STIPANO. First of all, I always agree with Mr. Hawke. So I’d 

like to get that on the record. 

Mr. GUTIERREZ. I don’t, and in that, we don’t share a common 

opinion. 

Mr. STIPANO. Secondly, while I would characterize our overall efforts in this area as a 9, I certainly would not characterize our efforts with respect to Riggs as a 9. We made errors in judgment, 

and I think they are obvious and we have discussed them. But I 

don’t think that Riggs is emblematic of our supervision broadly in 

any area and certainly not in the BSA area. 

Mr. GUTIERREZ. Let me ask you a question. Do you still trust 

people? Do you still send your bank auditors out and say, we trust 

them, and walk away? 

Mr. STIPANO. I believe you have to trust but verify. 

Mr. GUTIERREZ. Okay. Well, I would like to know what kind of 

things you are doing differently, given that Riggs started in 1997, 

1998, 1999, and finally, voila, this year we got a fine. So that is 

a long time, as we sit here, to watch an institution such as yours, 

that wants to expand. 

Now you are sending out preemption notices to the States saying, 

not only do we want to do all the great things we did while Riggs 

was doing all of these nefarious things, we want to expand our authority; but we don’t want to actually charge any more fees to our 

customers, the banks, in order to hire more employees in order to 

expand that authority. 

So I see an institution that walks up here and says, we are doing 

everything fine, we are doing everything so great—this is Mr. 

Hawke, of course, not yourself—doing everything so great and now 

we want to preempt attorneys general and bank regulators and 

other people at the State level from issues and consumer complaints, that you want to now preempt stateside. 

So I think you get my worry. 

Let me just say that I read your testimony, and it was like on 

page 19 on the top that says ‘‘The examiners found that, as with 

the Saudi Embassy accounts, the bank lacked sufficient policies, 

20

procedures and controls to identify suspicious transactions concerning the bank’s relationship.’’

You found out about those irregularities at the Equatorial Bank, 

or did the Riggs people tell you about them or the FBI tell you 

about them? Because as I read that, it kind of sounds like, voila, 

our examiners found out about it. Did your examiners find out 

about it as I was led to believe when I first read that paragraph 

or did others bring it to your attention? 

Mr. STIPANO. Let me give you an answer to that question. First 

of all, I don’t think the sentence says that we found problems in 

the Equatorial Guinea accounts. 

Mr. GUTIERREZ. It says ‘‘The examiners found that, as with the 

Saudi Embassy accounts, the bank lacked sufficient policies, procedures and controls,’’ ‘‘the examiners found.’’

Mr. STIPANO. Right. 

Mr. GUTIERREZ. Did the FBI or Riggs find it? 

Mr. STIPANO. No. The examiners found that, just like with the 

Saudi accounts, the bank did not have policies and procedures with 

respect to Equatorial Guinea. What happened with Equatorial 

Guinea was that this was actually something that was going to be 

looked at during the January 2003 examination. There were published accounts of problems——

Mr. GUTIERREZ. I just read it and I just want to see. So if you 

can only find something once between the OCC, the FBI—what 

agency, who brought it to public attention first? Did the bank examiners show up and say, voila, we found this or did Riggs say it? 

Mr. STIPANO. The examiners did not find the problems at Equatorial Guinea. 

Mr. GUTIERREZ. That’s what I am trying to say. So then, in other 

words, when I read your testimony and when I first read it, I said, 

hey, look, the examiners did a great job. They found this. 

Actually, they didn’t find it. 

Mr. STIPANO. Congressman, with all due respect, I don’t believe 

that is what that sentence says. The sentence says that they didn’t 

find adequate policies and procedures with respect to those accounts, just as they didn’t find adequate policies and——

Mr. GUTIERREZ. But really Riggs is the one that brought this to 

the attention of the OCC about the lack of procedures? 

Mr. STIPANO. Not exactly. 

Mr. GUTIERREZ. Fine. It is all right. What is, is. It will come up 

again——

Mr. STIPANO. Can I just finish the answer? 

At the conclusion of the 2003 examination, we told the bank that 

the next time we are in there, this was going to be an area that 

we were going to look at. So the bank was on notice that this was 

priority and, frankly, that was one of the problems. And the reason 

for such a big sum of money penalty was that despite having been 

put on notice, they still did not clean up those accounts. 

Mr. GUTIERREZ. All right. Let me just say that when your boss, 

Mr. Hawke, says nonsense about what banks are going to do, and 

I hear you give yourself a 9 out of 10, and I think that I with my 

staff kind of set the tone. So if I am out there saying that Congress, 

even though there has been a vote of the Banking Committee saying basically, the OCC is wrong, this committee has voted—and we 

21

are kind of elected, the last time I checked. At least with everybody 

else there was no dispute in their election by the people. 

When he says, nonsense, and this committee says to Mr. Hawke, 

let’s sit down, which we have done on a number of occasions, and 

let’s sit down with bank regulators and let’s sit down with attorneys general and let’s sit down with this committee and let’s try 

to resolve our differences after this committee has taken a vote—

not the Congress, but this committee has taken a vote—saying we 

think you have exceeded your authority and he says, no, nonsense, 

everything is fine, I guess that can, I believe, create a sense of arrogance within the institution when the boss basically says to Congress, after it has taken a vote in the committee, and uses those 

kinds of words when we believe we have a concern—and not only 

we, but a lot of other people think that there is concern. 

Let me just ask you that when consumers now call you folks up, 

have a consumer complaint, am I right that those phones only operate Monday through Thursday from 9:00 to 4:00? 

Mr. STIPANO. Congressman Gutierrez, I have to confess here. I 

am not the expert on our Customer Assistance Group. 

Mr. GUTIERREZ. We called on a Friday, and it said it was closed. 

So you won’t dispute that? 

Mr. STIPANO. I don’t know whether it is or not. 

Mr. GUTIERREZ. Let me just tell you, we tried it, and it said 9:00 

to 4:00 Monday through Thursday. 

I was a former city council member back in Chicago, and I loved 

that job a lot, and one of the things that kept us very close was 

that if your cable didn’t come on because the city council would authorize who got the cable license, people would call me up and say, 

I called the cable company and they won’t fix it; and if I told them 

that I was allowing the cable company, which I had voted, as the 

city council, to only open up their offices from Monday through 

Thursday from 9:00 to 4:00, I don’t know how long I would have 

stayed in the city council. 

I think if people call up the gas company in Chicago or Commonwealth Edison that has the franchise to serve electricity, and they 

were only going to open from 9:00 to 4:00, as a matter of fact, if 

I decided that my city council office or my congressional office tomorrow was only going to operate from 9:00 to 4:00 Monday 

through Thursday, I think you would agree with me that I would 

have a problem in doing that. 

And I think that you should understand that you have a problem 

and that when people complain to us that their complaint is well 

grounded, that government should work Monday through Friday 

9:00 to 4:00—maybe that is not an 8-hour day—and that if you 

need more help, since you want to expand your authority and preempt the States, that maybe you should say, Congress, we don’t 

agree with you, but we are going to open Monday through Friday. 

Does it sound legitimate to you as the deputy counsel that you 

should operate Monday through Friday? 

Mr. STIPANO. I do not deal with the Customer Assistance Group. 

I am open Monday through Friday, and I don’t leave at 4:00. And 

I get calls from people all the time. In fact, usually if there is a 

problem in the BSA area, the call ultimately comes to me. I am not 

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ance Group, but there are other people in the agency that can take 

calls——

Mr. GUTIERREZ. But the rest of the agency functions Monday 

through Friday, right? 

Mr. STIPANO. The agency functions Monday through Friday. 

Mr. GUTIERREZ. I suggest that all parts of the agency should 

function Monday through Friday, and I think we can probably give 

a lot of different examples about what would be wrong with not 

functioning Monday through Friday. It seems to me that that is the 

work week and that the financial institutions are open and people 

have problems; and it is wrong for agencies such as yours to want 

to preempt States and then say, we are only going to open our offices from Monday through Thursday from 9:00 to 4:00. It should 

be a better operation so that the public, which I have a concern 

about, is well served so that we are not getting messages that say 

we don’t have to deal with you, Attorney General, the OCC says 

that has been preempted; let’s call their offices, only to find your 

offices aren’t open. 

Because you want to know something. My State bank regulators 

in Illinois are open Monday through Friday. The attorney general 

of the State of Illinois is open Monday through Friday. And across 

this country I have yet to find a State bank regulator or attorney 

general, which your agency wishes to preempt, that is not open 

Monday through Friday. So I would expect that if you want to take 

over the responsibilities of those State agencies that at least you 

afford the public the same customer service that is currently being 

afforded them by attorneys general and State bank examiners, that 

we don’t reduce the quality of service to the American people which 

you and I have made a vocation to carry out. I guess that is our 

point. 

I have other questions, and we will submit them for the record. 

Thank you very much, Madam Chairman. 

Chairwoman KELLY. Okay. Thank you. 

Mrs. Maloney. 

Mrs. MALONEY. Thank you, Madam Chair, for your hard work on 

this, and Ranking Member Gutierrez. 

Welcome, Chief Counsel Stipano and General Counsel Baxter. I 

request that my opening statement be put in the record. I really 

would like to ask Mr. Stipano what aspects of the PATRIOT Act 

could help avert a repeat of the Riggs problem. 

Mr. STIPANO. I think that there are provisions in the PATRIOT 

Act that are helpful and will be helpful going forward. But I think 

that the problems——

Mrs. MALONEY. Specifically, which ones would be helpful going 

forward? 

Mr. STIPANO. I think that, first of all, section 312, which is the 

provision that requires due diligence and enhanced due diligence 

procedures for foreign private banking and correspondent accounts, 

that would be something that would be helpful because even 

though the Saudi Embassy accounts were not technically private 

banking accounts, in some ways they were operated like they were 

private banking accounts. 

There is an interim final rule in place implementing section 312. 

My understanding is that the Treasury Department will soon be 

23

issuing a final regulation which will codify this requirement, and 

I think——

Mrs. MALONEY. Why is it taking so long? We passed the PATRIOT Act and the anti-money laundering provisions almost 3 

years ago. And we still haven’t put the rule in place? I mean this 

is really outrageous. 

Mr. STIPANO. We have all the other ones in place. I am not a 

spokesman for the Treasury Department, though. The Treasury 

Department has the pen on this particular regulation, and it is the 

Treasury Department that has to issue the rule. So maybe this is 

a question for your hearing next week. I don’t really know the answer to that. 

Mrs. MALONEY. Well, then when you were looking at Riggs, 

under what standard did you examine Riggs regarding the due diligence and the opening of accounts with the diplomatic community? 

Were you using the standard before 312 or the intent of 312, section 312? 

Mr. STIPANO. We have a requirement that all banks have a compliance program, and among the things that are required as part 

of a compliance program are satisfactory internal controls. That 

would include due diligence procedures for all accounts and enhanced due diligence procedures for high-risk accounts. 

The embassy accounts—at least the Saudi Embassy account is a 

high-risk account; and what the bank should have done was, first 

of all, they should have had better systems in place so that they 

knew the number of accounts that they had. Secondly, they needed 

to have better information on how those accounts would be used, 

what the sources of funds would be, where the funds would go. 

Mrs. MALONEY. But when you knew about this in 1998 and 

1999—it was well known to the OCC that they were not in compliance with the Bank Secrecy Act at Riggs—did you go to them and 

suggest that they have standards and procedures and due diligence, and then go back and just make sure they got the job done? 

I mean, this is serious stuff right now. 

Every time I pick up the paper, New York, where I live, is Code 

Red, at least Code Orange. They are announcing terrorist attacks 

any day now, and we all know you can’t attack without money. So 

if you crack down on the shipment of money, we can crack down 

on the ability of terrorists to act. 

I mean, this is extremely serious and not to put the regs in place 

or even to have followed them or to have gone back—you talk about 

all the people you have in the field. What about who you have in 

Washington? You don’t even have to leave the office. You are right 

here in Washington with Riggs. You can walk across the street and 

see them, practically. 

And we knew, since 1998, they had problems with these highrisk accounts, and yet we didn’t come in and crack down on it 

more. I mean, I find it quite frankly scandalous. 

Mr. STIPANO. I couldn’t agree with you more as to the seriousness of this matter, but what we knew in 1998 was very different 

from what we knew in 2003; and in 1998 what our examinations 

revealed were deficiencies in the compliance program, not wholesale violations of the Bank Secrecy Act. It was a much less grave 

type of violation. 

24

They were brought to the attention of management. They were 

written up in the exam report. Commitments to fix the problems 

were obtained. But as I testified earlier, bank management did not 

follow through on these changes as quickly as they needed to, and 

hence, there were repeat violations. 

There is no question, looking back at it with hindsight, we should 

have been more forceful with that bank at that point and not waited until 2003 to take a formal enforcement action. 

Mrs. MALONEY. What does your enforcement action mean? Will 

they be fined? What is going to happen? 

Mr. STIPANO. There actually are three actions that the OCC has 

taken. The first one was in July of last year, and that was a cease 

and desist order. It is a public enforcement document. It is about 

20 pages long. It requires the bank basically to take steps to improve its anti-money laundering program. 

That cease and desist order was supplemented by a second cease 

and desist order that was issued a few weeks ago and——

Mrs. MALONEY. What I don’t understand is, why didn’t you issue 

a cease and desist order the minute that the FBI alerted you to the 

problems at Riggs? It almost makes it sound as if the OCC doesn’t 

take the Banking Secrecy Act issue seriously. 

Is it a priority at the OCC, the BSA? 

Mr. STIPANO. It absolutely is a priority. We were not alerted by 

the FBI. We found escalating problems with the bank’s program 

through our exam process and because of published reports about 

connections between the Saudi accounts and the hijackers. That 

triggered this very extensive examination that we did last year 

which formed the basis for our subsequent enforcement actions. 

Mrs. MALONEY. But you say that the BSA issues are a high priority of the OCC, but I am told that they are not even part of the 

National Bank Examiners Handbook, that most of the regulations 

that were issued in 2002 aren’t even part of the examiners handbook. Now is that true——

Mr. STIPANO. No, that is not true. The——

Mrs. MALONEY.—that it is not fully updated? That the handbook 

is not fully updated? 

Mr. STIPANO. We are in the process of updating it, and there 

should be a revised version out shortly, but——

Mrs. MALONEY. Why didn’t you update it the minute that we 

passed the PATRIOT Act? This is serious business. 

I can’t tell you how quickly New York reacted in a thousand 

ways. We totally rebuilt the command center that was destroyed, 

within 19 hours, completely rebuilt it, and I can’t believe you can’t 

get the handbook updated with the information that we passed to 

combat money laundering and terrorist dollars flowing through our 

country. I mean, really it is beyond—it is a disgrace, I think, an 

absolute disgrace. 

Mr. STIPANO. The PATRIOT Act required us to make lots of 

changes in our examination procedures and to write regulations, 

and that took time. We could have come out with a revised handbook earlier, but if the procedures weren’t done and the regulations 

weren’t written, it probably would not have been of great value to 

the examiners. 

25

Mrs. MALONEY. It would not have been. Well, what more should 

we be doing to make sure that the type of actions at Riggs don’t 

happen again? 

Mr. STIPANO. I think there are a number of steps that the OCC 

is prepared to take. 

Mrs. MALONEY. Such as? 

Mr. STIPANO. Comptroller Hawke has directed our Quality Management Division to do a stem-to-stern review of the Riggs matter 

to find out what happened and to see what lessons we can learn 

from it. But even before that review is done, there are several steps 

that we can take right now, and we are taking them. 

Mrs. MALONEY. When is your report on lessons learned from 

Riggs going to be due? In another 3 years? 

Mr. STIPANO. No, it will not be. It will be a matter of months. 

In fact, the review has already begun. 

Mrs. MALONEY. I would respectfully request that when it is done, 

it would be handed in to the chairwoman so she can give it to all 

of us, so we can all read it. 

Chairwoman KELLY. Mr. Stipano, I would concur with that. We 

would like that report delivered as soon as possible. 

Mr. STIPANO. As soon as it is completed, we will deliver it. 

Chairwoman KELLY. I thought you said it was completed, sir. 

Mr. STIPANO. No, no. I said the review has begun. 

Chairwoman KELLY. The review has been done? 

Mr. STIPANO. The review has begun. 

Chairwoman KELLY. Has begun. And I am sorry, if the gentlewoman would yield, her question was how long do you expect that 

to take? 

Mr. STIPANO. I don’t know exactly how long it will take. My 

guess is it will probably be several months. 

Chairwoman KELLY. Would you please inform us of the progress 

of that report on a regular basis? 

Mr. STIPANO. Yes, we will. 

The due date, by the way, is September 1. 

Mrs. MALONEY. Reclaiming my time, what other steps can we 

take that are concrete to crack down on the terrorist money business? 

Mr. STIPANO. We need to become better at identifying risk. One 

of the big problems with Riggs was that neither our examiners nor 

law enforcement nor anyone else recognized the risks in these embassy accounts. 

There are a number of steps that we are taking to do that. One 

of them is the nationwide implementation of a risk identification 

system that has been developed by one of our district offices. It involves gathering information on products and services and various 

types of activities that banks are involved in and putting it in 

spreadsheet form and developing a methodology to quantify risks 

and identify banks that may be outliers. 

We are also working on a new database that would use national 

bank-filed SARS to pinpoint operational risks generally, but also 

risks in the BSA area. 

Third, we are working with FinCEN and the other banking agencies on ways to better use BSA data. FinCEN is sitting on a gold 

mine of information with the SARS data and the CTR data and 

26

other data that they have. The ability of the government to connect 

the dots and provide that information to the banking agencies is 

absolutely essential because once we have that kind of information, 

we can target our resources to the areas of banks that are truly 

high risk. 

As I mentioned earlier, we have also completed our examination 

procedures on three sections of the PATRIOT Act and we are about 

to come out with new procedures on a fourth section. 

Mrs. MALONEY. Quite frankly, you don’t need a database or a 

spreadsheet to know that Riggs, the international bank for most of 

the foreign governments in the country and the foreigners in the 

country, is a high-risk bank. I mean, it is common sense, and yet 

it was not looked at. So I hope that you improve. This should be 

a priority. 

And I know you have a lot of smart people working in the OCC, 

and I have great respect for Comptroller Hawke. But it doesn’t 

sound like the BSA issues are at the top of your concerns, and I 

think it should jump ahead of any concerns that you have to 

change your charter and everything else you have been trying to 

do, because this is critically national security and, really, the security of our people is at stake. 

But I would like to go to Mr. Baxter and I would like to ask you 

about the Basle Capital Accords that are coming out that the Fed 

has been working on with the international community. When we 

finally solidify and come forward with these decisions on various 

capital requirements and so forth, do you think having an international standard is going to help us spotlight and see the type of 

problems that were at UBS? Do you think that would be helpful, 

or is that really not an issue? What is your feeling on that? 

Mr. BAXTER. One of the things we see in the UBS matter is an 

example of operational risk, a failure of people, a failure of controls. 

These failures were observed not here in the United States, but in 

the operation that was being conducted in Zurich. It is a good illustration of operational risk as a type of risk being addressed in 

Basle II, and here is one vivid demonstration of operational risk. 

It also, I think, Congresswoman, has relevance to what is being 

done at the Basle Committee because this occurred in a multinational banking organization. 

UBS is an organization that conducts its operations in many 

countries. It has 65,000 employees around the world; 22,000 of 

them are in the United States. So you can see an operational risk 

problem and an institution that conducts its operation cross-border. 

So it is a good illustration of why operational risk is an important 

part of the risk quotient that is addressed in Basle II. It is also a 

good illustration of why the effort needs to be multinational and 

because this Basle II is being imposed on institutions that conduct 

their operation cross-border. 

Mrs. MALONEY. Well, I was encouraged somewhat that the U.S. 

And Swiss authorities worked in cooperation with the U.S. management of UBS to investigate and correct the UBS systemic risk 

management lapses in Zurich. 

But one of your statements earlier was alarming to me when you 

said one of the problems is that the personnel at the bank were not 

informed of the laws of the United States of America, of how we 

27

treat these accounts, and that we certainly shouldn’t be transferring money and so forth to Libya, et cetera, and these other countries. And it seems to me that that would have to be part of the 

protocol, to let people know what the laws are. 

I mean, I find that an incredible—I can’t believe that someone 

is that stupid that they don’t inform everyone that this is the 

standard, because it is a U.S. bank, too, even though it is dealing 

with many different countries and just merged with the Swiss bank 

and so forth. 

What is your comment on that? It is the stupidity defense, ‘‘I just 

didn’t know.’’ I think if you read the paper, you would have known 

that—any intelligent person reading the paper would have known 

that we had these certain guidelines and rules about transferring 

accounts and moneys and so forth to various countries. 

Mr. BAXTER. Congresswoman, you are absolutely right that the 

people in the bank note trading area of the UBS in Zurich, they 

knew about the restrictions that were exported in our contract to 

them. They knew that they had to conceal what they were doing. 

They had to conceal what they were doing not only from the Federal Reserve, but also from the Swiss Federal Banking Commission, from the more senior management at UBS and from UBS’s 

external and internal auditors. 

They did it because they were willing to lie. They did it because 

they were willing to violate the law, and they paid a price for that. 

But there is no question that they knew of the limitations in that 

bank note trading area, and they knew they had to hide. And hide 

they did. 

Mrs. MALONEY. Well, I misunderstood you in your earlier comments. I thought you stated that they did not know, that there 

were people with the Swiss bank, and they just merged with another bank and they weren’t familiar. 

But you say it is just a matter of just crime, and I am glad that 

we have cracked down on it, but what could we do in the future 

to make sure that doesn’t happen again? How could we improve 

our oversight and our monitoring? 

Mr. BAXTER. Well, it won’t happen again with UBS because they 

are no longer in the——

Mrs. MALONEY. No longer in business, right. But other banks? 

Mr. BAXTER. With the other five contractors, what we have done 

is implement this 17-point program through contract changes that 

were effective in February of this year. 

In addition, we are planning visitations to each of our five contractors to review policies and procedures dealing with anti-money 

laundering and OFAC compliance in our offshore facilities. 

Now, it will come as no surprise that we have heightened atten- tion in those five contractors now, who have watched the $100 million penalty being assessed against UBS and have taken careful 

notice. So while this iron is hot, we going to make those visitations, 

we are going to review with our colleagues at OFAC the policies 

and procedures that are in place, and we are going to make suggestions to our ECI contractors as to how they can be improved. 

So those are the things that we have got in train. We are also 

expecting in the late summer/early fall to start to receive the public 

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testing to the management representations we will receive both 

with respect to contract compliance and with respect to accurate reporting. And the check of those independent public accounting 

firms, in our view, is significant. It is significant in a SarbanesOxley context and it is significant because we know those public accounting firms are very mindful of their own liability; and they will 

be making certifications directly to the Federal Reserve, and we 

will have a say in our contracts as to who those public accounting 

firms are and then the policies and procedures that they will follow 

with respect to their certifications. 

So all of those things are in train, and all of those things, we expect, will give us much greater assurance that we will not see a 

repetition of the conduct we found with UBS in any of our other 

contractors. 

Mrs. MALONEY. Did the Fed ever consider using only U.S. banks 

operating abroad for these functions? Wouldn’t that have made 

things simpler since U.S. Banks are not allowed to deal with countries on the OFAC list? 

Mr. BAXTER. You’re right, Congresswoman. It does make things 

simpler, but that, in itself, is no guarantee of perfect compliance. 

Again, we get to that old audit admonition about trust but verify. 

So we feel that even with respect to our U.S. ECI contractors—and 

most of them are U.S. Institutions—that we can’t only trust them, 

we have to trust and verify. 

So the procedures that I mentioned with respect to the new contracts and the external certified public accounting firm attestations, those we are going to implement across the board regardless 

of nationality. They will apply to the U.S. institutions and the nonU.S. institutions. 

With respect to the specific question, have we considered using 

only U.S. flag institutions, yes, we have considered that. The difficulty is to penetrate certain markets around the world, we feel we 

need to turn to some of our foreign commercial institutions for the 

reasons that led us to the UBS in 1996. And that is why, in Singapore, we are doing business with the United Overseas Bank. 

So we are certainly mindful that the U.S. flag institution might 

be simpler and has some legal difficulties that are less than we 

find with the foreign flag carriers or institutions, but we haven’t 

made the decision to use only American institutions at this point. 

Mrs. MALONEY. Thank you very much. And I yield back the balance of my time, although I think I used it all up. 

Chairwoman KELLY. That is quite all right. I thank you both. 

But I have one follow-up question for you, Mr. Stipano. What 

happened to the auditors that failed to find the problems at Riggs? 

Are they still at OCC? 

Mr. STIPANO. It is hard to answer that because we are talking 

about——

Chairwoman KELLY. I thought it was a fairly straight question. 

Are they still at OCC? 

Mr. STIPANO. There are a lot of examiners who have examined 

Riggs during this time period. Some of them are still at OCC and 

some of them are not. 

29

Chairwoman KELLY. What mechanism do you have in place to 

assess the performance of the bank examiners regarding the BSA 

compliance? 

Mr. STIPANO. We have a couple of mechanisms. One is the performance appraisal process that the OCC uses for examiners and 

for other types of employees and another is the Quality Management Division. That is the division that Comptroller Hawke has directed to do a review of the Riggs matter and to report back on 

what went wrong. 

Chairwoman KELLY. How long was that Quality Control Division 

in place? 

Mr. STIPANO. I don’t know offhand. It is not something recent. 

Chairwoman KELLY. Years? Months? 

Mr. STIPANO. In some form, I would say years. 

Chairwoman KELLY. I think that this has been a very interesting 

hearing. I am interested that you were talking about the great 

amount of information that FinCEN has and talk about the ability 

to connect the dots. If we streamline what is going on with regard 

to regulatory agencies and perhaps centralize them, then they perhaps can have access to each other’s information in a much more 

direct way that will result in better oversight, more rapid response. 

And certainly we don’t want to see this kind of thing happen again 

for such an extended period of time. 

We don’t live in the world that we lived in prior to 9/11/2001. We 

live in a very different world. And part of that world is that we 

now—those of us who are charged with the responsibility of making sure that our country is safe and that our banking system is 

safe, we must think outside of the box, look outside of the box for 

solutions; that we will never let this kind of thing happen that happened with the Riggs Bank again. 

I am concerned with not only what happened with OCC, but I 

also am concerned with the Fed in one aspect. The fine of $100 million sounds like a lot of money, but when you have a bank with 

more than $1 trillion in assets, that fine seems a mere slap on the 

wrist. I would hope that when an institution is fined, especially an 

institution that had in place people who were supposed to find this 

kind of malfeasance, I would hope that that institution would pay 

a much steeper price for not regulating and controlling their own 

employees’ behavior. 

Here in the United States we put people like that in jail when 

there is a fraud in a bank. We have bank fraud laws; those people 

go to jail. $100 million, it seems they got by on the cheap, and I 

am quoting a lot of other people who have also mentioned that to 

me. 

I would hope that when you are considering fines of this nature 

again that the Fed would consider a healthier fine for any kind of 

malfeasance that is occurring. 

This is a blow to our financial system in a way—both of these 

are blows to our financial system in a way that American people 

have a right to expect should not happen when we have institutions in place whose charge it is to make sure that it doesn’t happen. 

I appreciate the fact that you came here today. I appreciate the 

fact that you spent so much time with us, helping us understand 

30

what did happen, what went wrong, and helping us understand 

how it is possible that we might be able to get through this and 

come out on the other end with a much better regulatory environment that will help protect America and America’s financial institutions in a better way. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. So, 

without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and 

place their responses in the record. 

I thank the witnesses for their appearances here today. This 

hearing is adjourned. 

[Whereupon, at 3:57 p.m., the subcommittee was adjourned.] 

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A P P E N D I X

June 2, 2004

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