United States General Accounting Office

GAO Report to the Ranking Minority Member

Permanent Subcommittee on

Investigations, Committee on

Governmental Affairs, U.S. Senate

May 1995 MONEY

LAUNDERING

Needed Improvements

For Reporting

Suspicious

Transactions Are

Planned

GAO/GGD-95-156

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-259790 

May 30, 1995

The Honorable Sam Nunn

Ranking Minority Member

Permanent Subcommittee

 on Investigations

Committee on Governmental Affairs

United States Senate

Dear Senator Nunn:

This report was prepared in response to your request to determine how suspicious transactions

that might involve money laundering are reported. The report discusses the various forms used

by financial institutions to report suspicious transactions and how the reports are used by law

enforcement agencies at the state and federal levels.

As arranged with the Subcommittee, unless you announce its contents earlier, we plan no

further distribution of this report until 30 days from its issue date. At that time, we will send

copies to other congressional committees, various bureaus and offices within the Department

of the Treasury, and other interested parties. Copies will be made available to others upon

request.

The major contributors to this report are listed in appendix IV. Please contact me on

(202) 512-8777 if you or your staff have any questions concerning this report.

Sincerely yours,

Laurie E. Ekstrand

Associate Director, Administration

 of Justice Issues
Executive Summary

Purpose Money laundering is the disguising or concealing of illicit income in order

to make it appear legitimate. Financial institutions such as banks, savings

and loan associations, and credit unions are in a unique position to help

identify money launderers by reporting suspicious transactions to federal

and state law enforcement authorities. The Permanent Subcommittee on

Investigations, Senate Committee on Governmental Affairs, asked GAO to

determine (1) how suspicious transactions are reported, (2) how the

reports are used by law enforcement agencies, and (3) whether the

process can be improved.

Background Federal law enforcement officials estimate that between $100 billion and

$300 billion is laundered in this country each year. While illegal drug

trafficking accounts for much of the funds being laundered, other criminal

activities, including tax evasion, also account for an extensive amount.

In the past two decades, federal law enforcement efforts to combat money

laundering have focused on requiring financial institutions to report

currency transactions that exceed $10,000. Beginning in 1988, these

reports have been supplemented by reports of suspicious transactions.

Many of the transactions reported as suspicious involve individuals who

appear to be attempting to avoid the $10,000 reporting requirement.

However, any activity that deviates from the norm for a particular account

can be considered suspicious.

The Right to Financial Privacy Act, enacted in 1978, raised questions as to

whether financial institutions were authorized to report suspicious

transactions. To address these concerns, legislation has been enacted to

provide protection against civil liability for institutions reporting

suspicious transactions.

Results in Brief Banks and other financial institutions report tens of thousands of

suspicious transactions each year. The reports have led to the initiation of

major investigations into various types of criminal activity. However,

because there is no overall control or coordination of the reports, there is

no way of ensuring that the information is being used to its full potential.

Financial institutions report suspicious transactions on a variety of

different forms that provide different types of information and that are

filed with different law enforcement and regulatory agencies. The form

that is filed most frequently is filed with the Internal Revenue Service (IRS)

Page 2 GAO/GGD-95-156 Suspicious Transaction Reports
Executive Summary

and kept on a centralized database. However, the form does not contain

any information describing the suspicious activity that would allow law

enforcement agencies to evaluate the usefulness of the information on the

basis of the form alone. Moreover, some institutions have been filing these

forms erroneously. IRS and other federal and state law enforcement

agencies use the database on a reactive basis; that is, to provide additional

information on an investigation that has already been initiated.

Other forms used to report suspicious transactions do describe the activity

so that the information can be evaluated. However, these forms are filed

with six different federal financial regulatory agencies. Because the forms

are not maintained on a centralized database, they are not used on a

reactive basis. Financial institutions filing this form are required to send a

copy of it to the nearest district office of IRS’ Criminal Investigation

Division. However, IRS has not developed any guidance or directives as to

how the information is to be managed as an intelligence resource. Use of

the reports to initiate investigations varies among the 35 district offices.

GAO identified 15 states that receive copies of suspicious transaction

reports filed on one or both of these two forms. Nine of these states told

GAO that they use the information to initiate criminal investigations.

The Department of the Treasury, the financial regulatory agencies, and IRS

have recently agreed to substantial changes regarding how suspicious

transactions are to be reported and how the information is to be used.

These proposals, which were made with input from the financial

community, have the potential for significantly improving the contribution

that suspicious transaction reports make to law enforcement at both the

federal and state levels.

GAO’s Analysis

Many Reports of

Suspicious Transactions

Have Limited Utility for

Law Enforcement

In 1990 the Department of the Treasury modified the Currency Transaction

Report (CTR) form, which financial institutions use to report currency

transactions exceeding $10,000 to IRS. A block was added to the form that

could be checked to indicate that the transaction was considered

suspicious. In addition, the instructions for preparing the CTR were

amended so that the form could be used to report suspicious transactions

of any dollar amount.

Page 3 GAO/GGD-95-156 Suspicious Transaction Reports
Executive Summary

Of the 10.2 million CTRs filed in 1993, 63,536 were marked suspicious. Most

of these suspicious CTRs—47,083—identified transactions that were for

$10,000 or less. The average amount of these transactions was $7,117. (See

p. 19.) Although CTRs are the form financial institutions use most

frequently to report suspicious transactions, it is the least useful for

providing intelligence information on possible criminal activity. Because

there is no means for indicating on the form the reason why the institution

considered the transaction suspicious, it is difficult for law enforcement

personnel to evaluate the information and assess its potential.

Most financial institutions do not use CTRs to report suspicious

transactions. Of the 26,029 institutions that filed CTRs in 1993, less than

18 percent marked one or more of the CTRs as suspicious. Over 25 percent

of the suspicious CTRs were filed by 20 institutions, including 3 institutions

that erroneously filed the suspicious CTRs for transactions that they did not

consider to be suspicious. (See pp. 20 and 21.)

Other Forms Are Also

Used to Report Suspicious

Transactions

Since 1988 the financial regulatory agencies have required banks, savings

and loan associations, and credit unions to report suspected money

laundering on a Criminal Referral Form (CRF). Although each regulatory

agency requires the use of its own form, each form contains essentially the

same information, including a description of the transaction. Of the 80,340

CRFs that were filed in 1993, 13,220 reported suspected money laundering.

The remaining CRFs reported other criminal activity, such as credit card

fraud, employee theft, and check kiting. (See p. 23.)

There is no central depository of CRFs. They are to be filed with the

cognizant regulatory agency and, for those that report suspected money

laundering, a copy is to be sent to the nearest district office of IRS’ Criminal

Investigation Division (CID).

CID offices in IRS’ western region have been receiving suspicious

transaction reports on various forms since the late 1980s, when special

agents began soliciting reports on their own initiative. At first the reports

were made exclusively on a locally designed form. Currently, even though

financial institutions throughout the country use CTRs and/or CRFs to make

suspicious transaction reports, some institutions in the western part of the

country continue to use the locally designed forms in addition to the CTR

and/or CRF forms. (See p. 24.)

Page 4 GAO/GGD-95-156 Suspicious Transaction Reports
Executive Summary

Arizona has had its own form for banks in that state to use for reporting

suspicious transactions since 1985. State officials told GAO that in 1993

financial institutions in Arizona filed approximately 1,200 of these forms

with the state Attorney General’s Office. (See p. 24.)

Reports of Suspicious

Transactions Are Helpful

to Law Enforcement but

Their Use Is Inconsistent

CID special agents GAO spoke with provided numerous examples of major

investigations, many conducted by other agencies, that were initiated on

the basis of suspicious transactions reported to IRS. These cases involved

different types of criminal activity, such as drug trafficking, food stamp

fraud, and theft of government property. Many of the cases involved

millions of dollars in illicit proceeds. (See pp. 26 and 27.)

IRS does not have agencywide policies or procedures for managing

suspicious transaction reports. Consequently, the extent to which special

agents in the 35 CID district offices solicit, process, and evaluate the

reports is up to the discretion of the district CID chief and varies

significantly among districts. The percentage of investigations initiated on

the basis of suspicious transaction reports also varies significantly among

districts. From October 1990 to June 1994 CID initiated 21,507

investigations nationwide. About 4 percent of the cases were initiated as a

result of a suspicious transaction report. Among the district offices,

however, the percentage varied from 0 to over 18 percent. GAO believes

that the varying rates are an indication that use of the reports may not be

emphasized to the same extent among the districts. (See p. 30.)

Almost all of the states have been authorized direct access to the Treasury

database of CTRs which includes those CTRs that have been marked as

suspicious. However, states must use a specific name to search the

database and can access only the suspicious CTRs filed on the individual or

business named. Consequently, states do not have the capability of using

the database to target subjects for further investigation. (See p. 31.)

GAO identified 15 states that receive copies of suspicious CTRs and/or CRFs

that have been filed by financial institutions within their state. Nine of

these states told GAO they use the information to target subjects for further

investigation. (See pp. 31 through 34.)

Recent Initiatives for

Improving Suspicious

Transaction Reporting

The Department of the Treasury and the financial regulatory agencies,

with input from the financial community, have recently proposed several

major changes regarding suspicious transaction reporting. These include

Page 5 GAO/GGD-95-156 Suspicious Transaction Reports
Executive Summary

using a single form for the reports that would provide a description of the

transaction, establishing a centralized database for the reports, and

facilitating access to the information by the states. In addition, IRS plans to

develop and issue policies and procedures to ensure that the reports are

used and managed on a consistent basis. GAO believes the actions planned

by Treasury and IRS, if properly implemented in a timely manner, will

significantly improve how suspicious transactions are reported and used.

(See pp. 34 through 36.)

Recommendations GAO is not making any recommendations in this report.

Agency and Industry

Comments

GAO provided a draft of this report to the American Bankers Association,

Treasury’s Financial Crimes Enforcement Network, and IRS. Their written

comments are discussed in chapter 3 and are contained in appendixes I, II,

and III. Each of these organizations generally agreed with the information

in the report.

Page 6 GAO/GGD-95-156 Suspicious Transaction Reports
Page 7 GAO/GGD-95-156 Suspicious Transaction Reports
Contents

Executive Summary 2

Chapter 1 

Introduction

10

Criminals Face Problems in Dealing in Large Amounts of Cash 10

U.S. Efforts to Combat Money Laundering Center on Reports of

Large Cash Transactions

11

Suspicious Transactions Are Loosely Defined 11

Legislation Has Facilitated Suspicious Transaction Reporting by

Financial Institutions

13

Objectives, Scope, and Methodology 14

Chapter 2 

Reports of Suspicious

Transactions Are

Made on Different

Forms and With

Different Agencies

16

Currency Transaction Reports Can Be Used to Identify

Suspicious Transactions

16

Criminal Referral Forms Are Also Used to Report Suspected

Money Laundering

22

Some IRS Districts Receive Other Types of Suspicious

Transaction Reports

23

Arizona Has a Separate Form for Reporting Suspicious

Transactions

24

Chapter 3 

Reports of Suspicious

Transactions Are Not

Consistently Used or

Managed

26

IRS Has Had Success in Using Reports of Suspicious

Transactions

26

IRS’ Management and Use of Suspicious Transaction Reports

Vary Among District Offices

27

Use of Reports of Suspicious Transactions by the States Varies

Substantially

30

Recent Initiatives Would Significantly Change How Suspicious

Transaction Reports Are Made and Used

34

Conclusions 36

Agency and Industry Comments 37

Appendixes Appendix I: Comments From the American Bankers Association 40

Appendix II: Comments From the Financial Crimes Enforcement

Network

41

Appendix III: Comments From the Internal Revenue Service 42

Appendix IV: Major Contributors to This Report 45

Page 8 GAO/GGD-95-156 Suspicious Transaction Reports
Contents

Tables Table 2.1: CTRs and Suspicious CTRs Filed During Calendar Year

1993

19

Table 2.2: Suspicious CTRs Filed During Calendar Year 1993 by

Type of Filer and Amount

19

Table 2.3: Selected Statistical Information on the 20 Institutions

Filing the Largest Volume of Suspicious CTRs in 1993

20

Table 2.4: Criminal Referral Forms Filed During Calendar Year

1993

23

Table 3.1: IRS CID Investigations Initiated by Suspicious

Transaction Reports, October 1990 Through June 1994.

29

Figures Figure 2.1: CTRs Filed, 1990 Through 1993 18

Figure 3.1: States with Suspicious Transaction Reporting

Requirements

32

Abbreviations

CID Criminal Investigation Division

CRF Criminal Referral Form

CTR Currency Transaction Report

FinCEN Financial Crimes Enforcement Network

IRS Internal Revenue Service

Page 9 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

Money laundering is the disguising or concealing of illicit income in order

to make it appear legitimate. Over the past two decades, federal law

enforcement efforts to detect money laundering have evolved into a

strategy that is heavily dependent upon the reporting of large currency

transactions and tactical and strategic intelligence analysis of the collected

data.

In 1988 the Department of the Treasury began to encourage banks and

other financial institutions to supplement reports of large currency

transactions with reports of suspicious transactions of any amount. Since

then, the suspicious transaction reports have taken on a number of

different formats that are filed with various law enforcement and

regulatory agencies at both the state and federal levels. This report

describes how these reports are made and how they are being used.

Criminals Face

Problems in Dealing

in Large Amounts of

Cash

Federal law enforcement officials estimate that between $100 billion and

$300 billion in U.S. currency is laundered each year. While narcotics

traffickers are the largest single block of users of money laundering

schemes, numerous other types of activities typical of organized

crime—for example, illegal gambling or prostitution—create an

appreciable demand. In addition, violations of tax laws often accompany

laundering schemes that conceal the existence of an illegal source of

income. Money laundering is also a factor in many cases of tax fraud

involving income from a legitimate source.

Although the process of money laundering has been broken down into a

number of steps, it is generally agreed by law enforcement and regulatory

officials that the point at which criminals are most vulnerable to detection

is “placement.” Placement is the concealing of illicit proceeds by

• converting the cash to another medium that is more convenient or less

suspicious for purposes of exchange, such as property, cashier’s checks,

or money orders; or

• depositing the funds into a financial institution account for subsequent

disbursement.

Because of the problems associated with converting and concealing large

amounts of cash, placement is perhaps the most difficult part of money

laundering and is currently the primary focus of U.S. law enforcement,

legislative, and regulatory efforts to attack money laundering.

Page 10 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

U.S. Efforts to

Combat Money

Laundering Center on

Reports of Large Cash

Transactions

Federal efforts to detect large cash deposits were significantly enhanced

with the passage of the Bank Secrecy Act in 1970. The act requires

individuals as well as banks and other financial institutions to report large

foreign and domestic financial transactions to the Department of the

Treasury. The act has been amended to provide substantial criminal and

civil penalties for institutions who fail to file the required reports and for

individuals who deliberately evade certain reporting requirements.

Although the implementing regulations of the act require four types of

reports, the report filed most frequently is the Currency Transaction

Report (CTR).

Financial institutions1

 are required to file a CTR for each deposit,

withdrawal, exchange of currency, or other payment or transfer, by,

through, or to such institutions that involves a transaction in currency of

more than $10,000. CTRs are filed on an Internal Revenue Service (IRS) form

4789, which is to be sent to the IRS Detroit Computing Center in Michigan.

The volume of CTRs being filed has increased substantially in the past

several years. In May 1993 we testified before the House Banking

Committee that since 1987 the annual filings of CTRs had increased at an

average rate of 12.7 percent.2

 Increased efforts by federal regulatory and

law enforcement agencies, as well as enhanced cooperation by the banks

themselves, have significantly improved bank compliance with the

reporting requirements. The substantial increase in the volume of currency

transaction reports being filed has increased the importance of identifying

those transactions thought to be suspicious.

Suspicious

Transactions Are

Loosely Defined

Although U.S. financial institutions have been reporting suspected money

laundering for a number of years, specific criteria for determining whether

a transaction is suspicious have never been developed. Consequently,

institutions generally have a wide degree of latitude in deciding what

constitutes suspicious activity.

Financial institutions have developed a number of means designed to help

ensure that they are not being used to launder illicit proceeds. Chief

1

As defined by Treasury regulation, these include banks, federally regulated security brokers, currency

exchange houses, funds transmitters, check cashing businesses, and persons subject to supervision by

state or federal bank supervisory authority. In this report, unless otherwise noted, the term “financial

institutions” will refer to banks, credit unions, and savings and loan associations.

2

Money Laundering: The Use of Bank Secrecy Act Reports by Law Enforcement Could Be Increased

(GA0/T-GGD-93-31, May 26, 1993). Legislation enacted in September 1994 contains several provisions

for reducing the volume of CTRs filed.

Page 11 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

among these is a policy commonly referred to as “know your customer.”

Among other things, the policy calls for financial institutions to verify the

identity of individuals and businesses that are account holders and to be

familiar enough with their banking practices so that transactions that are

outside the norm can be readily identified. Officials from the Department

of the Treasury and the American Bankers Association told us that most, if

not all, financial institutions have implemented a know your customer

policy and treat any transaction not typically associated with an account

as suspicious. Moreover, guidance from regulatory agencies generally

encourages institutions to use the policy in this manner.

Although suspicious activity generally depends upon the customer, certain

types of transactions are suspicious in and of themselves. A common type

of suspicious transaction is structuring. Structuring occurs when a person

conducts currency transactions in amounts of $10,000 or less for the

purpose of evading the reporting requirements of the Bank Secrecy Act.

In September 1992 the Association of Reserve City Bankers (now known

as the Bankers Roundtable) published the results of a survey of suspicious

transaction reporting by the nation’s major banking institutions.3

 The

report included more than 200 profiles of suspicious transactions that had

been reported by 60 of the nation’s largest banking institutions. The

majority of the transactions that were reported as suspicious (85 percent)

involved structuring. The report found that the most common method of

structuring involved cash deposits but also included check cashing, cash

withdrawals, and the purchase of monetary instruments.

Other transactions that were reported as suspicious included

• customers changing the dollar amount of the transaction or cancelling the

transaction when informed of the reporting requirement,

• unusually large purchases of money orders and cashier’s checks,

• unusually large cash deposits, and

• wire transfers of funds to a foreign country.

3

Survey of Suspicious Transactions, Final Report of the Subcommittee and Task Force on Money

Laundering, Payments System Committee, Association of Reserve City Bankers.

Page 12 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

Legislation Has

Facilitated Suspicious

Transaction Reporting

by Financial

Institutions

The Department of the Treasury has identified 8 countries in addition to

the United States that, as of July 1993, require the reporting of currency

transactions that exceed a specified amount.4

 However, many other

countries require the recording of transactions over some specified

threshold. These records can then be made available to law enforcement

under the terms of that country’s bank secrecy laws.

Many countries also either require or encourage financial institutions to

report those transactions considered to be suspicious. In the United

States, financial institutions have been encouraged for some time to report

suspicious account activity that might be indicative of criminal activity.

However, certain provisions in the Right to Financial Privacy Act (P.L.

95-630) of 1978 generated questions in the banking community about the

type of customer information that could be disclosed in reporting a

suspicious transaction, as well as concerns of potential liability for such

disclosure. Subsequent legislation addressed these issues by, among other

things, providing certain protections against civil liability for institutions

reporting suspicious transactions.

The Money Laundering Control Act of 1986 (P.L. 99-570) amended the

Right to Financial Privacy Act to explicitly define the specific types of

account information that financial institutions could disclose without

customer permission, subpoena, summons, or search warrant. The intent

was to strike a balance between the privacy rights of customers while

allowing financial institutions to give government investigators enough

information about the nature of possible violations in order for such

investigators to determine whether there was a basis to proceed with a

summons, subpoena, or search warrant for additional information. The

1986 amendments also established a limited “good faith” defense whereby

financial institutions and their employees, when making a disclosure of

certain specified information, would be shielded from civil liability to the

customer for such disclosure or for any failure to notify the customer of

such disclosure.

Despite this provision, many banks were concerned that they might still be

liable under the Right to Financial Privacy Act for disclosures made on a

voluntary basis. Nothing in the statutory language required a financial

institution to initiate a disclosure to a government agency of a suspected

transaction, and some questioned whether the government would

intervene on their behalf should a civil action be initiated against them.

4

These are Australia, Brazil, Costa Rica, Ecuador, Norway, Paraguay, Uruguay, and Venezuela.

Page 13 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

This situation was remedied, to some extent, by the promulgation of

regulations by the Comptroller of the Currency and other federal agencies

charged with the responsibility to monitor U.S. financial institutions.

Comptroller of the Currency Regulation 12 C.F.R. Section 21.11 and

corresponding regulations issued by the other bank regulatory agencies

now require financial institutions to report suspected money laundering.

Nonetheless, there was still concern over the possibility of civil suits

because of reporting suspicious transactions. In 1992, under the

Annunzio-Wylie Anti-Money Laundering Act (P.L. 102-550), financial

institutions and their employees reporting suspicious transactions were

given broadened immunity from civil liability under any state or federal

law or regulation, such as the Right to Financial Privacy Act. The act also

prohibits financial institutions from notifying persons involved in a

suspicious transaction that the transaction has been reported.

Objectives, Scope,

and Methodology

We were requested by the then Chairman of the Permanent Subcommittee

on Investigations, Senate Governmental Affairs Committee, to review the

manner in which suspicious activities that relate to possible money

laundering are reported by determining

• how banks and other financial institutions report suspicious transactions,

• to whom the transactions are reported,

• the volume of reports made,

• how the reports are used, and

• whether the process can be improved.

To respond to the request, we reviewed pertinent laws and regulations and

published material such as academic and periodical literature. We also

reviewed reports prepared by federal and state agencies, private research

associations, and other experts. We interviewed officials at the Internal

Revenue Service, the Department of the Treasury, the Federal Reserve

Board, and the American Bankers Association. We also used the results of

our previous reports dealing with money laundering that are cited in the

text.

In order to determine the volume and characteristics of suspicious

transaction reports filed on Currency Transaction Reports, we used data

from the computer database at the IRS Detroit Computing Center and

relied upon IRS for the necessary computer programming. At our request,

IRS identified the 20 institutions that filed the largest volume of Currency

Page 14 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 1 

Introduction

Transaction Reports that had been marked suspicious in calendar year

1993. In order to determine what factors might influence some institutions

to mark a high percentage of CTRs as suspicious, we contacted the seven

institutions of these 20 that had marked more than 8 percent of the CTRs

filed as suspicious. This percentage was arbitrarily selected and has no

statistical basis.

To ascertain what states require suspicious transaction reporting and how

the reports are used, we telefaxed a single-page questionnaire to bank

regulatory officials in each state. All of the states responded. For those

states that indicated there was a requirement, we conducted telephone

interviews with regulatory and law enforcement personnel. We

interviewed officials and observed operations at the state facility in

Sacramento, California, that processes data for that state’s Office of the

Attorney General. We chose this one state operation to visit because of its

proximity to San Francisco, California, where we were reviewing IRS

district operations.

In order to determine the extent to which suspicious transaction reports

are used to initiate investigations by IRS’ Criminal Investigation Division

(CID), we used data provided us from a management information system at

IRS headquarters. We visited or contacted by telephone a total of 10 CID

district offices. The San Francisco office was selected because of its

recognized role as an innovator in using suspicious transaction reports.

The other district offices were judgmentally selected so as to include

offices that had initiated a relatively high percentage of cases based on

suspicious transaction reports as well as those that had initiated a low

percentage.

We provided a draft of this report to the American Bankers Association,

Treasury’s Financial Crimes Enforcement Network, and IRS. Their

comments are discussed on pages 37 and 38 and reproduced in full in

appendixes I, II, and III.

We did our review from April through December 1994 in accordance with

generally accepted government auditing standards.

Page 15 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 2 

Reports of Suspicious Transactions Are

Made on Different Forms and With Different

Agencies

Over the past several years, different forms have been developed for

financial institutions to use in reporting transactions that might involve

money laundering. Each of these forms has evolved from a recognized

need, but the forms differ as to the amount and detail of the information

provided and where the form is filed. Because of the concurrent

development and implementation of the forms, the reports overlap one

another. Consequently, the same suspicious activity may be reported two

or more times, on two or more different forms, and to several different

agencies.

This chapter describes how suspicious transactions are reported and to

whom they are reported. Chapter 3 discusses how the various reports are

used by different law enforcement agencies.

Currency Transaction

Reports Can Be Used

to Identify Suspicious

Transactions

As previously discussed, financial institutions are required to report

certain transactions that exceed $10,000 on a Currency Transaction Report

(CTR). Beginning in 1990, CTRs have also been used by some institutions to

identify suspicious transactions. Although this means of identifying

suspicious transactions produces the largest volume of reports, most

financial institutions do not use the CTR form to report suspicious

transactions. Using the CTR for this purpose does not provide any

information about the nature of the suspicious activity. Moreover, the

validity of some of the suspicious transaction reports filed on a CTR is

questionable because some have been filed erroneously.

Suspicious CTRs Are

Voluntary and Provide

Little Information

After it had received inquiries from financial institutions about whether

suspicious transactions should be reported and what information should

be reported, the Department of the Treasury issued Administrative Ruling

88-1 on June 22, 1988. The ruling encourages but does not require financial

institutions to report those transactions that might be “...relevant to a

possible violation of the Bank Secrecy Act or its regulations or indicative

of money laundering or tax evasion” to the local Criminal Investigation

Division (CID) office of the Internal Revenue Service.

Immediately after Administrative Ruling 88-1 was released, Treasury

officials began to notice that financial institutions were reporting

suspicious transactions by filing CTRs with the word “suspicious” written

across the form. To facilitate this type of reporting, Treasury issued a

revised CTR form in January 1990 with a block that could be checked to

indicate that the transaction was suspicious. In addition, the instructions

Page 16 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 2 

Reports of Suspicious Transactions Are

Made on Different Forms and With Different

Agencies

for the form were amended to read “This form may be filed for any

suspicious transaction, even if it does not exceed $10,000.” Although the

revised form makes it possible to identify transactions that have been

designated as suspicious, the form does not provide for a description of

the transaction. Consequently, there is no way to determine why the

transaction was considered suspicious.

All CTRs are to be filed with the IRS Detroit Computing Center, where they

are processed and entered onto a computer database along with other

reports required by the Bank Secrecy Act. Once a week, staff at the Center

are to distribute copies of those CTRs that are marked suspicious to the CID

district office that has jurisdiction over the state where the CTR was filed.

In 1993 more than 10 million CTRs were filed, 63,536 of them marked

suspicious.1

 As figure 2.1 demonstrates, the number of suspicious CTRs

filed since 1990 has remained relatively constant despite a substantial

increase in the volume of CTRs filed.

1

Approximately 126,000 CTRs were filed for amounts of $10,000 or less but were not marked

suspicious. IRS has not determined the reason why these reports were filed.

Page 17 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 2 

Reports of Suspicious Transactions Are

Made on Different Forms and With Different

Agencies

Figure 2.1: CTRs Filed, 1990 Through

1993 10.50


10.00


9.50


9.00


8.50


8.00


7.50


.10


.05


0

Millions of CTRs filed

CTRs filed


CTRs marked suspicious

1990 1991 1992 1993

Calendar year

Most Financial Institutions

Do Not File Suspicious

CTRs

Of the 35,131 institutions filing CTRs in 1993, about 75 percent identified

themselves as banks, credit unions, or savings and loan associations. Of

these 26,029 financial institutions, only 4,473—about 17 percent—marked

1 or more of the CTRs they filed as suspicious. Overall, less than 1 percent

of the CTRs filed by all financial institutions were marked suspicious. Table

2.1 provides additional information on institutions that filed CTRs and

suspicious CTRs in 1993. Table 2.2 provides additional data on the

suspicious CTRs filed in 1993.

Page 18 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 2 

Reports of Suspicious Transactions Are

Made on Different Forms and With Different

Agencies

Table 2.1: CTRs and Suspicious CTRs Filed During Calendar Year 1993

Type of institution

Number of

institutions

filing CTRs

Number of

CTRs filed

Number of

institutions

filing

suspicious

CTRs

Percent

filing

suspicious

CTRs

Number of

suspicious

CTRs filed

Percent of

CTRs

marked

suspicious

Bank 20,132 9,894,707 3,410 16.9 49,498 0.5

Savings and loan association 2,295 143,026 503 21.9 4,624 3.2

Credit union 3,602 32,326 560 15.5 2,488 7.7

Subtotals 26,029 10,070,059 4,473 17.2 56,610 0.6

Securities broker or dealer 311 2,405 13 4.2 296 12.3

Other 2,738 130,649 307 11.2 5,755 4.4

Unknown 6,053 44,011 345 5.7 875 2.0

Totals 35,131 10,247,124 5,138 14.6 63,536 0.6

Source: IRS Detroit Computing Center.

Table 2.2: Suspicious CTRs Filed During Calendar Year 1993 by Type of Filer and Amount

Type of institution

Suspicious

CTRs filed

for $10,000

or less

Number

of filers

Average

amount

Suspicious

CTRs filed for

more than

$10,000

Number

of filers

Average

amount

Bank 37,001 2,632 $7,340 12,497 1,849 $27,030

Savings and loan association 3,858 407 6,881 766 247 22,734

Credit union 1,938 431 5,931 550 262 23,085

Subtotals 42,797 3,470 $7,235 13,813 2,358 $26,635

Securities broker or dealer 27 7 $5,736 269 11 $35,318

Other 3,553 214 6,003 2,202 155 15,268

Unknown 706 267 5,622 169 110 20,206

Totals 47,083 3,958 $7,117 16,453 2,634 $25,189

Source: IRS Detroit Computing Center.

We discussed suspicious transaction reporting with officials of the two

largest (ranked by total assets) banks in the country. Both banks have a

policy of not filing suspicious CTRs. The reasons given for this policy were

a concern over inadequate internal review and evaluation of the reports,

possible civil liability for violating a customer’s right to privacy, and the

lack of space on the form to describe why the transaction was considered

to be suspicious.

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A Disproportionate

Number of Suspicious

CTRs Are Filed by a Few

Institutions

Although a total of 5,138 institutions filed suspicious CTRs in 1993, over a

quarter of the 63,536 suspicious CTRs filed were filed by 20 institutions. At

the request of the Department of the Treasury, we are not revealing the

identity of these institutions. However, table 2.3 provides additional

information concerning these institutions.

Table 2.3: Selected Statistical Information on the 20 Institutions Filing the Largest Volume of Suspicious CTRs in 1993

Filer

Number of

suspicious CTRs

filed

Percent of all

suspicious CTRs

filed

Cumulative

percentage

Total CTRs filed

by institution

Percent marked

suspicious

1 3,079 5.04 5.04 5,486 56.12

2 1,891 3.10 8.14 69,035 2.74

3 1,620 2.65 10.79 72,287 2.24

4 1,501 2.46 13.25 11,967 12.54

5 1,047 1.71 14.96 125,036 0.84

6 779 1.28 16.24 19,606 3.97

7 758 1.24 17.48 1,651 45.91

8 717 1.17 18.65 87,516 0.82

9 674 1.10 19.76 11,184 6.03

10 535 0.88 20.63 58,512 0.91

11 515 0.84 21.48 1,093 47.12

12 449 0.74 22.21 7,376 6.09

13 424 0.69 22.90 987 42.96

14 382 0.63 23.53 5,726 6.67

15 379 0.62 24.15 780 48.59

16 375 0.61 24.76 7,680 4.88

17 373 0.61 25.38 68,227 0.55

18 366 0.60 25.97 11,226 3.26

19 347 0.57 26.54 4,270 8.13

20 330 0.54 27.08 4,788 6.89

Totals 16,541 27.08

Source: GAO analysis of IRS data.

Reasons for Filing

Suspicious CTRs Vary, and

Some Are Filed

Erroneously

In order to determine the factors that influence some institutions to mark

a high percentage of CTRs as suspicious, we contacted the seven

institutions that had marked more than 8 percent of CTRs filed as

suspicious. This percentage was arbitrarily selected and has no statistical

basis. We found a variety of reasons for why institutions filed suspicious

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CTRs, and we also identified several instances where suspicious CTRs were

filed erroneously.

The institution filing the largest number of suspicious CTRs—over

5 percent of those filed nationwide—is not a financial institution but a

large corporation that provides money transmitting services at thousands

of locations nationwide. Under procedures developed by the company, all

transactions over a specified dollar threshold set by the company are to be

monitored at a central location where the decision is made about whether

or not to file a suspicious CTR. Company officials we spoke with told us

that because of the nature of their business, they are inclined to regard

many cash transactions as suspicious even though the amount might be

relatively small compared to typical transactions at a financial institution.

The eleventh largest filer of suspicious CTRs is also not a financial

institution but a liquor store that operates a check cashing service. Staff

from the store told us that they had been filing the suspicious CTRs

erroneously because of incorrect instructions they had received. An IRS

agent had informed them that a CTR was to be filed whenever a customer’s

total transactions exceeded $10,000. (Although Treasury regulations do

call for aggregating transactions, the time period specified is 1 business

day.) The store maintains records on individual customers so that any time

the transaction total exceeded $10,000, which may have taken several

months or longer, a CTR would be filed on each subsequent transaction no

matter what the amount was. According to store personnel, they had also

been told by IRS to classify these CTRs as suspicious since none of the other

transaction descriptions on the form were appropriate to describe the

transaction.

According to officials we spoke with at the institution filing the fifteenth

largest volume of suspicious CTRs—a small bank—most, if not all, of its

suspicious CTRs were filed at the request of IRS. We were told that IRS had

informed the bank that an account holder was under investigation and that

deposit activity for the account was generally under the $10,000 reporting

threshold for a CTR. The bank officials also told us that IRS requested the

bank to file a suspicious CTR for every transaction no matter how much the

amount was so that IRS would be able to monitor the account activity.

Consequently, the suspicious CTRs were not being filed because the bank

considered the transactions to be suspicious but in order to allow IRS to

monitor activity that would not otherwise be reported.

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The seventh largest filer of suspicious CTRs is a small bank located in one

of the nation’s largest cities. We were told that after the bank initially

determines that an account has had a single suspicious transaction, its

policy is to file suspicious CTRs on all subsequent transactions for that

account. Bank officials told us that many of the suspicious CTRs filed by

the bank are likely to be erroneous since not all subsequent transactions

might be considered suspicious.

We were also told that the bank had been heavily fined in the past for

Bank Secrecy Act violations. As proof of its willingness to comply with the

spirit as well as the letter of the law, the bank has implemented a policy

that encourages employees to file suspicious CTRs whenever there is any

questionable activity. This “when in doubt, file” philosophy was echoed by

the remaining three banks of the seven that we spoke with.

Criminal Referral

Forms Are Also Used

to Report Suspected

Money Laundering

Federal regulations require financial institutions to file Criminal Referral

Forms or Reports of Apparent Crime (CRF) to report known or suspected

crimes, such as credit card fraud, employee theft, and check kiting. In 1988

the activity to be reported was broadened to include suspected structuring

of transactions to evade the CTR reporting requirements, other violations of

the Bank Secrecy Act, and money laundering. (See ch. 1, p. 14)

Each of the financial regulatory agencies requires its own form be used for

the report. The different forms, however, provide essentially the same

information about the identity of the reporting institution and the

individual or business that is the subject of the report. Each form also

differs substantially from the CTR in that each has space for a description

of the transaction or activity that is being reported as suspicious.

The directions for filing the reports require the financial institution to send

the original to the cognizant regulatory agency and copies to the nearest

office of the United States Attorney, the closest office of the Federal

Bureau of Investigation, and the Department of the Treasury. The

instructions also specify that when suspected money laundering and/or

Bank Secrecy Act violations are being reported, a copy of the report is to

be sent to the local office of the IRS Criminal Investigation Division. Table

2.4 shows the CRFs filed with the regulatory agencies, including those CRFs

reporting suspected money laundering and/or Bank Secrecy Act violations.

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Table 2.4: Criminal Referral Forms

Filed During Calendar Year 1993

Regulatory agency

Total CRFs

received

CRFs reporting

suspected

money

laundering

Percent of

CRFs reporting

money

laundering

Federal Reserve 5,799 1,585 27.3

Office of Thrift Supervision 10,401 3,230 31.1

Federal Deposit Insurance

Corporation 15,657 2,170 13.9

Resolution Trust Corporation 375 24 6.4

National Credit Union Administration 761 11 1.4

Office of the Comptroller of the

Currency 47,347 6,200a 13.1

Totals 80,340 13,220 16.5

aEstimated by agency personnel.

Source: GAO poll of regulatory agencies.

Some IRS Districts

Receive Other Types

of Suspicious

Transaction Reports

As discussed in chapter 1, the Money Laundering Control Act of 1986

amended the Right to Financial Privacy Act with provisions that

authorized financial institutions to disclose certain specified account

information. Recognizing the potential value of information and reports of

suspicious transactions that could now be obtained from financial

institutions, special agents with the IRS Criminal Investigation Division

(CID) in the San Francisco, California, district office began a local initiative

in 1987 to capitalize on the legislation.

Under the initiative, financial institutions—primarily banks—in IRS’

western region were asked to report suspicious transactions directly to the

local CID office. At first, the reports were taken over the telephone. As

cooperation by the banks increased and the volume of telephone calls

became difficult to manage, the financial institutions began filing the

reports on a one-page form that was to be mailed to the CID district office.

The form is shorter than the multipage Criminal Referral Form used by

financial regulatory agencies but, similar to the CRF, has space for a

narrative description of the suspicious nature of the transaction.

Currently, even though financial institutions throughout the country use

CTRs and/or CRFs to make suspicious transaction reports, some institutions

in the western part of the country continue to file an additional report

directly with the local CID district office. The reports are to be evaluated

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and researched at the district, sent to an IRS computer service center in

California, transcribed onto computer tape, and mailed to the IRS Detroit

Computing Center in Detroit, where they are to be put on a database. As of

July 1994 a total of 68,111 reports had been filed with CID district offices in

IRS’ western region—mostly with the San Francisco office.

In calendar year 1993 a total of 91 financial institutions filed 20,940 reports

with the CID district offices, again mostly with the San Francisco office.

Some of the reports that were filed were copies of CRFs that were filed

with the CID office in accordance with the filing instructions. Others,

however, were the one-page form that some banks continue to use. IRS

officials do not believe that any were copies of suspicious CTRs.

Arizona Has a

Separate Form for

Reporting Suspicious

Transactions

Before federal agencies developed forms for reporting suspicious

transactions, Arizona was using its own form. In 1985 the Arizona Attorney

General’s Office developed a voluntary, informal reporting system relating

to possible money laundering activity through financial institutions.

Suspected money laundering and suspicious transactions were to be

reported to the state Attorney General on a one-page form that requested

identifying information concerning the customer and the nature of the

transaction. By 1990 the state was receiving approximately 150 reports of

suspicious transactions a month.

In 1991 a state law was passed requiring any state or federally chartered

institution to file with the state copies of various reports made to the

Department of the Treasury. The state law also provides that the timely

filing of a report with the appropriate federal agency shall be deemed

compliance with the state requirements if such reports are already being

supplied to the state. Arizona had been receiving copies of suspicious CTRs

filed by state financial institutions since August 1989.2

 Consequently,

financial institutions were excused from filing copies of suspicious CTRs

but were required to file copies of CRFs. The state Attorney General’s

Office accepted a copy of a CRF filed in lieu of the state form.

Officials with the Arizona Attorney General’s Office told us that in 1993 the

state received an average of 300 reports of suspicious transactions a

month, not including those copies of suspicious CTRs received on

computer tape from IRS. About two-thirds of the reports were copies of

2

Arizona is one of several states that have agreements with Treasury to receive copies of all CTRs filed

within the state on computer tapes from the IRS Detroit Computing Center. See Money Laundering:

State Efforts To Fight It Are Increasing But More Federal Help Is Needed (GAO/GGD-93-1, Oct. 15,

1992).

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CRFs filed with financial regulatory agencies. The remaining reports were

made on the state form, which, we were told, some financial institutions

used for situations they felt did not warrant a CRF.

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Information concerning suspicious transactions can be an effective means

of identifying a wide variety of criminal activity. Even so, use of the

information by law enforcement at federal and state levels is limited and

inconsistent.

No federal agency has been designated as responsible for developing and

administering a program that would manage these resources with a

focused, nationwide perspective. Although the Internal Revenue Service is

the primary recipient of the reports, the use of the reports is a local

initiative and varies among offices. Several states have recognized the

value of the reports but their ability to use the information also differs

because access to the data varies among the states.

IRS Has Had Success

in Using Reports of

Suspicious

Transactions

As discussed in chapter 2, district offices of IRS’ Criminal Investigation

Division receive reports of suspicious transactions in several different

ways. CID agents we spoke with at both the headquarters and district levels

described suspicious transactions reports from financial institutions as

extremely valuable intelligence leads. IRS does not keep records or data to

measure the value of the reports. However, agents we spoke with at the

field level related numerous examples of major investigations that had

been initiated on the basis of suspicious transaction reports made by

financial institutions. These examples include the following:

• In March 1994 a Texas funeral director was indicted along with three other

individuals in U.S. District Court on charges that they accepted

$4.9 million in drug proceeds during a 5-week period in 1989. The

investigation originated when a banker became suspicious of large cash

deposits being made into the account of the funeral home and telephoned

the CID district office in Dallas.

• In June 1994 a technical engineer with the Bureau of Engraving and

Printing in Washington, D.C., was arrested and charged with the theft of

$1.7 million worth of newly printed hundred-dollar bills. Tellers at a bank

in Annapolis, Maryland, became suspicious and telephoned the CID district

office in Baltimore after the individual made several deposits just under

the $10,000 reporting threshold.

• In November 1993 the San Francisco CID district office received a Criminal

Referral Form regarding possible structuring of deposits in order to avoid

having a CTR filed. On the basis of a subsequent investigation by CID and the

U.S. Postal Service, a Post Office employee has been charged with

embezzling over $600,000 from the Postal Service over the past several

years.

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• Telephone calls from two different banks to the Richmond, Virginia, CID

district office reporting that an individual was purchasing cashier’s checks

with cash in amounts just under $10,000 resulted in a major narcotics ring

being exposed. Eventually, 14 individuals were convicted and over

$1.5 million worth of cash, vehicles, and real estate was seized.

• The Houston, Texas, CID district office received a report from a bank that

an individual had deposited more than $12 million in cash during a

4-month period claiming that the money was to be used to open a chain of

13 stores to sell beauty and clothing products. A subsequent investigation

by IRS and the Drug Enforcement Administration resulted in the indictment

of four individuals for trafficking in cocaine.

• In New York City, a 2-year investigation by several federal law

enforcement agencies resulted in the indictment in September 1994 of 30

grocery store owners accused of food stamp fraud. The case was initiated

on the basis of a suspicious CTR.

• A telephone call from a bank to CID agents in Oklahoma City began a joint

investigation that, 2 years later, led to the seizure of over 26 pounds of

heroin at that city’s airport. The estimated value of the drugs was

$20 million. The suspicious transaction originally reported involved two

individuals using cash to purchase cashier’s checks for less than $10,000.

IRS’ Management and

Use of Suspicious

Transaction Reports

Vary Among District

Offices

Reports of suspicious transactions are a source of intelligence data for CID

special agents throughout IRS. As discussed above, districts have used the

reports to initiate a number of major investigations. However, the reports

are not managed from an agencywide perspective. The extent to which

agents in IRS’ 35 CID district offices solicit, process, evaluate, and use the

reports is up to the discretion of the district CID chief and varies from one

district to another. As a result, IRS cannot be certain the reports are being

used to their full potential throughout the agency.

There are no IRS procedures or policies as to how suspicious transaction

reports are to be managed at the district level. The CID Investigative

Handbook offers only the following guidance: “The [district CID chief]

should consider designating specific special agents to be responsible for

responding to financial institutions that provide information on suspicious

currency transactions and for evaluating the information received to

determine if a criminal investigation is warranted.”

During our review, CID management at the national office surveyed the 35

district CID offices to determine local policies regarding the receipt and

evaluation of suspicious transaction reports. The results of the survey

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indicated that the districts differ significantly as to the level of effort spent

evaluating the reports and the amount of emphasis given the initiative by

district management.

CID officials told us that some districts place much more emphasis on

agents establishing a close, working relationship with financial institutions

than do other districts. In these districts, for example, one agent is

designated to spend much of his or her time personally contacting

financial institutions and trade associations to explain the importance of

the suspicious transaction reports. We were told that, typically, the

institutions in these districts will often call the agent personally even

before a report is prepared.

According to CID officials, many of the districts maintain a localized

computer database of every report that is received. This database is then

checked for prior reports when newly received reports are evaluated. Not

all of the districts maintain such a database, however, so that IRS does not

know how many reports have been received nationwide. Without this

information, IRS cannot assess the management of the reports from an

agencywide perspective.

The CID districts also differ on how individual reports are evaluated. We

were told that some districts assign the reports to agents who decide if

further investigation is warranted on the basis of the information in the

report. Other districts have a policy of researching every report against

databases both internal and external to IRS before deciding if an

investigation should be opened.

The districts vary widely on the role the reports play in the initiation of

investigations. From October 1990 to June 1994 CID district offices initiated

over 21,000 cases. On an agencywide basis, about 4 percent of the cases

were initiated as a result of reports of suspicious transactions. Among

individual districts, however, the rate varied from 0 to over 18 percent. CID

officials said that they did not know why the rates varied. In our opinion,

the variance in the rates is an indication that the reports could be receiving

different amounts of emphasis among the districts. Table 3.1 shows the

rates for all of the CID district offices.

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Table 3.1: IRS CID Investigations

Initiated by Suspicious Transaction

Reports, October 1990 Through

June 1994.

CID district office

Total

investigations

initiated

Initiated by

suspicious

transaction

report Percent

Puerto Ricoa 74 14 18.92

Dallas, TX 867 99 11.42

Sacramento, CAb 344 39 11.34

San Francisco, CA 258 27 10.47

Oklahoma City, OK 420 42 10.00

Manhattan, NY 1,016 90 8.86

Las Vegas, NV 269 20 7.43

Laguna Niguel, CA 513 37 7.21

Anchorage, AKb 135 8 5.93

Brooklyn, NY 785 43 5.48

Wilmington, DEb 55 3 5.45

San Jose, CAb 306 16 5.23

Cleveland, OH 613 31 5.06

Philadelphia, PA 604 30 4.97

Los Angeles, CA 652 32 4.91

Seattle, WA 332 16 4.82

Ft. Lauderdale, FL 727 35 4.81

Richmond, VA 582 28 4.81

Newark, NJ 693 29 4.18

Baltimore, MD 458 19 4.15

Phoenix, AZ 389 14 3.60

Denver, CO 620 22 3.55

Honolulu, HIb 114 4 3.51

Pittsburgh, PA 363 12 3.31

Greensboro, NC 754 23 3.05

Indianapolis, IN 455 12 2.64

Buffalo, NY 410 10 2.44

Boise, IDb 86 2 2.33

Hartford, CT 387 9 2.33

St. Louis, MO 499 11 2.20

St. Paul, MN 365 8 2.19

Boston, MA 481 10 2.08

Parkersburg, WVb 155 3 1.94

Louisville, KYb 207 4 1.93

Des Moines, IAb 108 2 1.85

Atlanta, GA 877 16 1.82

(continued)

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CID district office

Total

investigations

initiated

Initiated by

suspicious

transaction

report Percent

Austin, TX 831 14 1.68

Jacksonville, FL 663 10 1.51

New Orleans, LA 418 6 1.44

Detroit, MI 767 11 1.43

Wichita, KSb 148 2 1.35

Houston, TX 480 6 1.25

Portland, ORb 187 2 1.07

Chicago, IL 698 7 1.00

Nashville, TN 610 5 0.82

Cincinnati, OHb 343 2 0.58

Omaha, NEb 95 0 0.00

Aberdeen, SDb 28 0 0.00

Milwaukee, WI 266 0 0.00

Totals 21,507 885 4.11

aIn addition to conducting investigations in the Commonwealth, the Puerto Rico office is also

responsible for conducting investigations overseas.

bThese CID district offices were closed prior to October 1993 and their operations consolidated

into the remaining 35 CID district offices.

Source: GAO analysis of IRS records.

CID officials told us that the majority of CID district offices share suspicious

transaction reports with the Examination function in IRS. Under these

procedures, if CID does not initiate a criminal investigation on a report, the

information will be passed on to tax examiners to use in identifying tax

fraud. IRS does not keep records on how useful suspicious transaction

reports have been in this regard.

Use of Reports of

Suspicious

Transactions by the

States Varies

Substantially

Several states have recognized the value of suspicious transaction reports.

The type of report these states receive, however, differs among the states

so that the information available for state law enforcement agencies to

work with varies considerably. Moreover, no state has access to the

reports on the same basis as do federal authorities.

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Most States Have Limited

Use of Suspicious CTRs on

File With IRS

In July 1993 Treasury Department officials announced the initiation of

“Project Gateway,” a program that would allow authorized personnel in

every state direct access to the database containing all of the Currency

Transaction Reports, including those marked suspicious, at IRS’ Detroit

Computing Center. Under the program, authorized personnel in each state

would be able to access the data through computer terminals linked to the

Center. As of November 1994, 47 states as well as the District of Columbia

had entered into agreements with the Department of the Treasury to

participate in Project Gateway, and a total of 40 states had already begun

operations. Treasury officials told us that agreements with the remaining 3

states were in the final stages of negotiation.

Although access to the data is now direct, states are limited as to what

CTRs—including those marked suspicious—can be accessed. Under

Project Gateway, state analysts must use a specific name to search the

database and can access only those reports filed on the individual or

business named. Consequently, states can use the data only on a reactive

basis—that is, when they already have the name of a suspect. They cannot

use the data on a proactive basis, as CID is able to, for targeting individuals

for investigation on the basis of suspicious transaction reports having

been filed.

Some States Have

Expanded Use of

Suspicious CTRs and Other

Types of Suspicious

Transaction Reports

In response to our survey, 15 states said that they require financial

institutions to report suspicious transactions that might involve money

laundering. Nine of these states said they use the information to initiate

criminal investigations.

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Figure 3.1: States With Suspicious Transaction Reporting Requirements

Connecticut

Maryland

New York

Use reports to initiate criminal investigations

California

Oklahoma

Colorado

Utah

Arizona


Idaho

Nebraska

Illinois

Florida

Indiana

Georgia

Texas

Require but do not use reports

Five of the 15 states that require suspicious transaction

reporting—Colorado, Connecticut, Idaho, Indiana, and Oklahoma—said

they require financial institutions to file a copy of any Criminal Referral

Form filed with the federal regulatory agencies. Officials in these states

told us that the primary reason for receiving copies of the CRFs is to

monitor reports of criminal activity occurring within the institutions. They

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said that they do not use the reports of suspicious customer transactions

as a basis for initiating criminal investigations.

As mentioned in chapter 2, several states have agreements with Treasury

that allow them to receive copies of all CTRs filed within the state on

computer tapes from the IRS Detroit Computing Center. Six

states—Arizona, California, Florida, Illinois, New York, and Texas—are

currently receiving CTRs, including those marked suspicious, on computer

tape.1

 The use of suspicious CTRs by these states varies.

In Arizona, as previously discussed, the Attorney General’s Office also

receives reports of suspicious transactions on CRFs as well as on the state’s

own form. State officials told us that all of the reports are entered into the

state’s own database and used on both a reactive and proactive basis.

Florida is somewhat similar to Arizona in that it requires state-chartered

banks to forward copies of CRFs filed to the state banking department.

Florida officials said that suspicious CTRs received from IRS are put on a

state database and used on a reactive basis. The CRFs, however, are

researched and sent to local law enforcement agencies for further

investigation at their discretion.

New York officials said that they also receive copies of CRFs from

state-chartered financial institutions. These are evaluated along with

suspicious CTRs and those reports of suspicious transactions that merit

further attention are routed to the appropriate law enforcement agency.

California does not require financial institutions to send copies of CRFs to

the state. However, the state is receiving photocopies of the special

reports provided by California financial institutions to IRS’ CID in the

western region (see p. p. 23). California enters these reports onto a

database along with the suspicious CTRs it receives from the Detroit

Computing Center. All of the suspicious transaction reports are used on a

both a reactive and proactive basis by the state.

Illinois and Texas officials told us that neither state receives copies of

CRFs. However, both receive CTRs on magnetic tape from IRS. According to

state officials, each state removes those marked suspicious and researches

and evaluates them. The resulting leads are sent to law enforcement units

in the field for further investigation at their discretion.

1

Although Maryland used to receive CTRs on computer tapes from IRS, it no longer does so.

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Other states receive copies of suspicious CTRs from sources other than IRS.

Although Georgia, Nebraska, and Utah do not receive CTRs on computer

tapes from IRS, each uses suspicious CTRs to some extent to target

individuals for further investigation. Each of these states has a law

requiring banks to provide the state with copies of CTRs filed with IRS. In

addition to receiving copies of all CTRs filed, Georgia requires financial

institutions to telefax copies of those CTRs marked suspicious to the state

banking department. Although Nebraska does not have the capability to

process CTRs filed on magnetic media, the state police receive copies from

financial institutions of those filed on paper and review them for those

marked suspicious. Similarly, an analyst with the Utah state police scans

all CTRs received to identify those marked suspicious. Law enforcement

officials from each of these three states told us that the reports are

reviewed and evaluated and, where warranted, sent to field units for

further investigation.

Recent Initiatives

Would Significantly

Change How

Suspicious

Transaction Reports

Are Made and Used

Concurrent with our review, the Department of the Treasury and the

financial institution regulatory agencies were in the process of reviewing

various aspects of the federal government’s efforts to combat money

laundering. Similarly, as discussed above, IRS’ Criminal Investigation

Division had initiated a survey of how suspicious transaction reports are

used and managed at the district office level. By December 1994, as we

were preparing this report, these efforts had resulted in a number of

proposals and agreements that could have a substantial impact on

suspicious transaction reporting by financial institutions.

For the past several years, a group known as the Interagency Bank Fraud

Working Group2

 has been attempting to consolidate the six separate CRF

forms being used onto a single, standardized form that would be filed with

a single recipient. As previously discussed, financial institutions use the

forms to report several types of criminal activity, including suspected

money laundering and/or attempts to evade currency reporting

requirements. Under current procedures, the institution filing the CRF is

also responsible for sending copies of the form to a number of regulatory

and law enforcement agencies. The purpose for consolidating the forms

and designating a single recipient was to ease the reporting burden on the

financial institutions and to place responsibility for ensuring correct

dissemination of the reports with the government rather than with the

reporting institution.

2

Members of the Group include representatives from the six financial regulatory agencies as well as

the Departments of Justice and the Treasury, the Federal Bureau of Investigation, and the Secret

Service.

Page 34 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 3 

Reports of Suspicious Transactions Are Not

Consistently Used or Managed

In August 1991 the six regulatory agencies signed a Memorandum of

Understanding with Treasury’s Financial Crimes Enforcement Network

(FinCEN)3

 that authorized FinCEN to design, develop, implement, and

maintain a computerized database containing the standardized CRFs. Under

the agreement, financial institutions would file CRFs directly with FinCEN.

In the interim, the Department of the Treasury, in conjunction with a

requirement in 1992 legislation, formed the Bank Secrecy Act Advisory

Group composed of 30 individuals from various state and federal agencies

as well as the private sector. The Advisory Group, which first met in

April 1994, was charged with assessing all of the reporting and

recordkeeping requirements of the act as well as other facets of the

government’s efforts to combat money laundering. One of the issues

discussed during the three meetings held in 1994 was how to facilitate the

reporting of suspicious transactions by financial institutions.

In December 1994, as we were preparing this report, we were informed by

representatives from FinCEN, the Bank Fraud Working Group, and the Bank

Secrecy Act Advisory Group that the following agreements had been

reached:

• The “suspicious transaction” block would be removed from the Currency

Transaction Report and the form would no longer be used to report

suspicious transactions. This action had been taken as part of a general

effort to simplify the form by reducing the amount of information to be

reported on the form.

• A standardized version of the Criminal Referral Form was being prepared

that could be filed either on paper or electronically. The filing instructions

for the form would specify that only one form would be filed, with FinCEN,

rather than copies sent to various federal agencies.

• IRS’ Detroit Computing Center would provide processing services for the

new CRF and also develop and maintain a centralized database of the

reports. FinCEN would serve as database administrator and assure that the

appropriate federal law enforcement agencies have access to the CRF

database. CRFs reporting suspected Bank Secrecy Act violations and/or

money laundering would be made available to the appropriate district

offices of IRS’ Criminal Investigation Division.

• FinCEN was exploring the feasibility of making available to the states those

CRFs reporting money laundering and/or Bank Secrecy Act violations. The

3

FinCEN is a relatively small Treasury agency that was established in April 1990 to support law

enforcement agencies by analyzing and coordinating financial intelligence.

Page 35 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 3 

Reports of Suspicious Transactions Are Not

Consistently Used or Managed

reports would be made available to the states on the same basis as state

access to the reports required by the Bank Secrecy Act.

• The database containing the consolidated CRF would be fully operational

by September 1995.

Also in December 1994 we were informed by officials of IRS’ Criminal

Investigation Division that procedures were being prepared to address

how suspicious transaction reports were to be managed at the district

level. IRS officials said that these procedures would be incorporated into

the CID Investigative Handbook and would help ensure consistent

treatment and use of the reports. Among the areas to be emphasized were

the importance of

• developing and maintaining a working relationship with financial

institutions,

• promptly evaluating the reports received, and

• performing a minimum level of additional research on the reports.

Conclusions Financial institutions are in a unique position to assist law enforcement at

the federal and state levels by reporting suspicious transactions that might

indicate money laundering. Reports of suspicious transactions have led to

the initiation of a number of major investigations dealing with a wide

range of criminal activity. However, the lack of overall direction and

control over the reporting of suspicious transactions has led to a situation

where reports are filed with different agencies on different forms that vary

as to the amount of useful information they contain.

Although IRS has successfully used the reports to initiate a number of

investigations, the management of—and emphasis given—the information

varies among district offices. IRS has no agencywide policies or procedures

regarding how best to solicit, process, and utilize the information. Because

IRS cannot be certain the information is used and managed consistently, it

has no assurance that the information is being used to its full potential

throughout the Service.

Several states have recognized the value of suspicious transaction reports

as a criminal intelligence resource. However, use of the information by

these states is limited compared to federal authorities because the type of

information available to the states differs.

Page 36 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 3 

Reports of Suspicious Transactions Are Not

Consistently Used or Managed

Recent agreements and proposals made by the Department of the

Treasury, IRS, and others are an indication that the problems associated

with how suspicious transactions are reported are being addressed. We

believe that the actions planned, if properly implemented in a timely

manner, will do much to provide for the consistent and centralized

management of the reports that has been lacking.

Agency and Industry

Comments

A draft of this report was provided to the American Bankers Association,

FinCEN, and IRS for comment. The Association provided written comments

on the report (see app. I) in which it said that it believes financial

institutions have an excellent record of cooperating with law enforcement

on the reporting of possible violations of law. It added that this

cooperation should improve even more with the anticipated changes in

suspicious transaction reporting discussed in this report because bankers

will be better equipped to focus on reporting potential criminal violations

rather than routine transactions.

FinCEN provided written comments (see app. II) stating that it found the

report to be comprehensive and accurate.

IRS also provided written comments on the report (see app. III) and said

that it generally agreed with the report’s findings. The comments noted

that, although CID should be allowed maximum flexibility in the use of its

resources, national guidelines are being developed to ensure consistency

in the evaluation and processing of suspicious transaction reports. IRS also

noted that changes are being made to a CID management information

system that will enable CID to better ensure the proper use of suspicious

transaction reports and track its accomplishments in the area.

IRS did take exception with a statement in the executive summary of the

report that describes the use of the IRS database of CTRs and suspicious

CTRs as being reactive. IRS did not believe that the statement recognizes the

proactive value of the data in identifying new targets or initiating new

investigations. In clarifying these comments with IRS officials, we were

informed that, although the word “database” was used, IRS was actually

referring to the individual suspicious CTRs and not the computer database

on which they are maintained.

It was not our intention to portray suspicious CTRs as not having any

proactive value. The statement in question refers specifically to the

database and not to the individual reports on the database. As noted in

Page 37 GAO/GGD-95-156 Suspicious Transaction Reports
Chapter 3 

Reports of Suspicious Transactions Are Not

Consistently Used or Managed

chapter 2 (see p. 17), IRS procedures call for staff at the Detroit Computing

Center to distribute copies of CTRs that have been marked suspicious to

the appropriate CID district offices on a weekly basis. However, as we

point out in chapter 3 (see p. 27), the extent to which these suspicious

CTRs—as well as suspicious transactions reported on Criminal Referral

Forms—are used proactively is up to the discretion of the district CID

chief.

Page 38 GAO/GGD-95-156 Suspicious Transaction Reports
Page 39 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix I 

Comments From the American Bankers

Association

Page 40 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix II 

Comments From the Financial Crimes

Enforcement Network

Page 41 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix III 

Comments From the Internal Revenue

Service

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

Page 42 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix III 

Comments From the Internal Revenue

Service

Now on p. 30.

See GAO comment.

Page 43 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix III 

Comments From the Internal Revenue

Service

The following is GAO’s comment on the Internal Revenue Service’s letter

dated April 26, 1995.

GAO Comment As explained in the report (see p. 28), the percentages of cases initiated

are based on all reports of suspicious transactions no matter what form

was used to make the report. Because IRS is not able to determine if the

reports were made on a Currency Transaction Report or on a Criminal

Referral Form, there is no way to quantify the proactive value of

suspicious Currency Transaction Reports.

Page 44 GAO/GGD-95-156 Suspicious Transaction Reports
Appendix IV 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Darryl Dutton, Assistant Director

Michael L. Eid, Senior Evaluator

Chas. Michael Johnson, Evaluator

Donna M. Leiss, Communications Analyst

Michelle D. Wiggins, Secretary

(181994) Page 45 GAO/GGD-95-156 Suspicious Transaction Reports
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