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37–207 PDF 2007

SUSPICIOUS ACTIVITY AND

CURRENCY TRANSACTION REPORTS:

BALANCING LAW ENFORCEMENT UTILITY

AND REGULATORY REQUIREMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MAY 10, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–30

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

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 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

MELVIN L. WATT, North Carolina, Chairman

LUIS V. GUTIERREZ, Illinois 

MAXINE WATERS, California 

STEPHEN F. LYNCH, Massachusetts 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

CAROLYN MCCARTHY, New York 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ROBERT WEXLER, Florida 

GARY G. MILLER, California 

PATRICK T. MCHENRY, North Carolina 

EDWARD R. ROYCE, California 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 10, 2007 ..................................................................................................... 1

Appendix: 

May 10, 2007 ..................................................................................................... 37

WITNESSES 

THURSDAY, MAY 10, 2007

Baity, William F., Deputy Director, Financial Crimes Enforcement Network 

(FinCEN) ............................................................................................................... 5

Bartlett, Hon. Steve, President & CEO, The Financial Services Roundtable .... 22

Hernandez, Salvador, Deputy Assistant Director, Criminal Investigative Division, National Crimes Branch, Federal Bureau of Investigation, U.S. Department of Justice .............................................................................................. 6 

Hodge, Megan Davis, Director, Anti-Money Laundering, RBC Centura Bank, 

on behalf of the American Bankers Association ................................................ 23

McClain, Scott K., Deputy General Counsel, Financial Service Centers of 

America ................................................................................................................. 26

Menzies, R. Michael Stewart, Sr., President & CEO, Easton Bank and Trust 

Company, on behalf of the Independent Community Bankers of America ..... 28

Mroz, Carolyn M., President & CEO, Bay-Vanguard Federal Savings Bank, 

on behalf of America’s Community Bankers ...................................................... 25

APPENDIX 

Prepared statements: 

Watt, Hon. Melvin L. ....................................................................................... 38

Miller, Hon. Gary G. ........................................................................................ 40

Baity, William F. .............................................................................................. 42

Bartlett, Hon. Steve ......................................................................................... 51

Hernandez, Salvador ........................................................................................ 68

Hodge, Megan Davis ......................................................................................... 76

McClain, Scott K. .............................................................................................. 87

Menzies, R. Michael Stewart, Sr. .................................................................... 97

Mroz, Carolyn M. .............................................................................................. 110

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Watt, Hon. Melvin L.: 

Written responses to questions submitted to William F. Baity .................... 121

Written responses to questions submitted to Hon. Steve Bartlett ............... 127

Written responses to questions submitted to Salvador Hernandez ............. 129

Written responses to questions submitted to Megan Davis Hodge .............. 135

Statement of the California Credit Union League ......................................... 140

(1)

SUSPICIOUS ACTIVITY AND 

CURRENCY TRANSACTION REPORTS: 

BALANCING LAW ENFORCEMENT UTILITY 

AND REGULATORY REQUIREMENTS 

Thursday, May 10, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Melvin L. Watt [chairman of the subcommittee] presiding. 

Present: Representatives Watt, Lynch; Miller. 

Chairman WATT. Let me call the Subcommittee on Oversight and 

Investigations to order, and thank everybody for being here. Good 

morning. I understand it is a little early for us to be convening a 

hearing, but we got thrown a curve ball by the other committee on 

which I sit, the Judiciary Committee. 

I am on that committee also, and we are expected to question Attorney General Gonzales today. We were originally told that hearing would start at 10:00, so we moved ours up to 9:00, thinking 

that there would be some overlap but not a lot, and then they 

moved their hearing up to 9:30. 

So we may not still achieve the desired objective, but we are not 

going to rush through this. We want to give this the attention that 

it deserves. And for that purpose, my ranking member has kindly 

agreed to limit the opening statements to just a brief opening statement by myself, and to 5 minutes by Mr. Miller, so we will get 

started, and I will put myself on the clock. 

We meet this morning to explore suspicious activity and currency 

transaction reports which are required under the Bank Secrecy Act 

of 1970. This is the first in what is probably going to be a series 

of hearings to explore suspicious activity reports and currency 

transaction reports, the real-life experiences of financial institutions in complying with these reporting requirements, and the utility to law enforcement that these reports have. 

First, I want to welcome all of the witnesses and thank them for 

taking the time today to appear before this subcommittee on this 

very important issue. And I want to say a special thanks to Megan 

Hodge, who is the director of anti-money laundering for RBC 

Centura Bank from my home State, recognizing that all politics is 

local, of course. 

2

Since 9/11, there has been increased focus on rooting out financial crimes, including terrorist financing and money laundering, 

and rightly so. As a result of this increased emphasis on detecting 

financial crimes, financial institutions have had to assume a much 

larger role, becoming full partners with law enforcement. 

Suspicious activity reports and currency transaction reports are 

just two of the very important ways that the financial industry has 

partnered with law enforcement. Today there are millions of these 

reports filed annually with the Financial Crimes Enforcement Network (FinCEN). Deputy Director Baity of FinCEN is here this 

morning and we look forward to his testimony. 

In this hearing, we hope to fully explore suspicious activity and 

currency transaction reporting under the Bank Secrecy Act, and 

figure out what works well and what doesn’t, what reports are useful and which ones not so useful, if any of them are not. 

We know that under the Bank Secrecy Act, financial institutions 

must report all transactions of $10,000 or more on a currency 

transaction report and report all suspicious activity on a suspicious 

activity report. What we do not yet fully understand is how financial institutions, including depository institutions, money services 

businesses, and others, actually comply with these reporting requirements, and if the guidance given to them by the regulators is 

appropriate and effective. 

We also want to explore the practical effects of Bank Secrecy Act 

reporting. How do financial institutions detect suspicious activity—

through the use of automated computer systems, human intelligence, or some combination? Are there increased costs to financial 

institutions of Bank Secrecy Act compliance, and are those costs 

passed on to consumers? How do financial institutions train their 

staff to recognize and report suspicious activity? Is better guidance 

needed? 

We also want to explore the utility of increased suspicious activity reports and currency transaction filings to law enforcement. Is 

law enforcement receiving robust, useful data from FinCEN and financial institutions? Are there changes that law enforcement would 

like to see in the FinCEN guidance to financial institutions or in 

the suspicious activity report form itself? 

The point of this hearing is to elicit information. Understanding 

the full scope of the Bank Secrecy Act reporting, particularly suspicious activity reports and currency transaction reports, is a bipartisan objective. We do not have any preconceived ideas as to the 

utility of these reports, or have in mind any particular legislative 

action. Rather, we are here to learn and benefit from the witnesses’ 

collective knowledge and experiences with Bank Secrecy Act reporting. 

We all must recognize that increased Bank Secrecy Act reporting 

does have some cost. Financial institutions spend millions of dollars a year in compliance, some of which undoubtedly gets passed 

on to consumers. Americans’ privacy and civil liberties must be balanced with assisting law enforcement. 

We all seek to equip law enforcement with the tools they need 

to keep America safe, especially after 9/11. We want the information they receive, however, to be robust and effective. 

3

With that, I will conclude and recognize the gentleman from 

California for 5 minutes, Mr. Miller, my ranking member. 

Mr. MILLER. Thank you, Chairman Watt. 

We started talking about this probably a month ago—the issues 

associated with the Bank Secrecy Act and how it was applied—and 

my staff and I have been involved in quite a few meetings and 

reading information. We have met with FinCEN, the bankers, and 

others who are involved in check cashing, as well as the FBI. 

What has come out of this is obviously there is a lack of communication that is really part of the system. I mean, nobody knows 

what anybody else is doing, which is probably the best way to have 

something like this happen when you are dealing with financial institutions that are somewhat being used to hide money or transfer 

money that is being used for some illegal purpose. 

But you try to look and you say, are the banks being overly burdened in what they are doing? Is there a need for what they are 

doing? Are there rules that properly define what they are supposed 

to do? And I think this hearing is good for one reason. I think we 

are going to ferret a lot of that out and determine what is working 

and what is not working. I had asked some questions on the $10,000 limit, which goes 

back to the 1970’s, and what would happen if you changed that? 

And it was very interesting coming out of the conversations that 

for every $2,000 you increase that by, you lose a lot of information 

out there that otherwise is needed by law enforcement. And the 

numbers were rather surprising when you looked at how many 

cases were generated by this information that is being provided. 

It is rather secretive, in a way, because it is law enforcement and 

they are trying to determine who is doing what in this country illegally, if terrorism is occurring, if money laundering is occurring, or 

other crimes are being committed through the passage of currency 

in the form of cash. 

And yet we want to look at our financial institutions and say, are 

we providing too much of a burden on them? Is there such a burden on a teller that when a teller does a normal transaction that 

teller might consider to be a normal process of his or her job, that 

they are filing information just out of fear rather than basically 

complying with what the rules might be? 

I think we are going to make a lot of information public today, 

and it is going to be able to maybe generate some effort on our part 

to put these organizations and groups together to talk and see if 

there is a better way the system could operate, if there are things 

that could be changed or modified that don’t impact the result of 

what we are trying to accomplish here. 

Having met with all the parties involved, I have come to the conclusion that there is substantial information being generated that 

is really benefitting the safety of this country, and in many ways 

stopping crime that is occurring that might not otherwise be 

caught in other fashions. 

And yet when I have talked to the individuals who are being required to do all the correspondence and apply with the system as 

it is structured, they feel in many cases it is a burden being placed 

on them. Many of the requirements are vague and ambiguous. 

They are not sure what they have to do, what they don’t have to 

4

do; that many of the transactions are being dealt with out of more 

of a cause created by fear rather than a process that they truly understand. 

On the FinCEN Web site, it states, ‘‘Working together is critical 

in succeeding against today’s criminals. No organization, no agency, no financial institution can do it alone.’’ I agree with that, and 

I am pleased that FinCEN is here today, as well as the bankers 

and check cashers and other groups that are here, and the FBI and 

other law enforcement, that everybody can talk. 

We can come away, I believe, with a better understanding of 

what we are trying to do here, what we are doing, and the benefit 

of that. And yet we might look at the structure and say, there are 

certain things we can do to streamline it, to make it more userfriendly for the banks and other agencies that have to comply with 

this regulation, yet do that in a fashion that does not negatively 

impact the positive information we are getting from the system 

that our law enforcement agencies will be able to work on today. 

So I commend you for holding this hearing. When you first 

talked to me about it, I kind of scratched my head and said, yes, 

I have heard a little bit about this in the past from some, and it 

might be interesting to get the information. The more we have researched it, and the more we have talked, I think this hearing is 

going to be very appropriate, and I believe we will come away, 

hopefully, with a resolution that makes it better. 

Thank you. I yield back. 

Chairman WATT. Thank you, Mr. Ranking Member. And without 

objection, all members’ opening statements will be made a part of 

the record. There are other members who will be joining us in 

progress. We are up a little early this morning for the members, 

I think. But that is not an indication that they are not interested. 

They will be here. 

We have two panels of witnesses this morning, the government 

witnesses and then the private sector witnesses on panel two. And 

with their permission, I will abbreviate their introductions and assure them that I will put their full curriculum vitae into the record, 

but in the interest of time, just do a very brief introduction now. 

On our first panel, we have William F. Baity, Deputy Director of 

the Financial Crimes Enforcement Network, commonly known as 

FinCEN. Did I pronounce Baity right? That is the way we pronounce it in North Carolina. Got it. 

We also have Salvador Hernandez, Deputy Assistant Director, 

Criminal Investigative Division, National Crimes Branch of the 

FBI. 

In the interests of time, and without objection, your full written 

statements will be made a part of the record, and each of you will 

be recognized for 5 minutes for a summary of your written testimony. We won’t be too vigorous with that, but try to stay as close 

to the 5 minutes as you can and we will tap when you are in that 

range and getting out of bounds too far. 

Mr. Baity, if you will proceed. You are recognized for 5 minutes, 

or somewhere in that neighborhood. 

5

STATEMENT OF WILLIAM F. BAITY, DEPUTY DIRECTOR, 

FINANCIAL CRIMES ENFORCEMENT NETWORK (FinCEN) 

Mr. BAITY. Thank you. Good morning, Chairman Watt, Ranking 

Member Miller, and distinguished members of the subcommittee. 

On behalf of our director and the men and women of the Financial 

Crimes Enforcement Network, FinCEN, we appreciate this opportunity to appear today to discuss the utility of the information provided by the financial institutions in accordance with the provisions 

of the Bank Secrecy Act, or BSA. 

As the administrator of the BSA, FinCEN continually strives to 

maintain the proper balance between the requirements that are 

imposed upon the financial services industry and the need to insure an unimpeded flow of important information to law enforcement and other officials who need this information. 

This balancing effort must be ongoing, and it must be continuously reexamined. We take this responsibility very seriously, and 

we look forward to working with this subcommittee in our united 

fight to safeguard the U.S. financial system against all types of illicit financial activities. In this regard, our director has tasked everyone in the agency to take a fresh look to help reexamine the efficiencies and the effectiveness of our regulatory regimes. 

I am also honored to appear today with Mr. Salvador Hernandez, 

Deputy Assistant Director for the Criminal Investigative Division 

of the FBI. Our partnership with the FBI, as well as other law enforcement agencies, allows for a seamless flow and utilization of 

the BSA information in our united fight against terrorist financing 

and money laundering. 

As I discussed in greater detail in our written testimony, 

FinCEN works to help safeguard the financial industry from illicit 

financial activity. This is achieved through a broad range of interrelated activities, including: administering the Bank Secrecy Act; 

supporting law enforcement, intelligence, and regulatory agencies 

through the sharing and analysis of the information received; and 

building global cooperation and technical expertise among financial 

intelligence units throughout the world. 

All of the information received pursuant to the BSA is critical to 

FinCEN’s ultimate goal of improving the transparency within the 

U.S. financial system. The BSA data received through currency 

transaction reports, suspicious activity reports, and other forms has 

proven to be highly valuable to our law enforcement customers who 

use this information on a daily basis as they work to investigate, 

uncover, and disrupt the vast networks of money launderers, terrorist financiers, and other criminals. 

However, FinCEN is a user in its own right. FinCEN’s analysis 

and liaison division, which is responsible for analyzing BSA data 

and other information, produces analytical products supporting domestic law enforcement, intelligence, and foreign financial intelligence units. 

Our analytical products range in complexity from traditional suspect-related reports to policy-level assessments of financial criminal 

threats in particular areas. Last year, by way of example, FinCEN 

produced numerous analytical products which consist of geographical threat assessments, analysis of money laundering, illicit 

financing methodologies, analytical support for major law enforceVerDate 0ct 09 2002 10:36 Aug 28, 2007 Jkt 037207 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\37207.TXT HFIN PsN: TERRIE
6

ment investigations, specific financial transactions tutorials, and 

analysis of the Bank Secrecy Act compliance systems. 

Specific examples included our study on mortgage loan fraud, a 

report on domestic shell company abuse, and domestic geographic 

threat assessments based on requests from the Texas Department 

of Public Safety and the Arizona Attorney General’s Office. We believe these types of analytical products, coupled with other sources, 

provided added value and understanding on a broader level regarding the individual reports of information that are provided under 

the BSA. 

Our efforts also reflect the understanding that we must address 

these issues from an international perspective. FinCEN, a founding 

member of the Egmont Group of financial intelligence units, works 

to strengthen the international sharing of relevant financial investigation. 

We, along with our FIUs, as they are called, work in a combined 

operational manner to better understand international threats to 

our responsive financial sectors. The Egmont Group has grown in 

10 years from approximately 14 jurisdictions to now over 100 countries and jurisdictions having financial intelligence units like 

FinCEN. 

In conclusion, Mr. Chairman, we are grateful for your leadership 

and that of other members of the subcommittee on these issues, 

and we stand ready to assist you in your continuing efforts to ensure the safety and soundness of our financial system. Thank you 

for the opportunity again to be here today, and I look forward to 

discussing these very important issues with the committee this 

morning. Thank you. 

[The prepared statement of Mr. Baity can be found on page 42 

of the appendix.] 

Chairman WATT. You have set a tremendous precedent, ending 

right on 5 minutes. That is going to be a hard act to follow, Mr. 

Hernandez. But you are recognized for 5 minutes, or somewhere in 

that neighborhood, also. 

STATEMENT OF SALVADOR HERNANDEZ, DEPUTY ASSISTANT 

DIRECTOR, CRIMINAL INVESTIGATIVE DIVISION, NATIONAL 

CRIMES BRANCH, FEDERAL BUREAU OF INVESTIGATION, 

U.S. DEPARTMENT OF JUSTICE 

Mr. HERNANDEZ. Good morning, Mr. Chairman, Ranking Member 

Miller, and members of the subcommittee. On behalf of the Federal 

Bureau of Investigation, I am honored to appear before you today 

to discuss how the FBI utilizes information obtained from the private financial sector. 

Chief among the investigative responsibilities of the FBI is the 

mission to proactively neutralize threats to the economic and national security of the United States of America. Whether motivated 

by criminal greed or radical ideology, the activity underlying both 

criminal and counterterrorism investigations is best prevented by 

access to financial information by law enforcement and the intelligence community. 

The FBI considers this information to be of great value in carrying out its mission to protect citizens of this country, and over 

7

the past 5 years, we have made significant advances in utilizing 

this information to carry out that mission. 

In the ‘‘criminal greed’’ model, the FBI utilizes a two-step approach to deprive the criminal of the proceeds of his crime. The 

first step involves aggressively investigating the underlying criminal activity, which establishes the specified unlawful activity requirement of the Federal money laundering statute, and the second 

step involves following the money to identify the financial institutions used to launder proceeds of criminal activities. 

In the counterterrorism model, the keystone of the FBI’s strategy 

against terrorism is countering the manner in which terror networks recruit, train, plan, and effect operations, each of which requires a measure of support. The FBI established the Terrorist Financing Operations Section, or TFOS, of the Counterterrorism Division on the premise that the required financial support of terrorism inherently includes the generation, movement, and expenditure of resources, which are oftentimes identifiable and traceable 

through records created and maintained by financial institutions. 

The analysis of financial records generated by the private financial services sector provides law enforcement and the intelligence 

community with real opportunities to proactively identify criminal 

enterprises and terrorist networks and disrupt their nefarious designs. 

Money laundering has a significant effect on the global economy 

and can contribute to political and social instability, especially in 

developing countries or those historically associated with the drug 

trade. The International Monetary Fund estimates that money 

laundering could account for 2 to 5 percent of the world’s gross domestic product. 

In some countries, people eschew formal banking systems in 

favor of informal banking transfer policies. Systems such as 

hawalas or trade-based money laundering schemes, and the Colombian black market peso exchange, which the Drug Enforcement Administration estimates is responsible for transferring $5 billion in 

drug proceeds per year from the United States to Colombia, are 

chief among them. 

Hawalas are centuries-old remittance systems located primarily 

in ethnic communities and based on trust. In countries where modern financial services are unavailable or unreliable, hawalas fill the 

void for immigrants wanting to remit money home to family members, and unfortunately, for the criminal element to launder the 

proceeds of illegal activity. 

There are several more familiarized venues that criminals use to 

launder the proceeds of their crimes, the most common of which is 

the U.S. banking system, following by cash-intensive businesses 

like gas stations, convenience stores, offshore banking, shell companies, bulk cash smuggling operations, and casinos. 

Money services businesses such as money transmitters and 

issuers of money orders or stored value cards serve an important 

and useful role in our society, but are also particularly vulnerable 

to money laundering activities. A recent review of suspicious activity reports filed with the Financial Crimes Enforcement Network 

indicated that a number of significant money services businesses’ 

filings involved money laundering or structuring. 

8

The FBI’s pending money laundering cases include examples of 

proceeds generated from criminal activities such as organized 

crime, drug trafficking, fraud against the government, securities 

fraud, health care fraud, mortgage fraud, and domestic and international terrorism. 

By taking a two-step approach to these investigations, step one 

being the investigation of the underlying criminal activity, and step 

two being following the money, the FBI has made significant inroads into identifying the financial infrastructure of the domestic 

and international criminal or terrorist organizations. Once the underlying criminal activity is identified and the financial infrastructure has been discovered, the FBI has aggressively applied the 

asset forfeiture laws in order to seize and forfeit the proceeds of the 

illegal activity. 

In terrorism investigations in particular, access to financial information significantly enhances the ability of law enforcement and 

members of the intelligence community to effectively counter 

threats. The lack of complete transparency in the financial regulatory system is a weakness on which money launderers and financiers of terrorism rely to reap the proceeds of their crimes and 

to finance terrorist attacks. 

Limited access to financial records inhibits law enforcement’s 

ability to identify financial networks and financial activities. Efforts to detect terrorist activity through financial analysis are further complicated by the fact that the funding of terrorism may differ from traditional money laundering because funds used to support terrorism are sometimes legitimately acquired, for example, 

charitable contributions and the proceeds of legitimate businesses. 

Overcoming these challenges so that we can prevent acts of terror has increased the importance of cooperation with our partner 

law enforcement agencies, the intelligence community, and the private financial and charitable sectors. 

If there is any doubt that law enforcement vigorously and 

proactively utilizes BSA data, and especially SARs, I would like to 

dispel that doubt right now. Federal law enforcement agencies review and utilize SARs in a proactive manner to identify both potential money laundering cases as well as money laundering trends. 

Moreover, as indicated in the 2007 National Money Laundering 

Strategy report that was issued last week, law enforcement agencies do not review the SARs in isolation. The Departments of Justice, Treasury, and Homeland Security encourage the formation of 

interagency SAR review teams to review and discuss the SARs in 

a coordinated manner in order to exchange information and avoid 

duplication of effort. 

There are 80 SAR review teams operating across the country 

analyzing BSA data to identify evidence of financial crimes and 

money laundering. In many cases, these groups include representatives from State and local law enforcement. The investigations resulting from these task forces frequently result in successful investigations of money laundering, fraud, drug trafficking, and other offenses. While we are limited in our ability to discuss such cases 

openly because of the confidentiality requirements surrounding 

SARs, we would welcome the opportunity to provide you with examples of such successful investigations. 

9

In conclusion, BSA data is invaluable to the FBI’s 

counterterrorism efforts as well as our more traditional criminal investigations. Our experience shows that terrorism activities are relatively inexpensive to carry out and that the utilization of data obtained pursuant to the BSA provides significant operational uplift. 

The FBI is committed to collaborating with the committee and 

Congress to ascertain whether certain categories of the BSA can be 

reworked without harm to our investigative capabilities. The GAO 

is currently studying this issue, with a report due in early 2008, 

and the FBI has been an active participant in this study. 

However, to alter the current BSA reporting requirements without careful study to determine the range of implications could be 

a significant setback to investigative and intelligence efforts relative to both the global war on terrorism and traditional criminal 

activities. Thank you. 

[The prepared statement of Mr. Hernandez can be found on page 

68 of the appendix.] 

Chairman WATT. Thank you to both of the witnesses for your testimony. 

The members of the subcommittee will now be recognized for 5 

minutes each for questioning, and if we need to, we will go back 

for a second round. I will recognize myself for 5 minutes of questioning. 

I have heard some pretty general testimony this morning, and I 

still am not sure I understand much about the underlying objectives that we are here for. First of all, I need to understand better 

the interface between the two agencies that you are here representing, FinCEN and the FBI, or FinCEN and other parts. 

Mr. Baity, FinCEN is under which Department? 

Mr. BAITY. We are a bureau of the Department of the Treasury. 

Chairman WATT. And do these SARs and CTRS come to your 

agency, or do they go to the Department of Justice? How does that 

work? 

Mr. BAITY. If I can, let me take you through the process. If a financial institution, which is covered pursuant to our regulatory authority, either files a currency transaction report or a suspicious activity report or another BSA report, that information is placed on 

forms that have been designed. Those forms are then put into a 

data system, which is maintained at the IRS ECC complex in Detroit on our behalf. 

We then ensure that the information is made available to appropriate law enforcement, which is done in several ways. In the case 

of the FBI and other Federal law enforcement agencies, it is done 

through a bulk download, where that information is provided to 

them in bulk. 

We also have arrangements with other agencies and State law 

enforcement where they have the ability to go into that data set, 

based on guidelines and procedures which we have established, to 

get information that they may be interested in that regard. 

And so through a myriad of ways, we provide it to a range of law 

enforcement pursuant to our rules of dissemination of the information. 

Chairman WATT. So FinCEN is kind of a clearing house for information. You get the suspicious activity reports and currency transVerDate 0ct 09 2002 10:36 Aug 28, 2007 Jkt 037207 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\37207.TXT HFIN PsN: TERRIE
10

action reports, you put them into a database, and then you make 

that information available to law enforcement agencies. Do you do 

any law enforcement yourself? 

Mr. BAITY. Well, as I stated, we do a couple of things. First of 

all, let me go back to your question. Yes, I think your characterization is correct. We do ensure that the information is provided to the 

appropriate law enforcement agencies. 

But the information from FinCEN’s standpoint is also valuable 

for our use because, as I indicated, we are looking at the information on a broader base, a macro level, to see what information we 

can glean. Some of our analytical products—for instance, the product that we recently gave to the Texas Department of Public Safety 

was a study based on all of the information as it related to movement of currency, and suspicious reporting along the Texas border, 

and it allowed them to basically make policy decisions about allocating resources in the right places. 

We also use the information to provide actual threat assessments. We are in the process of completing one for Ohio, where 

they can look to see money laundering trends and patterns. And we 

also use the information to provide guidance back to the financial 

sector that are filing these reports to illustrate patterns of information and various statistics, so we use the information ourselves. 

Chairman WATT. All right. Now, you had in 2006 17,600,000 

SARs or CTRs go into some system. I am still trying to figure out, 

where is that information going? Is it coming to FinCEN and going 

into a database? Does FinCEN itself use any of that information 

for investigative or prosecutorial purposes, or is that further downstream with the people that you provide the information to? Do you 

do any law enforcement? Do you prosecute anybody? 

Mr. BAITY. No. We are not a law enforcement agency. We are a 

law enforcement support agency. For instance, there are several 

ongoing matters with, for instance, the FBI and other law enforcement where they will come to FinCEN and our analysts will help 

them understand the data. 

Chairman WATT. But you don’t prosecute anything? 

Mr. BAITY. No, sir. 

Chairman WATT. Okay. And so the information that you get is 

gross information for your purposes, for the purposes of doing the 

1,284 basic reports that you described in your testimony and the 

176 complex reports that you described in your testimony. Is that 

information—that is gross information you are using. It is the cumulative information, the statistical information, rather than specific case information, specific SARs or CTRs. Is that right? 

Mr. BAITY. That is correct for the majority, even though in some 

of the requests, we are actually looking at the specific SARs to give 

that information back to the requester. 

Chairman WATT. All right. My time is expired. I will chase this 

on down the chain in the next round of questions, and I will now 

recognize the ranking member for 5 minutes for questions. 

Mr. MILLER. Thank you. To follow up on this, when the forms are 

completed—how long does that take, to complete the forms before 

they are put in a databank? 

11

Mr. BAITY. From the time that the forms are actually received, 

there are approximately 10 days before they are actually put into 

the database. That is the outside. 

Mr. MILLER. You said one bank was concerned that this was not 

really being utilized because they had received one of the forms 

back 8 months after they made application that it wasn’t filled out 

completely. And their confusion was if it was important, why would 

it take 8 months? 

Mr. BAITY. I am not— 

Mr. MILLER. Was this an unusual situation? 

Mr. BAITY. I think that is unusual. It could have occurred as part 

of a regulatory oversight, when the examiner looked at it and 

asked a question. But normally, when the information comes in to 

FinCEN, in essence, basically it is in the database within 10 working— 

Mr. MILLER. So if it is not complete, it is caught at that point 

and the bank is notified? 

Mr. BAITY. Normally, there is a process to go back to the institution, yes. 

Mr. MILLER. Now, when everything is in the databank, is there 

any portion of that that is automatically forwarded to any law enforcement agencies, like the FBI would immediately get it, or do 

they just have access to that databank? 

Mr. BAITY. Well, different agencies—as I mentioned, we have different ways in which we deliver the information. But normally, 

when I say download, every day a different completed data set of 

new information is put out, and those agencies that are allowed to 

go in and extract it in bulk can pick it up immediately, just like 

FinCEN does. 

Mr. MILLER. A question for Mr. Hernandez with the FBI. As you 

see the process that occurs and this information goes to the 

databank, is that the best process that you can see available as far 

as your availability of this information? 

Mr. HERNANDEZ. We receive most of that information by bulk 

download, as Mr. Baity has indicated. It is electronically sent to us, 

forwarded to us. We immediately match it with our investigative 

data warehouse and our FBI database. 

Mr. MILLER. Is that these 80 different partnership groups out 

there that are working on this? 

Mr. HERNANDEZ. No. Those would actually be human beings getting together to talk about what they have in the way of SARs. But 

our investigative data warehouse and our other database systems 

are matched against the information that comes in from FinCEN 

on the SAR reports, CTRs, and immediately put to use. So in my 

view, the electronic transfer of that information is the most efficient way to do business. 

Mr. MILLER. Now, you have 17,600,000 reports a year. Are these 

matches oftentimes done by a computer matching with a name, or 

do you have to try to have individuals go through this information 

and try to specifically review it to see if there is any applicability? 

Mr. HERNANDEZ. Currently, most of those matches are made by 

computer, by links between what we have in our databases and 

what comes in. And that is an important point because not so 

many years ago, before our databases were as robust as they are 

12

now, most of that matching had to be done by hand. And it was 

a difficult process. You can imagine the kinds of numbers that 

come into the typical field office. They are coming in by field office 

based on where the activity occurred. 

Now the process is much more efficient, and much more streamlined, so we are able to make use of far greater numbers of SARs 

now than we were even several years ago. In fact, it is interesting 

that the issue continues to percolate the way it has over the years. 

In reality, we make much better use of the SARs in spite of the 

fact that there are many of them, much more of them, now than 

we did, as I said, just years ago because of the systems that we 

have in place. 

Mr. MILLER. The workload for individuals actually increased dramatically because of the availability of the technology you have to 

focus on the compliance that you receive that are most beneficial 

to you as far as they are applying to case work? 

Mr. HERNANDEZ. Right. We actually have done some things at 

the headquarters level to increase, even more than we currently 

have, our ability to analyze SARs through a SAR exploitation product that we are working with our directorate of intelligence on that 

is in the process of being sent out to the field so that roles are 

clearly defined, who will do what with SARs when they come in. 

But again, to reiterate, the use we make of them now is far more 

comprehensive, far greater than it was even years ago. 

Mr. MILLER. There have been some comments from individuals 

I talked to who suggested that perhaps a working group should be 

organized amongst different agencies to see if we could make this 

process work better. But you currently have the Bank Secrecy Act 

Advisory Group that is in place. How successful has that been, and 

could it be improved upon? 

Mr. BAITY. Well, we think the Bank Secrecy Act Advisory Group 

has been extremely successful. It is a place where we can bring together—in fact, we will be meeting next week with that group—

where we bring together all of the industries that are affected by 

our regulatory regime, law enforcement and the regulators, to discuss the issues that are before them. 

Mr. MILLER. How often do you meet? 

Mr. BAITY. We meet twice a year. And that has been in existence 

now since before 1995, and with membership changing. But it has 

been a place where we have been able to address many of the 

issues collectively, and I think it has been successful because it allows us to get a full understanding of the concerns of the financial 

sector. 

Mr. MILLER. Well, I see my time has expired. I don’t know when 

it expired. But thank you very much. 

Chairman WATT. I am not being all that rigorous about it. We 

will keep going back and forth, so if you have a question you want 

to get in. Let me recognize myself for 5 more minutes, and we will 

keep this going as long as we think it is productive. 

Mr. Hernandez, I am going to approach this from the other end 

of the spectrum. You are the recipient of this information in some 

form downstream from FinCEN. Does the FBI get 17.6 million 

CTRs or SARs, or do you get just the bulk information? What form 

does this information come to you in? 

13

Mr. HERNANDEZ. I am not certain that we get 17 million, that we 

get everything that FinCEN gets, because FinCEN may be parceling that out to individual agencies. I would suspect that we get 

most of that since our jurisdiction is so broad. 

Chairman WATT. Maybe I should ask Mr. Baity that, then. Do 

they get 17.6 million reports, too? 

Mr. BAITY. To all of the agencies who have access, they have the 

same access to all of the records. 

Chairman WATT. So basically FinCEN is dumping this into an 

FBI computer. FinCEN has a computer that has the information, 

and it dumps it into the FBI’s computer daily? 

Mr. BAITY. We post it daily, and then there is a process by which 

the FBI and others electronically come and pull it out into their 

system. 

Chairman WATT. Pull it out selectively or just dump it? 

Mr. BAITY. It is made available to them to pull the whole data 

information. 

Chairman WATT. And does the FBI pull the whole data information, Mr. Hernandez, that you are aware of, or is it selective in 

what it pulls? 

Mr. HERNANDEZ. Well, the information would be pulled based on 

the field office where the activity occurred. For example, if the entire bulk is sent to everyone, Cincinnati at least initially would be, 

if it is in Cincinnati, the only field office that would be interested 

in those. And so it would pull those down that are of interest to 

it because the incident occurred there. 

Chairman WATT. But the FBI gets the whole pool in one location 

somewhere, or is it various offices of the FBI pulling from 

FinCEN’s database? Do we know that? 

Mr. HERNANDEZ. I don’t know that. 

Chairman WATT. Does anybody who is accompanying you know 

that? 

Mr. HERNANDEZ. I am told that we get monthly downloads of everything from FinCEN. It goes right into our investigative data 

warehouse. 

Chairman WATT. Monthly downloads? So this information might 

be 30 days old when you get it? Is that what you are saying? 

Mr. HERNANDEZ. Yes. It could be. 

Chairman WATT. Okay. Mr. Baity, State agencies that wanted 

access, are they pulling down the whole download? Is anybody pulling down the whole database that FinCEN has, or are they just 

going into it selectively? 

Mr. BAITY. There are two kinds. The bulk download provides the 

capability to get the entire download. 

Chairman WATT. We have established that once a month, the 

FBI gets a bulk download. Is there anybody else who is getting a 

bulk download? 

Mr. BAITY. There are other agreements with other law enforcement. 

Chairman WATT. Who? 

Mr. BAITY. Well, we have an agreement with DEA. We have an 

agreement with the Secret Service. The IRS has the ability because 

the data is at— 

Chairman WATT. I want to know whether they are getting it— 

14

Mr. BAITY. Yes, sir. They are getting it. 

Chairman WATT.—not whether they have the ability because it 

sounds to me like we have duplicate technology systems out here 

that end up getting exactly the same information. The whole bulk 

information DEA gets, the FBI gets once a month. You have it in 

your computer. Every time we build a computer system that can 

take 17 million pieces of information into it, it costs the taxpayer 

some money, and I am just trying to find out what is being done 

with this stuff. 

Mr. BAITY. Well, if I can, let me—in terms of the bulk download, 

that information is made available to the Federal law enforcement 

agencies so that they can directly pull it down. The reason why it 

is available in that regard is because they have different uses of 

it because of their investigatory authorities. We do not determine 

that, so we make that available. 

The other thing we do, though, is that we make it available—you 

asked the question— 

Chairman WATT. But might it be more efficient, if they were getting the information directly as opposed to your— 

Mr. BAITY. Well, they are getting it directly. They are getting it 

as FinCEN’s data, and they are getting it directly by us putting it 

out. Because they have different systems in how they bridge the information, we have built a system so they can interface to get the 

data. 

Chairman WATT. Mr. Hernandez, are there situations where this 

30-day delay in getting a bulk download has any law enforcement 

implications? 

Mr. HERNANDEZ. That point has actually been clarified for me. 

We have access to the information posted by FinCEN as it is entered. So we can go in and look essentially on a daily basis for information. We get a biweekly or monthly download, a dump, essentially, of all of the information. So depending on what it is we are 

doing, if we are looking for something in particular, we can look for 

it on the same day it is entered. 

And Mr. Chairman, I understand from your questions and from 

some of the statements early on, that some of the concern has to 

do with what is happening with 17 million records. 

Chairman WATT. That is where I am going to get to next. That 

is the third round of questions. But my 5 minutes has run out 

again, so I will go to Mr. Miller for 5 additional minutes. 

Mr. MILLER. Thank you. Taking up where we left off, you said 

this bank advisory group meets about twice a year. And based on 

meetings I had with the Financial Services Roundtable, the American Bankers Association, the American Community Bankers Association, the Financial Services Centers of America, and the Independent Community Bankers Association, there is a lot of confusion amongst the groups who have to comply with the regulations. 

And there are some who think that some examiners basically 

have told them that they have to file a certain amount or number 

of CTRs or SARs, or else they will be written up for lack of compliance. I guess it might be like that every community has their own 

local police officer who writes more tickets than everybody else, and 

everybody knows that one person by name. 

15

I don’t know if that is happening out there. But is there some 

way that you can see we can improve upon this process, maybe 

meeting more than twice a year or outreach or something to more 

involve the groups that have to comply with the regulations? 

Mr. BAITY. Let me, if I can, try to answer the specific example 

you raised first. 

The steps we have taken in conjunction with the other bank regulators is to come together and basically put together uniform 

guidelines on examinations to basically help alleviate the issue 

raised that one examiner is far out front or different than the normal. So we put that together as a manual which is being taught 

to all examiners to try to bring consistency to the examination 

process. 

We think that right now, even though we are looking at everything anew, that the current frequency of the meetings makes 

sense. And one of the advantages, as we rotate new industries 

under our regulatory authority, they are brought into the Bank Secrecy Act advisory group for discussions as we go forward. 

Mr. MILLER. One repeated statement from all of the organizations was that the guidelines are vague and ambiguous to such a 

degree that a teller is put in a position where they are almost 

afraid not to file a certain type of forms even though they might 

not necessarily be applicable because they are afraid that it can 

come back on them if they don’t. 

Is there something we can do to clarify some of this? 

Mr. BAITY. Well, again, what FinCEN has done is to try to participate in the examination training to make sure that they understand, from an examiner’s point, what is expected under the regulation. We meet with them regularly. We have put out guidance on 

that regard. So we not only meet with the regulators, but are trying to increase the guidance that we are putting out to the financial sector as well as to what are the expectations so that everyone 

is at least hearing the same message in terms of what we are trying to provide. 

Mr. MILLER. Mr. Hernandez, is there any alternative to the current system of CTRs and SARs that you see out there that would 

be as beneficial as the current system we have? 

Mr. HERNANDEZ. For the purposes of law enforcement and the 

FBI especially, 30-plus years of the Bank Secrecy Act CTR/SAR requirement has yielded tremendous results in terms of the initiation 

of investigations, enhancing of investigations. 

I don’t see an alternative system. The FBI has always been willing to discuss, and I think has, in individual contexts with banking 

institutions and certainly as members of groups of this sort, ways 

that we might streamline the process or ways we might identify 

things that aren’t particularly helpful to law enforcement. 

But I don’t see an alternative. The value coming from CTRs and 

from SARs is simply too great. We understand that not every single CTR and every single SAR is going to yield an investigation 

and a conviction. But that is not different than anything else we 

do. We don’t not look at what may not be a smoking gun lead on 

a terrorism case because we think it is not going to lead us to 

something important. We look at those things. 

16

And so we look at everything that comes in. We make connections where we can. And time has proved that we do make connections through joining SARs from different places, from different 

subjects, to make better cases, more significant white collar crime 

cases, that yield us to results of terrorism investigations. There 

simply isn’t any substitute for what we get in the way SAR and 

CTR data that I see. 

Mr. MILLER. There has been a suggestion that $10,000 today is 

not what $10,000 used to be in the 1970’s, and perhaps that number needs to be moved up. But I understand technology is different 

than it used to be that benefits you. 

How do you think that would impact you positively or negatively 

if it was raised? 

Mr. HERNANDEZ. Well, I would submit that $10,000 in cash or 

above is perhaps even more significant now than it was 10 years 

ago. In a largely credit and debit-based society, the fact that individuals show up at institutions with $10,000 or $12,000 or $14,000 

in cash is, I think, suspicious. 

Mr. MILLER. More so than it was in the 1970’s? 

Mr. HERNANDEZ. Possibly so, depending on who it is that shows 

up and where it came from, what the business is that is involved. 

An argument could be made, I think, if we were to look at this 

closely that in certain instances, the threshold could be lowered to 

get at what we are really interested in, and in certain instances, 

perhaps raised depending on what we are interested in. But I don’t 

think it is prudent to talk about raising the threshold simply because we are 30 years down the road. 

Mr. MILLER. I guess I will follow up on my next round. My time 

is up. 

Chairman WATT. Mr. Hernandez, you talk about over 30 years 

of experience. Currency transaction reports have been in existence 

since 1970. Right? How long have suspicious activity reports been 

required? 

Mr. BAITY. If I can answer that, the first reporting requirements 

were in 1996 for depository institutions. Subsequently, other industries have been brought on. So the first suspicious reporting program was started in 1996. 

Chairman WATT. And that was pursuant to the statute that was 

passed in 1996? 

Mr. BAITY. In 1994, the Money Laundering Suppression Act basically authorized it, over the next 2 years, we developed the program, and reporting actually started in 1996. 

Chairman WATT. Mr. Hernandez, you were about to tell me what 

happens with an individual. We have been approaching this from 

the 17 million pieces of paper. What happens from the individual 

piece of paper? 

Mr. HERNANDEZ. A number of things can happen. The individual 

piece of paper is brought into our IDW. A connection may be made 

there. It may be reviewed by an individual. It may be joined with 

some pending investigation in that field office; it may be joined 

with a pending investigation in another field office. 

Chairman WATT. So the FBI would have some suspicion that 

somebody is doing something illegal, and then they would use that 

17

person’s name to go and access a CTR or SAR report on that person? 

Mr. HERNANDEZ. We might look for it by name, if we have an ongoing investigation or a subject investigation. Often, though, those 

CTRs, those SARs, cause us to initiate an investigation. They are, 

after all, suspicious activity reports. That is a clue to us that there 

might be something we want to look at. 

So many of those CTRs or SARs start an investigation. And I understand that for the financial services industry, it is difficult 

sometimes to understand how one individual report might lead us 

to an investigation, especially if it is a smaller dollar amount. The 

fact is that many of those— 

Chairman WATT. Essentially if there are 17 million of them, I 

think, is the concern that people have. Is there somebody looking 

at each one of these 17 million CTRs and SARs? 

Mr. HERNANDEZ. I am not going to tell you, Mr. Chairman, that 

an individual is looking at 17 million, but 17 million are being hit 

against business of the current system we have, our databases, to 

see whether there are connections. 

Chairman WATT. All right. Let me just submit for the record, 

just so you will have it, the examination manual, the Bank Secrecy 

Act Anti-Money Laundering Examination Manual. This manual 

contains the instructions that you all have put out to the banks or 

financial institutions that provide the information to go into these 

reports? 

Mr. BAITY. If I understand what you read, I believe it is the instruction manual that is put out to the regulators in terms of their 

procedures for examination financial institutions for compliance 

with the statute. 

Chairman WATT. So you give these to the regulators, and then 

regulators take this set of directions and issue instructions to financial institutions? 

Mr. BAITY. They use that to examine if the institutions are complying with the BSA requirements. When they go in and do an examination of the institutions for their purposes, which include safety and soundness, they also review them to look for compliance 

with the Bank Secrecy Act. That manual is a product of our joint 

efforts with the regulators to bring consistency as much as we can 

to that process. 

Chairman WATT. This part of the examination process, how does 

an individual bank get communicated to about what they are expected to do to prepare for the examination? 

Mr. BAITY. Just about every institution has what they call a compliance officer, who is responsible for understanding the Bank Secrecy Act regulations and rules. The regulators, when they do their 

examination, in conjunction with those compliance officers they 

provide the information and expectations of them to the bank itself. 

So every bank has in it a process for complying or persons who are 

dedicated to complying with the Bank Secrecy Act requirements, if 

that answers your question. 

Chairman WATT. It does. What has happened since 1996? I 

mean, it seems to me that currency transaction reports can be generated electronically. Computers can do that without substantial 

human involvement. What has transpired since 1996? How are 

18

banks complying, how are financial institutions, with the non-mechanical function? 

CTR is a mechanical reporting function that a computer can go 

in and pick out. It is a cash transaction of $10,000. The computer 

just spits it out. The information goes. Tell me what you understand is happening in financial institutions just after 1996 aside 

from CTRs? 

Mr. BAITY. Well, since 1996 and specifically since 9/11, what we 

have tried to do is enhance the electronic filing of the information 

from all of the institutions that are covered so that the institution 

is filing not in a paper format but in electronic because it makes 

the data— 

Chairman WATT. The CTRs, though, how do you electronically 

file what is a personal observation? 

Mr. BAITY. Well, the suspicious activity reporting, which allows 

for the institution to basically examine the transaction and make 

a judgment whether, based on their understanding of their customer, whether that transaction is suspicious. They can fill out— 

Chairman WATT. So you are saying once it has been determined 

by a bank employee that there is a suspicious activity, you streamline the system for reporting that. I think the question I am asking 

is: What do you understand to be the process before that determination is made? What are the— 

Mr. BAITY. The process before, which is laid out in a regulation, 

is that the institution basically undertakes to review this—not just 

a teller making a decision, but I am talking in terms of suspicious 

activity reporting. 

Chairman WATT. Right. 

Mr. BAITY. That there is an examination within the institution, 

and in fact, it requires notification to senior management in the institution of the intent to file a SAR. So we ask the institution to 

actually make a value judgment and a review before they file the 

report with us. 

Chairman WATT. I ask unanimous consent to submit the 2006 

BSA/AMC Examination Manual for the record. Without objection, 

it will be submitted. 

[The above-referenced document is available at the following site: 

www.ffiec.gov/bsa—aml—infobase/default.htm] 

Chairman WATT. Is there a companion set of instructions that 

don’t go to the examiners, but go to the financial institutions themselves, or do we need to talk to the examiners about what the content of that is? 

Mr. BAITY. There are—I wouldn’t say a companion manual, but 

there are guidelines that have been provided to the industry on 

various questions about the compliance. And we provide that guidance as part of what we do on our Web site that is publicly available to the financial institutions because that depends on sometimes the question that comes to FinCEN when the bank asks, 

what do we do in this particular case? 

If it looks like a question has broad application, we issue a guidance document to all of the financial institutions that this is our 

perspective to answer that question. 

19

Chairman WATT. What about institutions that are not regulated? 

They have examiners. Do you have examiners for institutions that 

are not regulated under the Federal system? 

Mr. BAITY. Well, no, because first of all—let me take a step back. 

We are only talking about those financial industries or sectors that 

come under our regulatory authority. If you come under our regulatory authority, if you are, for instance, a depository institution, 

that is done by the Federal banking regulators—the OCC, the Federal Reserve Board, etc. 

But there are a range of financial institutions that we regulate, 

and we look to others, particularly the Internal Revenue Service, 

to help us with the compliance. So for instance, in the case of casinos that are under our regulatory authority, the Internal Revenue 

Service has a sector that actually goes out and reviews that industry for compliance. 

Again, that is done in conjunction with consultation with 

FinCEN as to what our expectations are. We do spend a lot of time 

training those industries on what we expect them to do. 

Chairman WATT. All right. I am going to recognize Mr. Miller for 

5 minutes, not to ask additional questions, but to seek unanimous 

consent to submit written questions for the record so that we can 

get further into this, because we could be here a long time, I think, 

trying to understand it. We will try to be more systematic in our 

approach, and maybe submit written questions to these witnesses. 

Mr. Miller? Five minutes. 

Mr. MILLER. Thank you. 

Mr. Hernandez, you suggested that in some cases, the amount 

could even be lower than $10,000 that would be beneficial. Could 

you explain that a little further? 

Mr. HERNANDEZ. I can’t conceive of what that would be right 

now. I just believe that as we have established a $10,000 threshold, 

it was based on something. It may be too general, in a sense. It 

may be too low, given certain kinds of activities, and it may be too 

high, given changes that have occurred over the past 6 years, certain kinds of activities. 

We have strong suspicion that on the terrorism side in particular, smaller dollar amounts are probably important and a good 

indicator, potentially. I think in the end that $10,000 is a good balance, given where we are. I will say this, it is my firm belief that 

if that were raised, and frankly, if the seasoned customer proposals 

that are moving forward are in fact enacted, we will get less information. That is a positive thing potentially for the financial sector 

because they will have to report less to us. We will have less to 

work with. We will have less in the way of information intelligence 

to put together into our investigations. 

I think there is a natural tradeoff, and the decision that is left 

with this subcommittee and, I suppose, Congress is: Where is that 

tradeoff? What as a society are we willing to trade for reduced 

numbers of submissions by the financial sector? I think it is all valuable. I don’t think anybody here is proposing that it be increased. 

But I think it needs to be said that there is value here, and there 

will be something lost by changing the rules if the rules are 

changed, clearly. 

20

Mr. MILLER. There are a lot of people in this country who don’t 

like government in their life. And I know one of the questions that 

was asked of me, or a comment that was made to me, by a banker 

was the small-town farmer who went out to the auction, sold an 

old tractor and a pickup truck and it exceeded the $10,000 or 

$11,000. He went to deposit it in his account, later to find out that 

that had to be filed with a CTR to the government, and he just 

went ballistic because he was a private person. 

And that really struck home. I think back to a few years ago 

when I went back to bury my dad in Arkansas, a little town called 

Japton, Arkansas. And Japton, Arkansas, has a little store with 

one gas pump. My brother and I walked into it, and there was a 

lady in the corner with a rifle leaning up against the wall with the 

cash register, and three elderly gentlemen sitting in these chairs 

rocking, staring at us as we walked in the door. 

We were going to pay, and they were staring at us. And they 

said, well, what are you doing here? And until I told them we came 

to bury my dad, and they asked who he was, then we were accepted once they found out we weren’t outsiders. But there are some 

people in this country who just do not like the government in their 

life. They are honest people, just trying to live their lives and they 

are bothered by something like this. 

How does a bank deal with these type of situations? 

Mr. HERNANDEZ. Well, basically I think we are dealing with a 

very basic problem in setting thresholds of any kind. How specific 

can you ultimately make a threshold? Can we account for $10,000-

plus deposits with the exception of a farmer who brings in $10,000 

from the sale of a tractor? There are any number of possibilities. 

Mr. MILLER. But the exemption that they are required to file, 

they say, by and large are so time-consuming they are unusable, 

that it is hard for them to justify doing it in this case. And I am 

not arguing this. I am just saying that this is a genuine question 

posed by a genuine individual who has a major concern. 

Mr. HERNANDEZ. Right. 

Mr. MILLER. That is what some of these banks are facing out 

there. And some people in this country just like their privacy. 

Mr. HERNANDEZ. Sure. That is a very natural tension. We understand that. We accept that. And again, it gets back to where are 

we as a society going to draw that line? Do we think it is important 

enough to be able to capture the $10,000-plus currency transactions 

in the general sense across the board because we think that is indicative of criminal or terrorist behavior, and in the process, draw 

into that some folks who clearly aren’t involved in anything of the 

sort? It may look suspicious at the outset, but it ends up not being 

suspicious. Nothing happens with that information. No investigation will follow that information. 

Mr. MILLER. But, see, the guy who likes his privacy doesn’t understand that argument. 

Mr. HERNANDEZ. That is exactly right. We understand the concern. And it is something that obviously in the FBI we deal with 

all the time. 

Mr. MILLER. Is there any way of making the form, Mr. Baity, 

more user-friendly, let’s say, for banks to be able to file an exemption rather than the exemption taking 15 minutes? Isn’t it easier 

21

just to hit the buttons and file it rather than having to go the exemption process that some people would prefer to use, but it is too 

complicated and time-consuming? 

Mr. BAITY. The short answer is, we are looking anew at everything, including the forms themselves. But if I could just take a 

minute to go back to your original question on exemption. As you 

know, there are exemptions in place that have not, from our perspective, been utilized fully by the banking sector and the other reporting entities that could reduce the number of CTRs, particularly. 

What we are doing is we are re-looking at those exemptions that 

have been in place for a while to try to get a clear understanding 

to see if there is something we can do to make them more usable 

by the financial sector as we go forward. So the short answer is we 

are looking at that, including such things as the forms themselves, 

because they have proliferated over several years. 

And if I could, Mr. Chairman, just to go back to your question, 

institutions do have access to the examination manual. 

Mr. MILLER. I would encourage you to do that if you are looking 

at those because that was a repeated concern, and I think that is 

a good direction to go. Thank you. 

Chairman WATT. Let me thank the two witnesses for being here. 

I ask unanimous consent to allow all members of the subcommittee 

an appropriate amount of time, whatever that is, to submit additional written questions to the witnesses. 

And we will try to do that expeditiously and do it within the parameters of our general committee rules, not outside that timeframe. Since I am a new chairman, I don’t know what that timeframe is. Thirty days? Okay, within 30 days. Without objection, so 

ordered. 

All right. We thank these gentlemen, and we will call up our second panel of witnesses. You all are going to make me miss Attorney General Gonzales, I can see that already. 

Without objection, we will submit for the record the California 

Credit Union League statement. They are not part of this second 

panel, but we will put their statement in the record. 

Let me thank the second panel of witnesses for being here, and 

with their permission, do the same as I did with the first panel, 

and abbreviate their introductions. We will put your full bios into 

the record, but we will abbreviate in the interests of time. 

Our first witness is the Honorable Steve Bartlett, who is well 

known to all of us on the Financial Services Committee. He has 

testified many times. He is the president and CEO of the Financial 

Services Roundtable. 

The rest of the second panel consists of: Ms. Megan Davis Hodge, 

director, anti-money laundering, at the RBC Centura Bank, on behalf of the American Bankers Association; Ms. Carolyn Mroz, president and CEO, Bay-Vanguard Savings Bank, on behalf of America’s 

Community Bankers; Mr. Scott K. McClain, Deputy General Counsel, Financial Service Centers of America, on behalf of the Financial Service Centers of America; and Mr. R. Michael Stewart Menzies, Sr., president and CEO, Easton Bank and Trust Company, on 

behalf of the Independent Community Bankers of America. 

22

We welcome each and every one of you. And as I said, your full 

curriculum vitae will be put in the record, and we will recognize 

each one of you for 5 minutes. I may be a little more aggressive 

than I was with the first panel, but I will try not to be unreasonable. 

Mr. Bartlett, 5 minutes, please. 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CEO, THE FINANCIAL SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you, Mr. Chairman. Mr. Chairman and 

Ranking Member Miller, we very much appreciate your leadership 

on this, and the leadership of this subcommittee in examining this 

difficult but solvable problem, a problem that has been with us for 

some time. 

Mr. Chairman, I would ask to submit for the record the annual 

report for M&T Bank, which is one of our companies, and has some 

comments in their annual report. I referred to it in my testimony. 

Chairman WATT. Without objection, so ordered. 

[The above-referenced document is available at the following site: 

http:/ir.mandtbank.com/fundamentals.cfm] 

Mr. BARTLETT. Mr. Chairman, I will summarize my testimony. It 

is the goal of the Financial Services Roundtable and our member 

companies to assist law enforcement in identifying suspicious activities and making that identification usable to law enforcement. 

We believe that can be done much better than is being done now. 

We think it can be done with a lot less disruption. But more importantly, we think that better focus and better targeting of suspicious 

activities in the identification and the reporting will assist law enforcement in a much greater way than they are assisted now. 

Mr. Chairman, we have been calling this problem to the attention of Congress for about 4 years. We have seen no progress at all. 

The system continues to get worse. It is more expensive, more 

clogged-up, and much more inconvenient and difficult for our customers, the customers of financial institutions, to use than it was 

just 4 years ago when we began calling it to the Congress’s attention. 

Mr. Chairman, we see three basic problems. One is the very 

large and increasing filing of defensive SARs. That has been welldocumented. The recent SAR activity report number is 62,000 suspicious activity reports filed in 1996, and almost a million filed in 

2005. 

We don’t think the number of suspicious activities have increased 

by that amount since 1996, but we think those additional filings of 

defensive filings has increased in response to the current procedure. And that is why we think the current procedure could be improved. 

Second, and this is really in the last 18 months to 2 years, we 

are now beginning to see an additional problem of what we call ad 

hoc enforcement. In response to the manual, the guidance manual 

that you cited, Mr. Chairman, we are now finding on a regular 

basis examiners who in the examination process, they begin designing with our financial institutions under the threat of—implied 

threat, in any event—of a potential criminal indictment, which 

means we listen to them very carefully. 

23

The examiners begin to create new and customized procedures 

for filing and identification of SARs that do not exist anywhere in 

the manual, do not exist in the regulations. Indeed, there are no 

regulations. These are guidance and not regulations. 

And so in the absence of a rule of law, in many of our companies—not all, but many of our companies—tell us that now, during 

the examination process every year, they just simply make up a 

new process for going forward, and then presumably they think 

that they will end up making up a new process the following year, 

depending on who the examiner is, which demonstrates the lack of 

clarity and the lack of rules in place to follow. 

And third, Mr. Chairman—this is the one that is the most difficult for us—the filing of suspicious activity reports, one of the results of this is that our companies are often told that a particular 

account or implied that a particular account is suspicious in some 

way. And oftentimes, we know that it is not suspicious. Oftentimes, 

it is a seasoned customer, a customer we have been doing business 

with for a long time. But the outcome is we close the account. 

And the outcome of that is you take large numbers of legitimate 

customers out of the banking system, which doesn’t help law enforcement, but does inconvenience those customers, some consumers, some small businesses, and also is harmful to the economy 

because you drive more people into the unbanked system of the 

cash economy. 

Mr. Chairman, we think that the system can be improved. I have 

met with most of the succession of directors of FinCEN, and they 

all have good intentions. I have also met with several Assistant 

Secretaries of the Treasury, and met with the Justice Department, 

and they have been cordial meetings. 

But the meetings have had one result, the same result you got 

this morning, which is that—and I will paraphrase what you just 

heard—we can see no changes in the process that we would be willing to consider. 

We think there are better systems. We think there are better 

processes. And what we would ask for is a chance to have a summit or a working group, as you suggested, between law enforcement, the regulatory agencies, and the industry, with an open mind 

towards looking for improvements instead of a set of, well, this is 

the way we do it and we want to tell you why we do it that way. 

We had those meetings, but we think some improvements are 

called for. Mr. Chairman, thank you for your leadership on this. 

[The prepared statement of Mr. Bartlett can be found on page 51 

of the appendix.] 

Chairman WATT. Thank you for your testimony. 

Ms. Hodge, you are recognized for 5 minutes. 

STATEMENT OF MEGAN DAVIS HODGE, DIRECTOR, ANTIMONEY LAUNDERING, RBC CENTURA BANK, ON BEHALF OF 

THE AMERICAN BANKERS ASSOCIATION 

Ms. HODGE. Thank you. Mr. Chairman, and members of the subcommittee, I am Megan Davis Hodge, director of AML compliance 

and BSA officer for RBC Centura Bank, headquartered in Raleigh, 

North Carolina, appearing today on behalf of the American Bankers Association, the ABA. 

24

ABA, its members and bankers from the boardroom to the teller 

line, have been steadfast partners in the effort to deter, detect, and 

defend against those who would abuse our financial system 

through fraud, money laundering, and terrorism financing. 

Mr. Chairman, we appreciate that you have chosen to focus this 

hearing on better balancing law enforcement utility and regulatory 

requirements. We share your goal. Our mission is too important to 

squander resources on ineffective reporting. We need to give priority to the efforts that achieve the greatest bang for the buck and 

eliminate those that produce the least. 

First, let me begin by briefly describing what banks must do to 

comply with suspicious activity reporting obligations, the cornerstone of the BSA. 

First, to identify suspicious activity, the bank must undertake a 

detailed analysis for every geographic area, product, and customer 

category to identify that risk areas that merit additional scrutiny. 

Second, we must monitor the ongoing banking activity of our customers to detect unusual activity. This detection could be triggered 

by an observant teller or by a manual or automated back office review of transaction records. 

Once unusual transactions are flagged, an investigation is conducted that is tailored to the specific circumstances of the customer. These inquiries are sensitive and time-consuming. 

After this detailed review, a SAR is filed if the bank believes that 

the customer’s activity meets the reporting requirements. Through 

this process, the bank must comply with filing deadlines, transaction threshold levels, and report form requirements. 

And finally, extensive records are required even if the decision is 

made to not file a SAR. 

This is not the end of mandated compliance. Periodic summaries 

are given to senior management, and an independent audit function takes place to ensure that the SAR process is sound. Of course, 

none of this can take place without extensive and regularly updated employee training. As the more than 300-page interagency 

BSA examination manual demonstrates, there is not a bank operation, product, or customer beyond the reach of the SAR process. 

What has this undertaking produced? It has produced a 600 percent increase in filings in the last 10 years, with no sign of abating, 

that from our perspective represents an excess of volume over 

value. Our conclusion is largely driven by two factors. 

First, regulatory pressures promote the ‘‘when in doubt, file’’ 

mentality that inflates SAR volume out of proportion to the risk 

represented by the underlying conduct. 

Second, in the absence of constructive feedback from law enforcement, banks identify an evolving array of fraud and other potentially serious crimes that expand the SAR universe regardless of 

the likelihood of action or interest by law enforcement. 

Changes can be made to address these issues and improve SAR 

process efficiencies. 

First, agencies can reduce the ‘‘when in doubt’’ defensive SAR filings by assuring examiners follow exam standards. It is the unwarranted substitution of examiner judgment for the bank’s well-considered risk assessment that is causing these defensive filings. By 

abiding by the exam manual, which focuses on effective programs, 

25

not quantitative outputs, fear of second-guessing will disappear 

and best judgment reporting will return. 

Second, eliminate low-value SARs by better aligning SAR thresholds to prosecutorial standards and by leveraging specialized and 

accessible task forces to better pursue elusive scams. 

Third, enhance SAR feedback by more specific tracking of the 

connection between SARs and the case results so that the reporting 

effort and law enforcement value are more visibly linked, as is done 

in other areas. 

And finally, the time has come to eliminate currency transaction 

reports on seasoned business customers. ABA recognizes your 

strong leadership, Mr. Chairman, in pursing such initiative. Your 

efforts and those of your colleagues on the subcommittee were critical to passing H.R. 323, the Seasoned Customer Exemption Act of 

2007, by voice vote in the full House. 

Enactment of this legislation could be the most significant step 

to improve our anti-money laundering efforts by trading volume for 

value, not only with respect to CTRs but also with regard to SARs. 

If we are better able to remove some of the noise, both banks and 

law enforcement will be able to better focus resources on improving 

results. 

Thank you, Mr. Chairman. I would be happy to answer any questions. 

[The prepared statement of Ms. Hodge can be found on page 76 

of the appendix.] 

Chairman WATT. Thank you so much for your testimony. 

Ms. Mroz, you are recognized for 5 minutes. 

STATEMENT OF CAROLYN MROZ, PRESIDENT AND CEO, BAYVANGUARD SAVINGS BANK, ON BEHALF OF AMERICA’S COMMUNITY BANKERS 

Ms. MROZ. Chairman Watt, Ranking Member Miller, and members of the subcommittee, I am Carolyn Mroz, president and CEO 

of Bay-Vanguard Federal Savings Bank, a $134 million depository 

institution in Baltimore, Maryland. I am here today representing 

America’s Community Bankers, ACB. I am a member of ACB’s 

board of directors, and I serve on ACB’s regulation and compliance 

committee. 

BSA compliance requirements are always at the top of the list 

of the most burdensome regulatory requirements for community 

bankers. Community banks are being held responsible for the same 

BSA requirements as multinational banks despite differences in 

their businesses and fewer resources available. ACB supports the 

goals of these laws, but inconsistent interpretation and a lack of 

regulatory guidance has made it increasingly difficult for community banks to comply with anti-money laundering demands. 

For example, in addition to serving as Bay-Vanguard’s president 

and CEO, I am also our BSA compliance officer. We are a small 

bank with only 31 employees. Large community banks comply by 

employing a full-time senior level BSA officer, but I don’t have that 

luxury. 

Regardless of bank size, many additional employees have to work 

with the BSA officer to file the CTRs and SARs and to respond to 

Section 314(a) requests for information. The added payroll and benVerDate 0ct 09 2002 10:36 Aug 28, 2007 Jkt 037207 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\37207.TXT HFIN PsN: TERRIE
26

efit costs, as well as specialized training and continuing education, 

are a significant expense for community banks. 

Also, third party audits and legal advice for SARs determinations can cost a small bank well over $30,000 annually. These are real 

costs that have a great influence on the bank’s ability to grow the 

business and serve the community. These burdens result in many 

lost opportunities. 

Banks are providing much more data than law enforcement appears capable of using. While we are committed to providing the 

government with the necessary information to combat unlawful activities, a greater emphasis should be placed on the quality of the 

data rather than the quantity of the data. 

We believe BSA requirements need to be modernized. For example, ACB believes that the BSA should be amended to provide an 

increase in the dollar value that triggers a CTR filing. The current 

$10,000 threshold was established in 1970. When adjusted for inflation, $30,000 in 1970 is equivalent to $53,000 today. Studies 

have shown that increasing the reporting threshold to $20,000 

would decrease CTR filings by 57 percent, and increasing the 

threshold to $30,000 would decrease filings by 74 percent. 

ACB also strongly urges the banking regulators, FinCEN and the 

Department of Justice, to work to help institutions identify activities that are truly suspicious and should be reported. Without additional guidance regarding what events should trigger an SAR, institutions will continue to face excessive compliance risk in an 

often zealous regulatory environment. 

Financial institutions believe that the Federal Government has 

little understanding of the amount of time and resources that BSA 

compliance drains from an institution’s ability to serve its community. What may seem like insignificant costs to law enforcement 

have very real business implications for community banks. 

As an example, 314(a) requests for specific data every 2 weeks 

are very costly and generate few enforcement results. Banks should 

not be expected to report transactions to law enforcement or conduct business in an environment that expects compliance at any 

cost. 

The time is now to review the BSA compliance requirements to 

ensure that the burden shouldered by the Nation’s community 

banks is commensurate with a demonstrated benefit to law enforcement. Banks stand ready and willing to respond quickly and completely to legitimate requests from law enforcement agencies. But 

compliance burdens that simply generate mountains of data cannot 

be justified. 

Thank you for your invitation to testify, and I would be glad to 

answer any questions. 

[The prepared statement of Ms. Mroz can be found on page 110 

of the appendix.] 

Chairman WATT. Thank you for your testimony. 

And Mr. McClain, you are recognized for 5 minutes. 

STATEMENT OF SCOTT K. McCLAIN, DEPUTY GENERAL 

COUNSEL, FINANCIAL SERVICE CENTERS OF AMERICA 

Mr. MCCLAIN. Thank you, Mr. Chairman, and members of the 

subcommittee. My name is Scott McClain, and I serve as deputy 

27

general counsel to Financial Service Centers of America, also 

known as FiSCA. FiSCA is a national trade association representing over 6,000 neighborhood financial service providers 

throughout the United States. 

FiSCA’s membership is comprised of community-based financial 

institutions that serve millions of customers from all walks of life, 

including those with bank accounts as well as the unbanked. Our 

members provide a range of financial services, including check 

cashing, money transfers, and money order sales, among others. 

Let me first say that FiSCA and its members are committed to 

the fight against money laundering and terrorist financing, and we 

have committed significant resources in this area. Ours is a regulated industry subject to many of the same types of reporting and 

recordkeeping requirements as banks and other depositories. As 

money service businesses, or MSBs, we are subject to rigorous compliance examinations by IRS agents. When viewed against the 

more traditional banking industry, our record of compliance is 

quite good. 

SAR and CTR compliance requirements have resulted in substantial costs to the MSB industry in several key areas, including 

labor costs, information technology costs, professional service fees, 

and banking service charges. Banks that service MSBs have likewise experienced mounting compliance and monitoring costs, which 

are passed on to MSB customers in the form of increased service 

fees. Any analysis of the value of SAR and CTR information to law 

enforcement should take into account the costs to the MSB industry. 

Since 9/11, there has been a tremendous increase in regulatory 

scrutiny of the financial services industry. Across the board, MSBs 

have responded to these pressures by defensive SAR filings. MSBs 

are persuaded that the key to avoiding penalties is to file reports 

on even marginally irregular activity. As a result, law enforcement 

agencies are deluged with SARs that may be largely useless. 

Pressure towards defensive SAR filings emanates in many cases 

from field-level examiners who second guess decisions by compliance personnel. Examiners have been critical of MSBs who have 

not filed enough SARs. MSBs have also been cited for not reporting 

transactions that the MSB knew to be legitimate. As a result, 

MSBs are adopting a ‘‘when in doubt, fill out’’ philosophy. 

To what extent are SARs valuable to law enforcement? What percentage of filed SARs lead to active investigation, and what percentage of those lead to criminal convictions? A critical analysis of 

these questions and the overall burden that SARs place on U.S. financial institutions is needed. 

Additionally, FiSCA supports an increase in the reporting 

threshold of CTRs. As has been noted earlier today, the present 

$10,000 threshold was established in 1970. Since that time, the 

threshold has not been increased, and it has been rendered outdated due to inflation. 

To a point made earlier by Mr. Bartlett of the Financial Services 

Roundtable, the post-9/11 atmosphere of fear has given rise to another indirect yet very costly burden to industry, particularly the 

MSB industry, and that is the termination of MSB bank accounts. 

28

Depositories that service MSBs are faced with significant regulatory burdens, and are required to expend ever-greater resources 

in maintaining MSB compliance and monitoring systems. Due to 

this uncertain regulatory environment, many banks have opted to 

discontinue their check cashers and money transmitter customers. 

It is critical to the interests of national security that transparency of MSB transactions be maintained by ensuring that MSBs 

remain part of the regulated financial community and continue to 

have access to depository services. 

In conclusion, regulatory pressures and the lack of clear guidance 

in this area have resulted in a tremendous number of defensive 

SAR filings and duplicative CTR filings at tremendous cost to industry. The value of these reports should be evaluated, and the 

current reporting system and its cost to industry should be critically assessed. 

Again, we thank you for the opportunity to present these views. 

I will be happy to address any questions that you may have. Thank 

you. 

[The prepared statement of Mr. McClain can be found on page 

87 of the appendix.] 

Chairman WATT. Thank you for your testimony. 

And Mr. Menzies, you are recognized for 5 minutes. 

STATEMENT OF R. MICHAEL STEWART MENZIES, SR., PRESIDENT AND CEO, EASTON BANK & TRUST COMPANY, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF 

AMERICA 

Mr. MENZIES. Thank you, Chairman Watt, Ranking Member Miller, and distinguished members of the committee. As president and 

CEO of Easton Bank & Trust in Easton, Maryland, the home of the 

world-famous Waterfowl Festival, it is my honor to testify to you 

today as vice chairman of the— 

Chairman WATT. World famous what festival? 

Mr. MENZIES. Waterfowl Festival, during the first week of November every year. It is my honor to testify as vice chairman of the 

Independent Community Bankers of America and our 5,000 members, and to discuss the Bank Secrecy Act with you today, and to 

seek ways to prevent the Act from becoming form over substance. 

We strongly urge Congress to recognize and identify the real 

costs that BSA requirements place on banks, especially community 

banks. Bankers across the country have identified this Act as one 

of the most burdensome of compliance acts in the regulatory body. 

Our focus should be based on finding risk-based approaches that 

balance the cost to the banking industry and our customers, and 

benefits to law enforcement. 

To that end, we support a streamlined seasoned customer exemption from the CTR reports. In addition, law enforcement should 

clearly demonstrate the results produced from data collected. An 

open dialogue between law enforcement and the industry would 

help all of us focus our efforts on being more productive and effective. Fundamentally, specific feedback from law enforcement would 

help banks identify suspicious transactions. It would encourage us 

to understand that our efforts are truly worthwhile. 

29

I am heartened to hear Director Baity say that he plans to take 

a fresh look at interaction with the banks and balancing cost 

versus regulations, especially understanding that the effort to modernize exemptions has been underway for almost 15 years now. 

It is imperative that law enforcement understand the cost in 

terms of dollars, training, time, and regulations. And these costs 

are truly ultimately borne by our customers. We have 49 full-time 

employees, and more 8 percent of my staff is occupied with BSA 

compliance. Every employee receives 2 or 3 hours of BSA training 

every year. This training is costly and requires our employees to 

divert significant attention away from customer service. 

In addition, we complete regular internal and external audits of 

BSA compliance. Quarterly internal audits require a minimum of 

8 hours to complete. External audits cost us about $4,000 a year. 

When FinCEN asks my bank to search our records for data 

matches on suspicious individuals, each request requires at least 2 

hours of research by three employees every 2 weeks. If a match is 

found, the time increases significantly. 

Last year, as you pointed out before, Chairman Watt, over 17 

million reports were filed. In the first 41⁄2 months of 2007, our bank 

has filed more than double the number of SARs than last year. Although our CTR and SAR filings are automated, it still requires a 

minimum of 5 minutes to complete each CTR and up to 20 minutes 

to file an SAR. 

Many institutions report the cost of using CTR exemptions outweighs any associated benefit. As a result, many institutions prefer 

not to use the exemptions and file the CTR in every case where it 

is over $10,000. Unlike these banks, we use the existing customer 

exemption, but we do it for only two customers. Without the exemption, we would have filed 65 more CTRs this year. 

We applaud Ranking Member Bachus for taking the lead on this 

issue, and once again sending a seasoned customer exemption to 

the Senate in the form of H.R. 323, the Seasoned Customer CTR 

Exemption Act of 2007. We applaud this committee and the House 

for passing H.R. 323. We believe this bill is an important step to 

bringing the costs and the benefits of BSA reporting back into balance. 

Specifically, H.R. 323 would streamline the exemption process 

and make it easier for banks to use. While this sounds like a small 

fix, it is important to community banks. It would result in substantial savings to our banks and increase the time employees can 

spend meeting our customers’ financial needs. 

The requirement to renew exemptions was one reason that banks 

chose not to use the exemptions. They fear—we fear—that missing 

the renewal or an unreported transaction would make us vulnerable to regulatory discipline and damage our reputation possibly in 

the community. 

ICBA looks forward to working closely with Chairman Frank, 

Ranking Member Bachus, and members of this committee to find 

solutions that reduce the BSA compliance burden while still meeting the needs of law enforcement. Adoption of this important legislation is one step that will decrease the growing regulatory burden 

confronting all the banks of this Nation. 

Thanks so much for your time. 

30

[The prepared statement of Mr. Menzies can be found on page 97 

of the appendix.] 

Chairman WATT. I would like to thank all of you for your testimony. We have been advised that a series of votes may be imminent, so we want to try to get through the questioning session with 

this panel so that we don’t have to detain you all here while we 

go and vote and come back. So perhaps we got carried away on the 

first panel, but we will try to restrict that this time. 

Since Mr. Lynch has not asked any questions yet, I am going to 

recognize him first and then Mr. Miller. And I will go last, in case 

we run out of time before we get through everybody. 

Mr. Lynch is recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I want to thank Mr. Miller as well for holding this hearing. I think it is an important one. 

I wear two hats here this morning. I am also the chairman of the 

Task Force on Anti-Terrorist Financing, so these suspicious activity 

reports and the currency transaction reports are very important 

from an international standard as well. 

I just came back from the Middle East. I met with the central 

bankers from Afghanistan, Jordan, and Turkey, and as well as our 

Treasury folks, FBI, FinCEN—I know they were in here a little 

earlier—trying to impose a system of transparency internationally 

to stop anti-terrorist financing. 

And so I think the goal of this process here is to figure out, 

where is that balance where we can get enough information to feel 

confident that we are preventing terrorists from using the financial 

system to their end while not imposing undue burden on our banking system. 

And I was encouraged as well at Mr. Baity’s comments that we 

need to take a fresh look because some of these guidelines have 

been put in place many, many years ago and they need a fresh 

look. 

But I have to admit, I come from this—because of the anti-terrorist task force, I come with some caution because I see us trying 

to regulate a global system where we are trying to institute transparency and encourage these other international banks, many of 

them in the Middle East, to give us suspicious activity reports. 

I was in Ramallah recently. A lot of banking, a lot of economic 

activity, in Ramallah, in Jordan, in parts of the Middle East that 

we know there are some nefarious groups there that rely on illicit 

financing and money laundering to wage a terrorist war. And we 

are getting no SARs. We are getting no CTRs. And that has been 

difficult. 

So while you are here saying we need less, I just think it sends 

the wrong message sometimes internationally. So we really do have 

to find that balance between getting enough information and instituting a standard that will be adopted internationally and will be 

effective internationally at the same time that we can allow banks 

to operate with less of a regulatory burden. 

I would like to ask, though, and a number of people have mentioned the $10,000 trigger for suspicious activity reports or cash 

transaction reports. And that has been in place for a while. The 

International Convention on Anti-Terrorist Financing has that in 

it. In other words, a cash transaction over $10,000 should trigger 

31

a report. But also, as little as $5,000 in a transaction can require 

a report if other factors are present. 

Now, based on what you are dealing with right now, where do 

you think—and I will just ask the whole panel here—where do you 

think our numbers should be? What should trigger in a dollar 

amount or a factor consideration—what should trigger a suspicious 

activity report or a CTR today? 

Mr. MENZIES. Congressman, I would be pleased to take a shot at 

that as a community banker. 

Mr. LYNCH. Sure. 

Mr. MENZIES. I don’t have a dollar amount as a community banker. What I would like to see personally is substance over form. And 

I don’t know that I can tell you that that occurs at $1,000 or 

$10,000 or $20,000 or $30,000. But I do believe I can tell you that 

we are reporting form in many cases and they are not of any substance at all. 

Congressman Miller’s description of the farmer was an experience that I had, where the farmer went to the Farm Bureau dinner 

and spoke with his brother and sold his brother his tractor for 

$12,000, and his brother said, I am going to pay you cash. 

And he comes into the bank to deposit the cash, and he looks at 

his niece, who is the teller, and he says, how can I make this deposit so that you don’t send it in to the IRS? Because I am told that 

you banks are sending all this stuff in to the IRS. And his niece 

now is involved in a structured transaction, and if she doesn’t report an SAR, she has broken the law. And in my opinion, that is 

a great example of form over substance. So I think that the— 

Mr. LYNCH. With all due respect, Mr. Menzies, that is a pretty 

highly specific case. I mean, not every businessperson out there has 

a niece who works as a teller. You are really— 

Mr. MENZIES. It is a pretty unusual case. But Congressman, believe me, the public knows about the reporting process. This secret 

is not a secret. And it is not because the bankers are running 

around saying, listen, I am going to turn you in. The public knows 

about it. 

And as Congressman Miller pointed out, there are a lot of people 

who are really concerned about these reports. And I am not— 

Chairman WATT. The gentleman’s time is expired, but I will 

allow each one of the witnesses to quickly— 

Mr. LYNCH. Mr. Chairman, just one point and I will yield back. 

Chairman WATT. Yes. Sure. 

Mr. LYNCH. But that is the point. People are concerned. The terrorists are concerned. That is why they are avoiding the formal financial system, the formal banking system, is because they know. 

They won’t use that system because they know a report will be 

filed. That is the point. That is why Mr. Haniyeh was confronted 

at Rafah Gate with $30 million in a suitcase, because he couldn’t 

use the traditional banking system. 

And that is what we want to do. We want to force them to use 

a hand courier system because there is a great risk, especially in 

the Middle East, to use that system. We don’t want them in the 

standard banking system. And so while you see it as an encumbrance, there is also value in that, in squeezing the illicit money 

out of the system. 

32

I yield back. 

Chairman WATT. I thank the gentleman. 

The gentleman from California is recognized for 5 minutes. 

Mr. MILLER. Thank you very much. And I want to thank all of 

you for the private meeting we had to discuss this issue. We are 

never going to be able to touch on everything we dealt with in that 

meeting, and I want to thank you very much. 

You heard the previous panel. What I am really convinced of is 

that we have a major failure to communicate here, and we have to 

address it. It is like one guy is going out to dinner with his family, 

and they have steak and lobster, and they say, that was a really 

good meal. The guy at the next table has to pay the bill. 

And we need to understand how many of these SARs are beneficial, and how many are useless. I think a lot of it is going to deal 

with communication and how we go about doing it, and I just don’t 

think that level of communication exists today. 

The Bank Secrecy Act Advisory Group, I think, was intended to 

accomplish that. And obviously, it is not, based on information you 

gave me, the questions you gave me, the impact on your associations, your groups, your individual members, and yet when I talk 

to FinCEN out there and the FBI and law enforcement, their perspective and what they think they are generating from it. 

But how successful do you think this advisory group has been, 

and how do you think we could enhance it in some way or modify 

it or change it or restructure it so that it would work? It would be 

beneficial for all the parties to get together and come up with 

something that people understand and your groups understand, 

and something that really generates information we need to have. 

Why don’t we start here and go right down. 

Mr. BARTLETT. Mr. Miller, I didn’t know it existed until this 

morning, if that gives you any indication. 

Mr. MILLER. That is my point. It is communication with the industry. What I think this subcommittee could do would be to send 

staff to attend it, to create a balanced group with an open mind to 

look at the processes to determine how we can file suspicious activity reports in which some identifiable or some at least double-digit 

percentage of them are truly suspicious. But we are not getting an 

open mind or an open discussion at this point. 

So if you would convene it and come to the meetings, and I know 

you would, with an open mind, perhaps we could get all sides to 

have an open mind in the discussion. 

Ms. HODGE. The ABA believes that the BSAAG has been able to 

make some progress and can continue to work with continued focus 

on the issues as are being discussed today. 

Mr. MILLER. Okay. I am going to give each of you a chance because we are not going to have time to go much farther today. 

Ms. MROZ. I agree that I have never heard of that organization 

until today. And one of the concerns that I have is we are automatically linking CTRs and SARs, and I don’t think they are necessarily linked at all. I do duplicate CTRs during the month for ma 

and pa customers of mine who are using cash. They bring in—you 

know, they are a convenience store and they sell cigarettes and 

gas. If they do that, they are over $10,000, probably, in 2 days. 

33

And so I am not getting any information from those CTRs. My 

SAR investigations many times, most of the time, don’t even come 

from a CTR. 

Mr. MCCLAIN. Thank you. We believe that the BSAAG has been 

helpful and has resulted in some very good communication between 

the regulator and the industry. Additionally, some subcommittees 

were established on the BSAAG that resulted in some fruitful results. 

Our concern would be at this point that there are not enough 

seats at the BSAAG and not all sections of industry are represented at the BSAAG at this point. There are just a limited number of seats open to the money service businesses industry at this 

point. There is a revolving process for being on the BSAAG, but 

again, we don’t believe it is open enough for enough sectors of industry. Thank you. 

Mr. MENZIES. I guess my own enhancement would be that they 

should write clear and measurable and understandable goals and 

objectives with a timeline to attain those goals and objectives. 

Mr. MILLER. Well, Mr. Chairman, I think we need to look at the 

costs and the impact on the banks, and we also need to look at the 

benefit to counterterrorism and to money laundering and things 

that are going on in this country. 

But we need to look at the structure. And there has to be some—

there is an absolute disconnect today between law enforcement, 

FinCEN, and the industry who has to comply here. And we need 

to create a more transparent structure where people understand 

that—if you understood that there was tremendous benefit in what 

you were doing and the results that were coming out of it, you 

might look at some of this a little differently. 

But I think from what we have talked about in the past, you are 

not sure that what you are doing is even being looked at, nor if 

there is any real benefit to most of what your compliance requires 

you to do. And I think that incumbent upon us to look at some way 

to make sure that that changes in the future. 

And I thank you for your testimony, and I yield back. 

Chairman WATT. I thank the gentleman. Let me recognize myself 

for just a few minutes to make comments and ask a couple of questions. 

I think the thing that was most striking to me, as much complaints as we get from the financial sector about compliance with 

Sarbanes-Oxley and the cost of complying with Sarbanes-Oxley, is 

the statistic that is in Mr. Bartlett’s testimony, that the cost of 

compliance with the Bank Secrecy Act is at least twice the cost of 

compliance with Sarbanes-Oxley. That is pretty dramatic since 

most of us on this committee are constantly hearing about the cost 

of Sarbanes-Oxley, and so there needs to be a look at how to understand this. 

Now, let me just see if I can fix this in my own mind. Up to 1996, 

there was nothing like the suspicious activity report. You just had 

the currency transaction reports. Is it clear that a currency transaction report can be just done by technology? Do the community 

banks and independent bankers—do you have the technology that 

will just allow you to spit out a $10,000 cash transaction, and that 

is just a reporting function? Or is that adding burden to you? 

34

And Mr. McClain, how does that play itself out in your world? 

I know the big banks can do it electronically, I presume. The big 

banks can do that electronically. What about community banks, 

independent banks, and the folks in your industry, Mr. McClain? 

Mr. MCCLAIN. If I may, to two points on your question, Mr. 

Chairman. The cost, the labor costs, the man-hour costs that go ultimately into creation of the CTR forms, is quite substantial in the 

financial services industry. Virtually across the board, financial 

service companies’ centers are required to either complete them 

manually—substantial man-hours go into that process—or they are 

required to adopt rather expensive data processing systems that 

allow them to automate some of that process. So there are cost factors in both elements of that. 

Additionally, with respect to the e-filing of the CTR process 

through FinCEN, it is a very cumbersome process. It is designed 

for banks. It is not designed for smaller mom and pop operations 

such as a number of community financial service centers. So we believe that that particular process should be streamlined or looked 

at with regard to this industry, and that would certainly facilitate 

that process. 

Chairman WATT. Mr. Menzies and Ms. Mroz, do your institutions—are they technologically able to comply with the CTR provisions? I am setting aside the SAR provisions now. 

Mr. MENZIES. Mr. Chairman, we could if we were to invest in 

that software and in that technology. We have not, and— 

Chairman WATT. What would that cost for a typical bank? 

Mr. MENZIES. I don’t know the exact cost. But I do know that it 

would be more expensive for us to go acquire the software than to 

continue to do it manually. One of the challenges is that when a 

CTR is presented, if the owner of the convenience store sends their 

clerk, Betty Lou, to make the deposit, then that information has to 

be captured. And you don’t do that with software; you do it by the 

teller seeing that Betty Lou is making the deposit, not the owner 

of the convenience store. So there is some information that you just 

don’t automate. 

Chairman WATT. Ms. Mroz? 

Ms. MROZ. We are not automated, either. And one of the other 

problems in addition is the aggregate. If they do two transactions 

in one day and neither one of them are over $10,000, we have a 

human being who is tracking those transactions. We get a large 

transaction report of anything over $5,000, and we try and match 

up. Someone is physically every day checking that report to make 

sure that there aren’t multiple transactions from any one customer 

that also exceeds $10,000. 

And again, money is driving the bus. We can’t afford the soft- ware. I have heard quotes anywhere from $30,000 to $100,000 for 

that software. And for a community bank, that is just—we can’t afford it. 

Chairman WATT. Ms. Hodge? 

Ms. HODGE. Mr. Chairman, if I may, certainly larger banks oftentimes have invested the financial resources in order to facilitate 

a more automated filing process. But they are still not immune 

from the situations that you have just heard described that do require manual intervention, sometimes by the teller itself as they 

35

are conducting the activity to obtain the information accurately on 

the person conducting the transaction, and then sometimes in the 

back office trying to piece together the aggregated information or 

perhaps correct errors that were made on behalf of the teller. 

Chairman WATT. Well, obviously, there are a myriad of other 

questions that we have not gotten to today. So I will just note that 

some members may have additional questions for this panel also 

and may wish to submit them in writing. And without objection, 

the hearing record will remain open for 30 days for members to 

submit written questions to these witnesses and to place their responses in the record. And we would ask you, if that occurs, to respond promptly. 

We thank the witnesses for being here. I don’t think you want 

to wait for what appears to be about 45 minutes to have us come 

back to continue this questioning. I hope you will find it preferable 

to answer additional questions in writing. But we want to thank 

you for being here. We think it has been an effective first hearing 

on this issue, and the subcommittee will stand adjourned. 

[Whereupon, at 11:01 a.m., the hearing was adjourned.] 

(37)

A P P E N D I X

May 10, 2007

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