U.S. GOVERNMENT PUBLISHING OFFICE

28–675 PDF WASHINGTON : 2018

S. HRG. 115–158 

COMBATING MONEY LAUNDERING AND OTHER 

FORMS OF ILLICIT FINANCE: OPPORTUNITIES 

TO REFORM AND STRENGTHEN BANK SECRECY 

ACT ENFORCEMENT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE ISSUES UNDERLYING THE MODERNIZATION OF SYSTEMS DESIGNED TO COMBAT MONEY LAUNDERING, TERRORIST FINANCING, CORRUPTION, WEAPONS PROLIFERATION, SANCTIONS EVASION, AND OTHER THREATS 

JANUARY 9, 2018 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOHN O’HARA, Chief Counsel for National Security Policy 

SIERRA ROBINSON, Professional Staff Member 

ELISHA TUKU, Democratic Chief Counsel 

COLIN MCGINNIS, Democratic Policy Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, JANUARY 9, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Greg Baer, President, The Clearing House Association ....................................... 4 

Prepared statement .......................................................................................... 29 

Responses to written questions of: 

Senator Brown ........................................................................................... 58 

Senator Sasse ............................................................................................ 62 

Senator Tillis ............................................................................................. 70 

Senator Warner ......................................................................................... 75 

Senator Cortez Masto ................................................................................ 79 

Dennis M. Lormel, President and Chief Executive Officer, DML Associates, 

LLC, and Former Chief, FBI Financial Crimes Program ................................. 5 

Prepared statement .......................................................................................... 35 

Responses to written questions of: 

Senator Brown ........................................................................................... 86 

Senator Sasse ............................................................................................ 87 

Senator Tillis ............................................................................................. 96 

Senator Warner ......................................................................................... 100 

Senator Cortez Masto ................................................................................ 105 

Heather A. Lowe, Legal Counsel and Director of Government Affairs, Global 

Financial Integrity ............................................................................................... 7 

Prepared statement .......................................................................................... 46 

Responses to written questions of: 

Senator Brown ........................................................................................... 111 

Senator Sasse ............................................................................................ 117 

Senator Tillis ............................................................................................. 124 

Senator Warner ......................................................................................... 130 

Senator Cortez Masto ................................................................................ 134 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Countering International Money Laundering ........................................................ 145 

Letter submitted by the FACT Coalition ............................................................... 174 

Statement submitted by the Independent Community Bankers of America ...... 176 

Letter submitted by the Credit Union National Association ............................... 178 

(III)

(1) 

COMBATING MONEY LAUNDERING AND 

OTHER FORMS OF ILLICIT FINANCE: OPPORTUNITIES TO REFORM AND STRENGTHEN BANK SECRECY ACT ENFORCEMENT 

TUESDAY, JANUARY 9, 2018 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

Today’s hearing is the first of two currently planned hearings to 

explore the difficult issues underlying modernizing a decades-old 

system designed to combat money laundering, terrorist financing, 

corruption, weapons proliferation, sanctions evasion, and a host of 

other threats. 

Our Nation’s financial industry has long worked on the front 

lines of preserving the integrity of the United States and international financial systems and in partnership with our Government since at least when the Bank Secrecy Act was first enacted, 

in 1970, and the phrase ‘‘anti–money laundering’’—or AML—was 

coined a few years later. 

From its tax and narcotics beginnings, the BSA, its regulations, 

and other supporting laws have evolved into a mass of counterthreat-finance regulatory requirements designed to focus the industry’s attention on an ever-expanding set of domestic and foreign 

threats to the Nation. 

These threats were brought to the forefront of Americans’ hearts 

and minds and have only increased after the terrorist attacks of 

September 11, 2001, and, in response, the enactment of the PATRIOT Act. 

The threats against our Nation, our people, and our financial 

system are real. Everyone sees these threats. One only needs to 

turn on a TV or read an article about corruption, drugs, or a terrorist attack and wonder about the money that had to be involved 

to make it happen or the profits that came as a result. 

Illicit money enables bad people to do the worst of things in this 

world. Where does it come from? Where does it go? And who has 

it now? These questions will always need to be asked and answered. 

2 

In fact, these questions are being answered, whether they always 

know it or not, by an entire industry of technical and financial professionals dedicated to managing the day-to-day BSA and other 

threat finance compliance requirements of our financial institutions. 

They do the hard work of monitoring hundreds of millions of financial transactions and producing millions of reports so that law 

enforcement and security professionals can do their jobs of managing an increasingly complex domestic and international threat 

picture. 

But a lot has changed in this nearly 50 years that have passed 

since the BSA was enacted. Certainly the sophistication, types, and 

numbers of threats have increased. The regulations that focus the 

financial industry’s attention on suspicious activities have also increased. So, too, have the resources that are expended and paid by 

industry and Government alike to maintain a constant vigilance 

over threats to the financial system. 

It is incumbent on this Committee to then ensure that all of this 

work and the resources involved result in a ‘‘high degree of usefulness’’ in protecting this Nation, as intended by the BSA itself. 

I welcome each of our witnesses today whose individual expertise 

in financial regulation, law enforcement, and financial transparency together will help inform the Committee of potential ways 

to sharpen the focus, sustainability, and enforcement of a modernized, more efficient U.S. counter-threat-finance architecture. 

Getting this right saves lives. Period. 

This is a bipartisan issue. 

This is both an American and a global issue. 

I look forward to working with Senator Brown and all Members 

of the Committee to see that the needs of the stakeholders in this 

important work are critically examined and addressed in order to 

modernize a system that benefits so many, at home and abroad. 

Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for this important 

hearing, the first of two this month in which the Committee will 

look at ideas for strengthening and reforming our laws to combat 

money laundering and illicit financial transactions. 

Some of the world’s largest banks and their foreign partners 

have run afoul of these laws. In some cases they had inadequate 

anti–money laundering oversight and compliance regimes. Other 

banks willfully and persistently violated U.S. bank secrecy, sanctions, and anti-corruption laws. 

In fact, the GAO concluded last year that from 2009 to 2015 

about $12 billion was collected in fines and penalties and forfeitures from financial institutions for violations of the Bank Secrecy 

Act, the Foreign Corrupt Practices Act, and U.S. sanctions requirements. 

These laws are all tools that aid the Federal Government in detecting and disrupting and inhibiting financial crimes, terrorist financing, bribery, and corruption. 

During that same period, Federal agencies assessed more than 

$5 billion specifically for Bank Secrecy Act violations. When one 

3 

widens the lens and reaches back to 2005, that number grows larger, much larger. 

Many of these banks violated U.S. anti–money laundering and 

sanctions laws by knowingly facilitating financial transactions for 

rogue jurisdictions like Burma and Iran and Sudan and Libya and 

Syria. 

Some conducted transactions with individuals or entities affiliated with terrorist organizations and drug cartels in violation of 

U.S. law. Many violated the law for several years. And in some 

cases, foreign affiliates of banks operating in the U.S. were working 

actively to circumvent the compliance systems of their own banks. 

These are not victimless crimes. For example, money laundering 

on behalf of drug cartels has a direct line to the opioid epidemic 

in my State, where more die of opioid overdoses than any State in 

the country. These drug cartels have a direct line to the opioid epidemic in Ohio, where Sinaloa cartel actors have been active in robbing so many families of sisters and husbands and parents and 

children. 

These types of violations should concern those who argue we 

should loosen laws or regulations or oversight in this area. These 

laws have been critical in protecting the integrity of our financial 

system. 

That said, we should assess whether there are ways to responsibly update and strengthen the anti–money laundering framework, including through new measures to require beneficial ownership information when companies are formed in the U.S. Right now 

the U.S. has the dubious distinction of being a haven for anonymous shell companies. That needs to end so that law enforcement 

can stanch the flow of money into illegal activity. 

Broadening information sharing may make sense, but important 

questions about privacy protections, of course, must be answered. 

We should focus on sharpening suspicious activity reporting and 

bolstering efforts by law enforcement to give banks guidance on 

what to look for, instead of substantially raising currency reporting 

thresholds. 

There are many tough questions for the Committee to consider 

on these issues. I welcome our distinguished witnesses, and I look 

forward to the comments of the panel. 

Thanks, Mr. Chairman. 

Chairman CRAPO. Thank you very much, Senator Brown. 

We appreciate our witnesses’ being with us today, and I want to 

remind the witnesses that we have asked that you each keep your 

initial presentation to 5 minutes so that we can have time for our 

questions and answers; also, to remind the Senators that they 

should keep their questions to a 5-minute period. 

Our witnesses today are Mr. Greg Baer, president of The Clearing House Association; Mr. Dennis Lormel, president and CEO of 

DML Associates and a former Chief of the FBI Financial Crimes 

Program; and Ms. Heather Lowe, the legal counsel and director of 

Government affairs of Global Financial Integrity. 

Again, we appreciate all of you being with us today, and, Mr. 

Baer, you may proceed. 

4 

STATEMENT OF GREG BAER, PRESIDENT, THE CLEARING 

HOUSE ASSOCIATION 

Mr. BAER. Thank you. Chairman Crapo, Ranking Member 

Brown, and Members of the Committee, I appreciate the chance to 

testify before you today. 

Over the past year, the Clearing House has convened off-therecord symposia on the AML/CFT system and produced a comprehensive report. We included a wide range of stakeholders from 

banking, data science, diplomacy, and global development. We emphasized law enforcement input, which included former senior officials at Treasury’s Office of Terrorism and Financial Intelligence, 

former FinCEN Directors, the former Chief of the AML Unit at the 

SDNY, and numerous former officials from Justice, DEA, IRS, Customs, and Scotland Yard. The consensus, reflected in our report, is 

that our current AML/CFT system is extraordinarily inefficient, 

outdated, and driven by perverse incentives. 

Collectively, U.S. financial firms act as an intelligence-gathering 

agency for law enforcement and national security, employing thousands of people and spending billions of dollars. That collective 

agency currently yields much extremely valuable intelligence, but 

a fraction of what a modernized, properly targeted regime could 

achieve. 

An effective approach to AML/CFT should be risk-based, devoting 

the greatest majority of resources to the most dangerous activity. 

Unfortunately, banks have been pushed away from risk-based approaches because their performance is graded not by law enforcement or national security officials but, rather, by bank examiners, 

who do not track how the intelligence is actually used. Instead, 

those auditors focus on what they know: policies, procedures, and 

quantifiable metrics—for example, the number of computer alerts 

generated. 

So, for example, if a bank were to start a financial intelligence 

unit focused on the opioid crisis, it would likely receive no examination credit for that activity. It would receive blame if a diversion 

of resources caused it to fail to file a SAR in another area. 

What gets measured gets done, and providing valuable intelligence to law enforcement or national security does not get measured. According to bank analysis, there is little to no governmental 

analysis. For the average SAR filing, there is a less than 10 percent chance that any law enforcement follow-up will occur. For certain categories of SARs—structuring, insider abuse, and here insider abuse includes teller crimes—the yield is close to 0 percent, 

and those SARs—insider abuse and structuring—now represent a 

majority of the SARs filed. 

Furthermore, banks know that the fastest way to get in regulatory trouble is failure to file a SAR that an examiner subsequently determined should have been filed. Therefore, they reportedly spend more time documenting decisions not to file SARs, papering the file, than they do following up on the SARs they do file. 

In other words, they focus on the noise, not on the signal. 

To file SARs, in practice, almost all banks hire one of a handful 

of vendors who construct rules for generating alerts—for example, 

three cash deposits between $5,000 and $10,000 in a 3-week period, 

or a wire transfer over $1,000 to a high-risk country, say Mexico. 

5 

These crude rules generate numerous alerts, and bank investigators must then decide whether to clear the alert or file a SAR. And 

examiners will criticize thresholds that do not generate a large 

number of alerts. Of course, it is widely understood that sophisticated criminals know these rules, as the software is for sale and 

widely distributed, and its rules do not change much over time. 

Consider then the potential for revolutionary change that artificial intelligence and other concepts therefore present. AI does not 

search for previously identified typologies but, rather, mines data 

to detect anomalies. It gets progressively smarter, it would not be 

easily evaded, and it changes as criminal behavior changes. 

The current system is not modernizing, however, because there 

has been no indication from the regulatory agencies or others that 

dollars can be shifted from the existing, rules-based system to a 

better one—in other words, that firms will be rewarded, not punished, for innovation. 

Perverse incentives also explain a push for banks to eliminate 

clients in countries or industries that could end up creating political risk, so-called derisking. A recent report in The Economist 

notes, ‘‘Derisking chokes off financial flows that parts of the global 

economy depend on. It undermines development goals such as 

boosting financial inclusion and strengthening fragile States. And 

it drives some transactions into informal channels, meaning that 

regulators become less able to spot suspicious deals. The blame for 

the damage that derisking causes lies mainly with policymakers 

and regulators, who overreacted to past money-laundering scandals.’’ 

The cause of derisking is clear: Regulators require banks to deem 

certain accounts ‘‘high risk’’ based on factors such as line of business or country of origin. The cost of maintaining that account 

thereby rises exponentially as the bank must conduct an independent investigation of each such client, and that does not even 

include the risk of fines in the event the client actually does something wrong. The safest alternative is always to derisk, that is, fire 

the client. 

Last, one important change to the current system that requires 

new legislation is ending the use of shell companies with anonymous ownership. The Clearing House strongly urges Congress to 

adopt such legislation promptly and is pleased to see bipartisan 

support for it. 

I hope this testimony has been helpful, and I look forward to 

your questions. 

Chairman CRAPO. Thank you, Mr. Baer. 

Mr. Lormel. 

STATEMENT OF DENNIS M. LORMEL, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, DML ASSOCIATES, LLC, AND FORMER 

CHIEF, FBI FINANCIAL CRIMES PROGRAM 

Mr. LORMEL. Thank you, Chairman, and thank you guys for 

holding this hearing. I think this is really an important topic. And 

to your point in your opening statement, when you talked about 

saving lives, when I was in the FBI, we actually were able to help 

save lives based on Bank Secrecy Act information and investigations that we conducted. 

6 

I have given you a statement for the record, and I am just going 

to highlight some points on that, and I will look forward to questions afterward and for the discussion. I certainly appreciated 

Greg’s testimony. And as I said, I was in law enforcement, and I 

have been doing this for 45 years, and in law enforcement I was 

the direct beneficiary of suspicious activity reports in particular. 

And I agree that we have a lot of inefficiencies in the system, and 

they need to be improved, and this is a great starting point. And 

I believe that the Clearing House report is a good starting point for 

discussion. 

I also think that we need to have a more robust discussion on 

this, and I would encourage you to include law enforcement more 

actively in that dialogue, and particularly when we get into SARs, 

and I will close out my testimony on SARs when we get to that. 

I really applaud what you guys did in having the symposiums, 

and I was not involved in that at all. And one of the things that 

concerned me was the level of actual participation law enforcement 

was involved, and I know you mentioned some people that you had 

spoken to, and certainly that is very helpful. But I spoke, after you 

issued the report, to current executives in law enforcement, people 

that sat in the chairs I sat in, and in other chairs in other agencies, 

and they were not involved in the dialogue. And I think it is really 

important that going forward that those voices are heard, particularly if you get into the situation where you look at suspicious activity reports and you determine—or currency transaction reports, 

and you consider changing the reporting thresholds. I think particularly in today’s world and environment, where we talk about, 

you know, the threat of homegrown violent extremists in particular, currency transaction reports will factor into those types of 

investigations. And I am sure the FBI can provide statistics on that 

type of thing. 

One of the things that I like to do is visualize the flow of funds, 

and as Mr. Baer pointed out, there are a lot of inefficiencies in the 

current system, and we really need to look at it and bring those 

up to date. But from the vantage point where I came from, the information that flows—so law enforcement is the back-end beneficiary of suspicious activity reports and other BSA reports. Financial institutions are really the front-end monitors when it comes to 

that type of information, and so they provide that information and 

it flows to law enforcement. And the basic flow, the basic system, 

and the information that comes to law enforcement on a regular 

basis is good information. The problem is that as you add filters 

on top of that—and the regulatory filters is what I am talking 

about—the more regulatory filters and the more convoluted the 

flow of information from banks to law enforcement, that is where 

we run into the inefficiencies and the system being flawed. And 

that, in my view, is where we need to focus our attention going forward in terms of improving the system. 

And then on the subject of SARs, as I said, I was the direct beneficiary of SARs in law enforcement, and one of the things that I 

would encourage you to look at, if you get into the SARs, is the law 

enforcement constituents. For instance, I datamined quite a bit at 

the program level at FBI headquarters. We had the ability to do 

datamining and a lot of broad analytical work that was very helpVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
7 

ful. If you talk to people who work with SARs at the street agent 

level, at the levels of the SAR Review Teams—every U.S. Attorney’s Office has a SAR Review Team. They still manually review 

SARs. So you are going to get two different perspectives on the use 

of SARs. From where I sat, more was better because we were able 

to use a lot more information and use it against other data sets. 

To the SAR Review Teams out in the streets, they have to physically look at every SAR, they are going to say less is better. So 

I think there is a balance there as to the quality of the SAR information. 

And then to the point, again, I was firsthand involved in and a 

firsthand beneficiary of some very good, innovative projects, and I 

cite one in my written testimony that JPMorgan Chase did back in 

2009, and it came out in 2011, where they worked with Homeland 

Security, and they had targeted monitoring. It was to the same 

points that you were making about transaction monitoring, and 

this was targeted monitoring where they specifically set up certain 

rule sets. And, consequently, the hit rate in that type of proactive 

investigations, they have tremendous results. They are tremendously effective, they are very efficient, and we need to encourage 

more of that type of work. And I agree that there is not the incentive there for banks to conduct those types of investigations. And 

I also believe—and I do a lot of training with financial institutions, 

and I am a firm believer, and I look at things, and I try to assess 

the flows, information flows, and that is how I broke down the flow 

of SARs or BSA data to law enforcement from financial institutions. And I think that in that regard—and I will stop, sir, on this. 

I am very passionate about this topic. And I believe that the more 

we can do to encourage law enforcement and banks to work together as partners and to work together in terms of being 

proactive, and particularly when we were in a reactive type of environment, the better the outcome. 

Chairman CRAPO. Thank you, Mr. Lormel. 

Ms. Lowe. 

STATEMENT OF HEATHER A. LOWE, LEGAL COUNSEL AND DIRECTOR OF GOVERNMENT AFFAIRS, GLOBAL FINANCIAL INTEGRITY 

Ms. LOWE. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee, for the opportunity to testify before you today on this very important topic. I hope that my 

contributions to today’s hearing will help you take measured and 

informed decisions that are in the public’s interest with respect to 

the U.S.’s anti–money laundering regime. 

So my written testimony, of course, is much more lengthy and 

more detailed, and I hope that you have a chance to read through 

that. There are additional points in that testimony that I will not 

be making verbally today. 

So some of the key points that I did make in my testimony are, 

first, that money laundering and the technology that can help us 

combat it are both evolving. And in light of this, it is appropriate 

to consider whether changes to our regulatory structure should be 

made. 

8 

Equally, however, it is critical that Congress balance and carefully weigh the potential benefits against the potential negative 

ramifications before making decisions in this area. 

Number two, as you have seen, money-laundering enforcement 

tends to be through identification of regulatory infractions as opposed to criminal money-laundering cases. The burden of proof is 

lower. It is far less costly for the Government to pursue regulatory 

infractions than pursuing criminal money-laundering charges, and 

yet it still has a very dissuasive effect. Despite this, the hallmarks 

of serious criminal money laundering are really there in those 

cases, in those regulatory cases. As a result, decreasing the ability 

to enforce using the regulatory approach may have serious, negative repercussions on compliance and, ultimately, allow a lot of 

criminal access to the U.S. banking system. 

Number three, it is critical that information about the natural 

person(s) who own and control companies—otherwise known as 

‘‘the beneficial owners’’—is finally collected either by the States or 

by the Federal Government and that it be made available to law 

enforcement and to banks at the very least. Companies with hidden 

ownership are the number one problem in the anti–money laundering world, and the U.S. cannot continue to allow our failure to 

act to put the U.S. financial system and the global financial system 

at risk. 

Number four, I strongly oppose one of the Clearing House’s proposals, and that is transferring responsibility for setting AML priorities for individual banks from those banks to FinCEN. Banks 

are best placed to understand their own business, their own systems, the risks that their own client base presents, and what is inherent therein, and to create the systems that work best in their 

own business models to combat that money-laundering risk. 

FinCEN and other regulators should review those assessments, but 

they cannot be responsible for carrying them out. They do not have 

the information they need to do so. 

The Clearing House recommends greater information sharing 

among banks and with Governments in a number of ways, and we 

do really support that. It is a really significant impediment to AML 

enforcement around the world that this information sharing is not 

happening. However, it really does need to be done with some appropriate safeguards, especially where it may result in somebody 

being denied banking services. Say a bank in Hong Kong denies 

services for whatever reason, sends that information to the U.S., 

and U.S. banks deny services, that person may not be able to get 

a bank account anywhere, and there may be a good reason for that, 

which is fine; but they also need an opportunity to disprove whatever information has been collected on them and give them access 

if they do have legitimate business. 

Number six, transferring raw banking data from banks to 

FinCEN to analyze, with the appropriate privacy safeguards, is not 

actually a bad idea either. However, it really is essential that we 

do not absolve banks of the responsibility to carry out their own 

analysis as well, which they have the ability to review within the 

context of the additional client information that they are holding 

and because they are the gatekeepers to the financial system. The 

Federal Government cannot do that alone. 

9 

Number seven, some types of entities and persons should be required to have AML programs in place that currently do not, such 

as those involved in real estate, lawyers, and others. The banking 

sector cannot and should not carry the responsibility alone, especially where these persons act as a proxy to open the door to the 

financial system for criminals and their money. 

And, finally, I just wanted to end with an overall concept, that 

money-laundering and sanctions violation cases over the past few 

years really relate to willful, knowing, and very egregious violations of U.S. laws and regulations that have resulted in U.S. and 

foreign banks granting access to the financial system for hundreds 

of millions of dollars in funds supporting genocide and funds supporting major, violent South American drug cartels, and many 

other violations. These fines that have resulted from these cases 

have been seen by the banking industry as heavy, so banks have 

begun to take AML regulations that have been in place for many 

years much more seriously. I would, therefore, remind Members of 

Congress that the regulatory burden here has not actually really 

been increasing. The threat of being found out is what has actually 

been increasing. 

Thank you very much. 

Chairman CRAPO. Thank you very much, Ms. Lowe. 

Before I go to my questions, I would like to ask unanimous consent to enter into the record two letters—or a letter and a statement from industry: one from the Credit Union National Association and another from the Independent Community Bankers of 

America. Without objection, so ordered. 

My first question, Mr. Baer, is for you. There has been considerable discussion of the need for improved information sharing between financial institutions and regulators and among the financial 

institutions themselves. How is information sharing accomplished 

under the current regime? 

Mr. BAER. Sure. Thank you, Mr. Chairman. Right now, under 

Section 314(b) of the USA PATRIOT Act, information sharing is allowed among firms with regard to two types of offenses: one is terrorist activity, and the other is anti–money laundering. The definition of anti–money laundering can be a little complex because that 

can include some of the predicate offenses. But there does seem to 

be room, and not a lot of room, to draw a principal distinction between anti–money laundering and a lot of other Federal crimes to 

expand the categories of offense for which, you know, information 

sharing is permitted. 

It has multiple benefits. It certainly allows banks to better identify who the true criminals are. It also, in an underrated way, allows banks to identify people who are not criminals. So one bank 

may be looking at only one piece of the puzzle and see something 

that looks suspicious and speak to another bank and realize, no, in 

the broader context, that is actually OK. 

So it makes the whole system more efficient both in terms of 

finding bad guys and not finding good guys. 

Chairman CRAPO. So I was going to ask how we could improve 

that, but I think you just described it, right? Yes, Ms. Lowe, would 

you like to comment on that? 

10 

Ms. LOWE. Sure. I would like just to add some little more of a 

context to this. 

Chairman CRAPO. Turn your mic on. 

Ms. LOWE. Oh, sorry. It has a green light. 

Just to add a little international context and a little historical 

context to this particular area, back in 2012, the Financial Action 

Task Force, which is the international anti–money laundering 

standard-setting body, was going to update its recommendations, 

and one of the proposals that they made was that banks be required to share information across borders in this way. And, basically, everyone agreed that that was a really good idea and really 

important back in 2012, but realized it could not actually be included in the recommendations because, in particular, the EU’s privacy laws would actually prevent that information sharing from 

happening. Since 2012, those privacy rules in the EU have actually 

only strengthened. 

So in looking in this area, if you are looking to make revisions 

here, something you also need to be looking at are the EU privacy 

laws as well as the U.S. privacy laws to see, you know, does anything need to change in there, and we may need to be doing international—work across the ocean to really move that forward, because we cannot really do it alone. We can allow it within the U.S., 

but abroad is going to be much more difficult. 

Chairman CRAPO. Well, thank you, Ms. Lowe. That perspective 

is helpful. 

Mr. Lormel, you mentioned yourself the Clearing House report 

that was put out and indicated that you feel we need some more 

law enforcement engagement on that. With regard to the report 

itself, it characterizes the current AML/CFT regime as outdated 

and in need of redesign to increase the efficiency and effectiveness 

of it. Are there parts of that report that you agree with? And if so, 

which are the most critical parts of it that you see? 

Mr. LORMEL. Well, I do agree with parts of the report for sure, 

and I believe that the comments about the system being antiquated 

is—they are good comments, and I think that we really need to 

look at the regulatory framework, and I think where they pointed 

out in the report that the regulators—they have a different perspective, and that is why when I wrote my statement, I talked on 

the importance of perspectives and understanding perspective. 

And, quite frankly, if you look at law enforcement and financial institutions and you put them in a triangle, where you have got the 

financial institutions here, law enforcement and regulators, you 

will have hard lines between the regulators and law enforcement, 

and there is a broken line between law enforcement and the regulators. And so I think a lot of the dialogue belongs—should belong 

there and bringing it—but what we need to do is we need to encourage—and that is the other thing I agreed with in the statement. I am a firm believer in innovation. I think our system is 

very—it is inherently reactive, and the more we can do to use financial intelligence information from a proactive perspective, the 

better. So where they encourage innovative and incentivizing innovation, I think that is important. 

In my statement I wrote about a bank—and I am not really at 

liberty to talk about it other than the fact that it is similar to what 

11 

I described with the JPMorgan Chase thing. And if you talk to 

those bankers and they were going to be forthright about it, what 

they would tell you is that there is no incentive and that the regulators really do not encourage them to do that. And I think that 

is where I agree and where I think the building block going forward is how do we promote innovation. 

Chairman CRAPO. Thank you very much. My time has expired. 

Senator Brown. 

Senator BROWN. Thanks, Mr. Chairman. Before I start, I would 

like to ask unanimous consent to include a letter and other documents from the FACT Coalition into the record and that the record 

remain open for 5 days for any other documents that Senators 

might have. 

Chairman CRAPO. Without objection. 

Senator BROWN. Mr. Lormel, thank you for your service at the 

FBI, and thank you for serving as Chief of the Financial Crimes 

Program. Let me start with you. Give us a sense of how you think 

law enforcement can better respond to the traditional criticism 

from banks that it too seldom shares targeted information that is 

useful to banks in assessing customer risks. 

Mr. LORMEL. Yes, sir. I think that law enforcement, really we 

need to put a feedback mechanism or we need to do more to encourage feedback in working with financial institutions, and I believe that in a lot of instances—and I certainly, when I was in law 

enforcement, was guilty of this to a degree. Again, it goes to a matter of perspective and almost wearing blinders that I am trying to 

develop my law enforcement case and in doing that I did not look 

or I did not consider enough the position of the banks and trying 

to determine how I could better share information with banks. 

One of the things I put in my statement, for instance, on the subject of terrorist finance is the fact that—and I am sorry, sir, I may 

be drifting from your question. But I think it is important that we 

put mechanisms in place to provide security clearances to people in 

banks where we could share classified information and other intelligence information back that they can run into their systems and 

use for transaction monitoring. If you think about it, the financial 

institutions are the repository. They have got the financial intelligence, and how do we provide them with more information, and 

maybe it is the—— 

Senator BROWN. Is there any evidence—sorry to interrupt. Is 

there any evidence that that is happening or that there is a mechanism, an effort to make that happen other than your saying you 

would like that to happen? 

Mr. LORMEL. Which, the security clearances? 

Senator BROWN. Yeah. Well, the security clearances and then the 

sharing back of information. 

Mr. LORMEL. Yes, there are initiatives. There are one-off initiatives at different agencies. For instance, I started the Terrorist Financing Operations Section at the FBI. TFOS continues to have 

working groups with a number of the financial institutions. They 

have major financial institutions they deal with. And to the extent 

they can permissible, they share information. We were involved 

with the SWIFT project, for instance, and the sharing of information among agencies and sanitizing some of that information and 

12 

being able to share that back to the extent you can with the banks. 

I do not think we do it as consistently as we can. 

Senator BROWN. Thank you. 

Ms. Lowe, you have done a lot of work for the Global Financial 

Integrity on transparency internationally and in the U.S. with 

FATF and otherwise including beneficial ownership legislation. Describe for the Committee how you think we should be thinking 

about new beneficial ownership requirements. For example, what 

are the key elements in the definition that you think are critical? 

Ms. LOWE. Sure. So key elements of the definition—and the definition is critical to any legislation. I think we have a problem actually with the current customer due diligence rule that was adopted 

for banks where the definition is actually not sufficient. It does not 

meet international requirements. The FATF and the IMF have 

both said the same, so important to note that that is something we 

should probably look at. But for beneficial ownership, you want to 

know the direct or indirect persons who own or control a company 

or who have control by other means. And there is a recent Kazakh 

case which involved control by other means. It is a very difficult 

thing to determine, but you need to be asking the questions to figure out where it exists. So those are really important elements. 

I think that the U.S. Treasury has been pushing the idea that 

one should be able to simply list a senior manager of a company 

as the beneficial owner. That is not a beneficial owner by any international definition or anybody’s idea of who is a beneficial owner 

of a company. It is the person at the top of the chain or people at 

the top of the chain who own or control the company. 

The other thing that I think the U.S. Treasury has been pushing 

is the concept that if a company does not have anybody who owns 

more than 25 percent of that company directly or indirectly at the 

top, then there is nobody with enough beneficial ownership to actually be listed. So, therefore, if you have or create five people to own 

20 percent of a business, you would get away with not listing anybody as your beneficial owner, which is really not acceptable. It is 

incredibly easy to get around. 

I would note that the SEC accepts a 5-percent threshold because 

they do require beneficial ownership of information for SEC-regulated entities. And, actually, in the FATCA legislation, Congress 

put that threshold at 10 percent. Treasury, when it actually implemented, implemented at 25 percent. So I would note that difference 

as well. 

Senator BROWN. Why would that be? Why would Treasury implement it that way? 

Ms. LOWE. You would have to ask Treasury. I think they think 

it is easier to comply with. I think it—— 

Senator BROWN. Which is kind of not the point. 

Ms. LOWE. Right, which is kind of not the point to my mind. But 

I would suggest you ask Treasury that question. 

Senator BROWN. Thank you. 

Chairman CRAPO. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

I am just curious. The United Kingdom recently established a 

body known as the ‘‘Joint Money Laundering and Intelligence Task 

Force’’ that brings together financial institutions, law enforcement, 

13 

and trade associations to discuss AML risks and how Government 

and private industry can work better together. Can you discuss the 

efficacy of the U.K.’s task force and whether or not there is anything that we can learn from the British system? It kind of comes 

back down to either a coordinated effort where you eliminate some 

of the dotted lines and so forth. But I am just curious if any of you 

have had any contact with or if you are familiar with that system 

and how that compares with ours. Yes, sir? 

Mr. BAER. Yes, Senator, actually we have met with them a couple of times, and, actually, they attended our symposia. We think 

it is a very good model. It is not an entire anti–money laundering 

system, but it is the sort of thing you would take for granted that, 

of course, you would have, you know, law enforcement, intelligence, 

senior bank folks sit down on a regular basis and basically work 

cases together. It is the type of informal, now through JMLIT formalized information sharing that we very much support, and it is 

done in a very thoughtful way there. 

Now, that is not a replacement for the broader AML/CFT regime 

or OFAC or any of the other things. So I would not describe it as 

a substitute for the current regime, but it is certainly a very useful 

component potentially of a U.S. regime, and we would very much 

support a similar endeavor here. 

Mr. LORMEL. I certainly agree with that, and some of the training I conduct, I have trained with the former head of terrorist financing for Scotland Yard, and he was an original member of 

JMLIT, and he really emphasizes the importance of that sharing, 

and to bring the banks and the intelligence community and law enforcement together under that Government umbrella is a phenomenal thing. And I would really hope we can build on that model 

and try to replicate it to the extent we can. 

Ms. LOWE. And just to add on there, the original country that actually did this was Australia under what they called ‘‘Project 

Wickenby’’. So that is also something to take a look at. 

Something that the U.K. is doing very well is this concept of the 

FinTech Sandbox, so within this area. They are creating a system—they have created a system where a financial institution can 

come to them and say, ‘‘We would like to try this new technology. 

We know it is not something that is OK under the regulations at 

present. Can you take a look at it? Let us know what you think, 

let us know if we can try it out. And then we will give you feedback 

on how it is going and you can review.’’ And then over time, the 

Government can then approve that technology for the larger industry. 

So that I think is a really good process that they have put in 

place that we should be looking at as a model at this point. 

Senator ROUNDS. Thank you. 

I am just curious, with regard to SARs and the reporting requirements right now, there is one process in which the regulatory processes are set up so that you define, and clearly everybody knows 

what they are with regard to the reporting requirements for the 

different monetary transactions that occur. Bad guys know what 

they are as well, and so you have, first of all, a system set in place 

today that everybody knows what the rules are, and the real challenge for those that wish to move resources around is how do we 

14 

appropriately get around those SARs or the reporting requirements. 

Can you talk to me a little bit about our focus on the compliance 

side of making sure that the financial institutions are appropriately reporting the transactions that are occurring that are suspicious in nature versus our ability using existing resources or the 

need for new resources to go after the unique ways in which the 

bad guys can get around those reporting requirements? 

Mr. BAER. Sure. It is a great question, Senator. It really gets to 

sort of the heart of the matter here. 

Right now banks are, as I noted, using sort of a rules-based system developed by a set of vendors who are common to all, and 

those rules are rather crude. They overgenerate alerts. They require huge investigative resources to basically clear away the chaff 

and whichever is left, the wheat. And that is a fantastically sort 

of complex and time-consuming and not terribly productive endeavor. 

It is also an endeavor that they have to undertake with regard 

to offenses that no Federal prosecutor would ever prosecute. So our 

estimate is that approximately 40 percent of SARs filed are structuring, that is, multiple cash deposits that add up to 10 percent— 

$10,000, but could just as easily in most cases are just simply a 

small business that does a lot of cash. But that—and the yield on 

those SARs is close to 0 percent, and yet they are 40 percent of the 

SARs filed, maybe more. 

The same thing with insider abuse where you fire a call center 

employee for misstating his or her time sheets or fire a teller because the till is short. Those are not crimes that are going to be 

prosecuted, but that is where the SAR resources are going. Right 

now the largest focus of the AML system is filing sales practices 

SARs on low-level employees, unfortunately. 

So it gets to what I think Dennis was talking about, which is, 

yeah, we can—and I think what the Ranking Member was talking 

about, we could say, law enforcement could say let us prioritize 

opioids, let us prioritize human trafficking, let us prioritize other 

things. That is what any rational intelligence community would do, 

any rational law enforcement or national security organization 

would do. And you can tell the banks that. But the banks are in 

no way absolved by the bank examiners of having to file those 

SARs on teller abuse. So they cannot shift the resources out of that 

to the more serious crimes to more innovative and thoughtful artificial intelligence and other means of catching bad guys. They are 

sort of stuck in the mud in an old rules-based system that does not 

work very well. 

Senator ROUNDS. Thank you. 

Chairman CRAPO. Senator Reed. 

Mr. LORMEL. If I can just add one comment, sir, just on that. 

Chairman CRAPO. Briefly. 

Mr. LORMEL. I believe, though, that—I mean, and I agree with 

that statement. But at the same token, we still see a good number 

of SARs that come through that are very meaningful and they continue to come through. So there is a fine balance here that we really have to try to achieve. 

Senator ROUNDS. Thank you, Mr. Chairman. 

15 

Chairman CRAPO. Senator Reed. 

Senator REED. Well, thank you very much, Mr. Chairman. Let 

me thank all the witnesses for their excellent testimony. I have reviewed it, and I particularly thank you, Mr. Lormel, for your service in the FBI. Thank you, sir. 

One of the issues that has been raised in your testimony and in 

your written statements is beneficial ownership and shell companies, and one of the disturbing things, we are getting the reputation around the world as a place to go if you want to hide money, 

and we used to think, at least when I was younger, that that was 

un-American, that, you know, it was these little exotic lands overseas, et cetera. 

So beginning with Mr. Baer, given the context that most of this 

is a function of State law because unless you are publicly traded 

company, the SEC does not have a lot to do—few exceptions, but 

not a lot to do. So how do we get our arms around this when there 

is a new industry for attracting questionable money because of beneficial ownership rules and limited or shell companies? 

Mr. BAER. Right. It just really gets down to what is the need to 

form a company with anonymous ownership in the United States, 

and the United States, as I think some have noted, is a magnet for 

this because we and I think Kenya are the two worst in the world 

on this. 

There is certainly a legitimate desire, I believe, that you may not 

want the whole world to know who owns your company. Everybody 

uses the example of, you know, when the Disney Corporation was 

buying up half of Orlando, they did not want to have to pay exorbitant rates for the last piece of land. And there may be valid privacy 

reasons where you do not want people to know who owns your company. But we cannot think of any valid reason you would not want 

law enforcement to know who owns your company, or if there is a 

bank that, pursuant to Federal law, is required to know who owns 

your company, well, they should get to peek behind and see who 

that is as well. 

So, you know, I think as Heather noted, there are difficult issues 

around how to define beneficial ownership. We actually support the 

FinCEN final customer due diligence rule on that. But there are 

certainly other ways to look at that. But I think the general notion 

that you should not be able to have a company with anonymous 

ownership from law enforcement and banks who are required to 

know who owns you is a pretty simple concept, and I think that 

is why it has gotten good bipartisan support. 

Senator REED. Just a follow-up, and then I will go to Mr. Lormel. 

One, you could either do it through changes of State law requiring 

the acknowledgment of real ownership, or you could do it through 

the banking laws in terms of banking relationships, even deposits 

that the entity would have to disclose who was, so we have a Federal avenue if we have to deal with this. 

Mr. BAER. Yes, Senator, I think a couple of alternatives have 

been proposed. One is just to have the States do it when you file 

your articles of incorporation, you file your ownership. 

Senator REED. Right. 

16 

Mr. BAER. Some have suggested that—and I do not know if that 

is right or not—that might be a burden on the States or they may 

choose not to do that, so the alternative has been—— 

Senator REED. Well, I think there are about 45 States at least 

that require that. 

Mr. BAER. Yes. So for those, I think at least one of the bills I 

have seen has the sort of fail-safe that if the State does not want 

to do it, FinCEN can gather that information and hold it the way 

it holds a lot of confidential information currently. I think others 

have suggested the IRS. I think FinCEN is probably the right place 

if the State does not want to do it. 

Senator REED. I only have about 2 minutes, but, Mr. Lormel, 

your comments? You are a law enforcement officer. 

Mr. LORMEL. Well, certainly having been in law enforcement, I 

dealt with the challenge of trying to identify beneficial ownership. 

That was always a challenge, and it was always problematic. And 

in today’s world, when we need to get things more urgently, that 

is problematic. I look at this and I look at the good-case scenario 

in a sense, and I agree with Greg that FinCEN may be the better 

alternative. I am a believer going back that the information should 

be collected at the States at the point of incorporation. To me, that 

makes the most sense. And trying to make that uniform I am sure 

would be a bit of a challenge. 

Alternatively, FinCEN would be, I think, a good alternative. The 

IRS is not a good alternative in the sense that that information for 

me as an FBI agent, when I was an FBI agent, I would have to 

get a court order, or I would not have access to that information. 

So it is not relevant then for my investigative purposes. So the 

FinCEN alternative would be a decent alternative. 

Senator REED. Thank you. 

Ma’am, your final comments? 

Ms. LOWE. Sure. You know, I am happy with States collecting it. 

I am happy with FinCEN collecting it. I would note, you know, one 

of the things people raise is the privacy issue. First of all, on the 

Disney example, I would point out that you have two parties in 

that; you have Disney and you have a farmer. And that money— 

I am sorry, that land is worth whatever they can get for it, right? 

You have two parties in a transaction. One party should not have 

more information than the other party has. That is not good economics. So there is that. 

I would say that we are talking about making information on 

beneficial ownership available to law enforcement and to the 

banks, which is fine, and I think it is where we need to go next. 

But I would note that the entire European Union, 28 countries 

have now decided to make beneficial ownership information on 

companies public information, and that is despite their very, very 

strong, you know, individual privacy laws that are in place. Other 

countries around the world are doing the same. Afghanistan is 

working to make public registration of beneficial ownership information. Ghana is doing that. Nigeria is doing that. And we are just 

grappling with can we give it to FinCEN. So a little context there. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

17 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chairman. Thank you all for 

being here. 

Mr. Baer, in your written testimony there was a footnote that I 

found very striking in terms of the regulatory burden and whether 

or not we are putting our resources to their best use. It is on page 

6. It says, ‘‘The over 800 employees in Global Financial Crimes 

Compliance at Bank of America is greater than the combined authorized full-time employees in Treasury’s Office of Terrorism and 

Financial Intelligence and the Financial Crimes Enforcement Network.’’ And that does not include other bank employees in anti– 

money laundering, economic sanctions compliance, business operations, and technology. 

It seems like if you see that with a large bank of the scale of 

Bank of America, which happens to be down in my neck of the 

woods, I wonder what the small banks and medium banks are 

doing in terms of the regulatory burden on them. Are we spending 

that money for its best purposes? Are we spending that money on 

innovative concepts that could be worked back into the financial— 

to a broader benefit for the financial services industry? So I know 

that a part of what I think we have to do is go back and look at 

the practices that seem like they add cost and not value, either as 

they are currently implemented or—can you give me some sense, 

if you were to go through and just do it quick, when we come into 

committees like this, we tend to have a ‘‘Solve World Hunger’’ sort 

of scope to our discussion. And if we were just going to cook a good 

meal and make some progress, what sorts of quick hits, immediate 

obvious things that there seems to be consensus on but no action 

in terms of congressional action? And I would open that up to anybody, starting with Mr. Baer. 

Mr. BAER. Sure. Thank you, Senator. And I would just say we 

highlight those numbers—I mean, not to complain about the cost 

but just to emphasize how important it is that those resources are 

being misallocated. 

Senator TILLIS. Well, I think it is very important for that purpose. 

Mr. BAER. Right, because, again, you are talking about a very 

large intelligence community that has been created under the PATRIOT Act and the BSA, and so it actually really matters whether 

they are well led and they are incentivized to do the right things, 

and the stakes are very high. So it is not, ‘‘Oh, we do not want to 

spend the money anymore.’’ It is, ‘‘We are spending it on the wrong 

things.’’ 

And I should note, you know, I testified last year with a commu- nity banker who had, I think it was, a $100 million bank with 

three branches. He had seven AML compliance officers and four 

lending officers. AML was 15 percent of the budget of his bank. So 

this is not just a problem for large banks. It is a very large problem 

for small banks. He also described how he was pressured to dramatically increase the number of high-risk customers they designated and on which they had to do more and more investigations. 

I actually wrote down the number. His system, they generate 7,100 

alerts a year and file 15 SARs. And they do not even know if any 

of those SARs are of any use. 

18 

So I think I am sort of dodging your question, which is what is 

the easy—— 

Senator TILLIS. But how do we use some of those metrics, some 

of those outcomes to be instructive to what we should first start 

looking at to improve the system? Look, I am not against money 

laundering—I think it is a bad thing. What I want to do is make 

sure as much lead can be put on the target as possible, and right 

now it does not—it seems like we are shooting a lot, but not necessarily hitting the target near as much as we could, and it is costing us a lot of money. 

So, again, I want to move—we are going to submit several questions for the record. This is an area that is very important to me 

and of personal interest, but if we are going to do the best that we 

can, let us say harden our domestic banking system, we obviously 

have a lot of international depositors, and we do a good job here, 

and we do not have strong global cooperation, we do not work 

through some of the privacy differences between the EU, what have 

we done except move the snakes somewhere—I mean, what we are 

trying to do here is not limit our portfolio of banking clients. We 

are trying to identify bad actors and take their money away. And 

so what sort of global initiatives are really leading us down that 

path to say, OK, everything is great here, but the money is still 

flowing through other international banking entities? Ms. Lowe, I 

would be happy to have you answer that one and give me the secret sauce. 

Ms. LOWE. Well, organizations like mine are working internationally on these issues, so, you know—— 

Senator TILLIS. Yeah, but what progress are we making? 

Ms. LOWE. You know, I think actually we are making quite a lot 

of progress. In a lot of the world, the FATF recommendations, the 

sort of framework, if you will, of what we consider to be an anti– 

money laundering regime, has only recently in the past 2 or 3 

years been put in place in many, many different countries. And so, 

you know, as it goes, you put laws in place, and then you give some 

time for the industry to get used to them, to understand how to implement them, et cetera, and then you start enforcing, et cetera. So 

in many parts of the world, this is still very nascent, but the regime and the framework is in place. 

The U.S. FinCEN is our financial intelligence unit, or FIU, and 

we are part of what is called the ‘‘Egmont Group’’, which is the network of financial intelligence units around the world that have 

methods and ways of sharing information among financial intelligence units or between financial intelligence units. And right now 

there are over 135 Egmont FIUs, which tells you that we are making progress. 

I spent a lot of time in Africa last year actually meeting with 

heads of FIUs, and, you know, it is actually inspiring to have those 

meetings because these are people that really want to make a difference and they are trying. 

Senator TILLIS. I am going to submit several questions for the 

record. 

Ms. LOWE. Sure. 

Senator TILLIS. But I would also like you to come back and just 

think about as I would do when I go in any organization, what are 

19 

the things that we should clearly be making consensus on—or making progress on? Because there is consensus, you just need action. 

Ms. LOWE. There is no question on the beneficial ownership. Absolutely no question there. 

Senator TILLIS. So we will look forward to your feedback so that 

we can work with the Chair and the Committee. 

Ms. LOWE. Sure. No problem. 

Senator TILLIS. Thank you. 

Chairman CRAPO. Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Thank you all for this discussion. Mr. Chairman and Ranking Member, I appreciate the conversation. And let me follow up with what my colleague Senator 

Tillis has just been talking about. I agree. I think there has to be 

some balance absolutely on this. I hear from Nevada, from the 

gaming industry, the same thing that I am hearing from the banking industry, some of the concerns. They are absolutely open to 

looking at how we address the security necessary to attack money 

laundering, but at the same time streamlining some of the forms, 

making sure they want to be cooperative with Government, and so 

I am really curious about how we find this balance now. 

The first question I have is you have been talking about—and let 

me just focus on the law enforcement piece of this—this risk-based 

approach. And I am curious, Ms. Lowe, is this something that you 

would support and how would you identify what this looks like? 

Ms. LOWE. The risk-based approach is actually fundamental to 

the entire international anti–money laundering regime. It is not a 

question for me of how does this look. It actually exists. It is a 

framework, and it has a look, right? A casino, for example, or a 

bank looks at what are its financial products or what is its business line. Who are its clientele, and what risks do they pose? What 

countries am I bringing money to and from? And what risks does 

that pose based on whether or not those are high or low risk for 

money laundering, et cetera? And they create a profile. A casino 

will do this, a bank will do this. And then they will craft their 

anti–money laundering regime to reflect what they consider to be 

their highest risks, OK? So that is the basics and the basis of the 

risk-based analysis. 

I think a lot of the concern that you are hearing is that when 

examiners are going in, they are not really open to that risk base 

that the financial institution has put in place. They are looking at 

checking their boxes that are on their forms. 

Senator CORTEZ MASTO. When you say the examiners, that is the 

Federal Government, the regulatory oversight. 

Ms. LOWE. Yes. 

Senator CORTEZ MASTO. They are coming, and they are not recognizing—— 

Ms. LOWE. Right. I understand that that is the concern, and I 

think Greg can probably tell you a little bit more about that. But 

as far as the risk-based approach goes, I absolutely 100 percent 

support that. I think it is incredibly important, actually, in order 

to actually address the problem. 

Senator CORTEZ MASTO. And that is something the industry is 

actually doing now, Mr. Baer. 

Ms. LOWE. Yes. 

20 

Senator CORTEZ MASTO. Is that right? 

Mr. LORMEL. If I can add a comment to that. 

Senator CORTEZ MASTO. Please. 

Mr. LORMEL. Yes, it is one of the fundamentals in an AML program to have a risk-based approach, and fundamentally and the 

way conceptually it is supposed to work then is you identify that 

risk and to what Greg has been complaining about or pointing out 

is the inefficiency. And what has happened is that the regulators 

now have put the banks in a position where they are not necessarily going after that risk or putting metrics in place or procedures in place to deal with that high risk, but they are more into 

the check-box mentality. And I have done a lot of training, and I 

was on the quarter point and monitor team for Western Union, and 

one of the problems they had—and they used that as an example— 

was their investigative process was such that it was really a checkthe-box mentality, and we had to break them from that and say, 

you know, you need to go out and you have got to have an investigative mind-set. And it is a similar thing when you come over to 

the banks, and I think that is where I talked earlier about law enforcement being that beneficiary and the banks being the monitor, 

is the process from getting information from the bank to law enforcement has become so convoluted, and it gets detoured because 

of the regulatory concern or the perceived concerns. 

Senator CORTEZ MASTO. And so can you address your targeted 

monitoring? How do you—is that the same thing or is it something 

different? 

Mr. LORMEL. OK. Well, it is similar in the sense that all financial 

institutions conduct transaction monitoring, and they will have 

vendors or whatever are involved in that. And they have a baseline 

monitoring system, and they identify and they alert to certain 

rules, because you establish the rules and you alert them, and that 

is where one of the problems we have is there are too many false 

positives in the system. So if you are going to do targeted monitoring—and I will use the human smuggling or the human trafficking. We understand these are the scenarios that we know that 

smugglers are going to follow, and this is where, to the question 

earlier from Mr. Reed about how we can help, is to provide the financial institutions, the compliance people, with those scenarios, 

and for them then to build into their systems targeted monitoring 

where you are specifically on top of your regular transaction monitoring, you have a targeted monitoring for a specific crime problem, 

you know, and I would like to see us carry that over to terrorist 

financing if we can—I think the area of human smuggling, you 

have got more defined and identifiable patterns of activity so that 

it is more workable there. 

Senator CORTEZ MASTO. Right. And I know my time is up, and 

thank you, Mr. Chair, but this is something, I agree, the technology 

gives us the ability now to be targeted to also focus on the riskbased, and we do need law enforcement at the table when we are 

having this conversation. So I appreciate the dialogue today. Thank 

you all. 

Chairman CRAPO. Thank you. 

Senator Warren. 

21 

Senator WARREN. Thank you, Mr. Chairman, and thank you all 

for being here today. 

Money laundering is a massive problem. The United Nations estimates that between 2 and 5 percent of global GDP—that is about 

$800 billion to $2 trillion—is laundered through the international 

banking system every single year. That money funds terrorists. It 

funds human traffickers. It funds crime syndicates. So everything 

we can do to try to crack down on that is good, and that is what 

we should be doing. 

But it seems to me we need to rethink a lot of our money-laundering laws, some of which, as you noted, were written back in the 

1970s and are badly out of date, because that makes it hard for law 

enforcement that is trying to stop money laundering and bad for 

financial institutions that are trying to comply with these laws. 

So my colleagues have probed some areas, but I want to ask 

about some other areas where we might be able to update our rules 

and help both law enforcement and financial institutions. So let me 

start with reporting requirements. 

Mr. Baer, I have heard from a lot of community banks and credit 

unions that anti–money laundering reporting requirements are a 

big part of their overall compliance costs, so let us probe that a bit. 

They have pointed out that the threshold that triggers a currency 

transaction report to the Treasury Department has been at $10,000 

since 1972. So let me ask, do you support raising that number? 

Mr. BAER. Thank you, Senator. I think here—I mean, obviously, 

our organization is slightly larger, somewhat larger banks. I think 

for them that number is not as big a burden in the sense that they 

have the capability to file whatever the number is. Those systems 

are built, and it is at least a clear rule. You know the number, 

right? 

Senator WARREN. Right. 

Mr. BAER. The larger problem for them has been questions like: 

How do you decide whether it is $10,000? If you own with someone 

else a company and you make a cash deposit, the company makes 

a cash deposit, and the other owner makes a cash deposit, do you 

add all those up? So those are the tougher issues. But certainly for 

community banks, I agree with you it is a large burden. 

Senator WARREN. OK, that it is large burden. All right. And we 

should at least talk about where the number should appropriately 

be set. But community banks also, when they come in and talk, 

and other small financial institutions, often mention the costs associated with filing the suspicious activity reports with the Treasury 

Department. You know, the banks are filing more and more of 

these reports every year. I note that there was a 50-percent increase in filings just from 2012 to 2017 over this 5-year period. At 

the same time, the banks are submitting this information through 

a reporting process that, as I understand it, makes it actually harder for law enforcement to use. 

So, Mr. Baer, let me ask, the Clearing House has proposed letting banks directly share data with the Treasury Department with 

proper guardrails to protect customers’ privacy. This sounds like it 

would make it easier for the banks, but can you say a word about 

how it would impact Treasury’s ability to catch criminals that are 

laundering money? 

22 

Mr. BAER. Yes, Senator. I think it would have both those effects. 

A lot of times what law enforcement really wants is just the underlying data. They do not need a carefully calibrated paragraph written by a bank compliance officer about that information. So with 

regard to certain types of activities, it would certainly be much 

more efficient to avoid—you know, you have the alert, and then 

you have to conduct an investigation to decide whether to file a 

SAR, and you have to document why you did not file a SAR if you 

decide not to file a SAR, and that is a massive resource drain. And 

it would be much simpler just to file the data with law enforcement 

and let them datamine it to the heart’s content. 

Senator WARREN. OK. 

Mr. BAER. And that would be a very efficient—— 

Senator WARREN. So I hope we keep digging into this because we 

might be able to reduce costs for the banks and at the same time 

help law enforcement do this more efficiently. 

I have got two more questions I want to hit, if I can very quickly. 

Another one is anonymous shell corporations that make money 

laundering easier. You know, there are a variety of proposals out 

there to deal with the so-called beneficial ownership legislation at 

the Federal level that would require companies to disclose their 

owners. Just setting aside the details, which we could go into for 

a long time, can I just ask, do all of you support the idea in principle? Can I just have an on-the-record yes? 

Ms. LOWE. Yes. 

Mr. LORMEL. Yes. 

Mr. BAER. Yes. 

Senator WARREN. Good. OK. So we have got three yeses on that, 

Mr. Chairman. I support this as well. 

Let me ask one more question. Ms. Lowe, in your estimation, if 

we did that, if we revealed the beneficial ownership, would that increase or decrease the costs of anti–money laundering compliance 

for small financial institutions? 

Ms. LOWE. It should certainly decrease it. If they have access to 

that information as a place to start their customer due diligence, 

you know, a lot of people equate customer due diligence and just 

beneficial ownership, and that is not correct. You also need to know 

the source and use of the funds coming in for that account and 

many other things. But that is the start. And if a bank has someplace to start, I think it really reduces their costs significantly. 

Senator WARREN. Good. And I take it that both of you would 

agree with that. 

I just want to say I introduced a bill with Senator Rubio to increase oversight of money laundering used by human-trafficking 

networks, and I was very glad when we were able to adopt that at 

the Committee and get it into the language on the North Korea 

sanctions bill. But we need to do a lot more with our money-laundering laws, and I think we can make some changes to reporting 

requirements and beneficial ownership disclosure that would make 

life easier both for law enforcement and for our smaller banks. And 

I look forward to working with the Committee to be able to do exactly that. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

23 

Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. 

I want to ask a question about AI. I think, you know, in challenging spaces, especially challenging spaces that include data, 

there is a tendency to think of this as sort of a magical solution 

where you just sort of throw big data, throw AI at the problem, and 

I want to get your sense—in the intelligence community, there is 

a conversation about the sort of overabundance of data and the 

overreliance on data points and an underutilization of human intelligence and instincts. And I am wondering what you think about 

the balance between utilizing new data analytics, big data AI in 

terms of fighting money laundering, but also how do we balance 

that with the fact that we probably still need human beings who 

have instincts, who have experience? I think we should move in 

this direction. I just think we should not overcorrect and abandon 

the sort of institutional knowledge of people. I will start with Mr. 

Baer. 

Mr. BAER. Senator, I think that was very well put. I think those, 

like us, who believe there is great potential here do not believe that 

you would eliminate the human element. Really what you would 

use the AI for is—we have talked a lot about alert SAR filing. So 

you would use AI in order to generate fewer alerts but much 

smarter alerts, and you would then still need to have an investigator come in and decide whether or not that was truly a suspicious activity that needed to be reported to law enforcement. 

The true great advantage of the AI approach, though, is you get 

rid of what we have discussed earlier, which is a rules-based approach. If X, then alert. If Y, then alert. But there is a whole other 

alphabet that you are not even looking at. And what AI is able to 

do is look for anomalies. So instead of typologies, it is anomalies. 

And it gets smarter and smarter and it learns. 

So particularly in the world we would hope to get to is where, 

you know, banks could share that information. A friend of mine 

uses the example of a food truck, which is a great way to launder 

money, but it is also a great way to feed people in D.C. So one bank 

may only have three food truck clients, so they do not know what 

is anomalous. But if that bank could share information with a bank 

that has 300 food truck clients say in San Francisco, that bank 

would get smarter. 

Senator SCHATZ. And isn’t that the Square model, on the private 

sector side, isn’t that what Square does? They just sort of presumptively give you the device, and then if you look different than the 

thousands of other florists or food trucks, then you get scrutiny as 

opposed to sort of preapproval? 

Mr. BAER. I think it is a very similar approach. 

Senator SCHATZ. Mr. Lormel. 

Mr. LORMEL. I agree. I think we definitely need to keep human 

intelligence in the mix. It is very important. And certainly you hit 

the word of ‘‘instincts,’’ and, again, I do a lot of training, and I always talk about trusting your instincts, because even with the best 

technology, you need to rely on human experience. And I think that 

is important. But I also think we need to leverage newer technologies to improve our efficiencies and certainly our capabilities. 

And I will look at it from the law enforcement perspective. The 

24 

more that we could use analytical tools, certainly the better and 

the more sharply we can focus our attention, and I think the more 

timely we can act. 

Senator SCHATZ. Ms. Lowe. 

Ms. LOWE. I do not think I have anything to add as far as the 

AI element of it, but just to go back to some of the things that were 

being discussed a little earlier. So a bank is concerned that they 

are spending too much time filing SARs about structuring transactions under a $10,000 threshold. I understand that. But if they 

do not do that, then law enforcement does not see that that same 

client is doing that at six different banks, right? And all of a sudden, what would have been, well, a problem but probably something that would not be investigated if it was only at that one bank 

will be investigated if it is at six different banks, right? So I think 

we need to also bear that in mind when we are talking about what 

do we file SARs on and what don’t we. 

Senator SCHATZ. One final question. I will start with you, Ms. 

Lowe. It appears to me that I do not think we are going to settle 

the sort of technical aspect of these questions and these system improvements, process improvements, and rule changes and all the 

rest of it. And so I know Senator Tillis mentioned the U.K. model, 

the working group. There has been some discussion about a sort of 

FinTech, FinCEN Sandbox. I am wondering what you think about 

establishing a public–private either task force or working group to 

kind of work the technical details, because as much wisdom as is 

possessed on this dais, I am not sure we can settle this in statutory 

law or that that is where this belongs. So I am just wondering, 

very quickly, if you like the idea of some sort of working group in 

statute. 

Ms. LOWE. Sure, I think that that is an important thing, I think 

at least for a limited time period. I do not think it would have to 

go on forever. I would note, though, that the people that are really 

innovating in the FinTech area are actually mainly Nordic. So a lot 

of the companies are based in Sweden and Denmark and Norway, 

and not actually in the U.S. So I would be concerned about limiting 

it just to sort of U.S. involvement. I think you actually need to be 

looking further. 

Senator SCHATZ. Fair enough. But, listen, in the Defense Department, you have the Defense Policy Advisory Board. You can have 

sort of standing committees without authority to actually establish 

policy, but who are highly influential and can help agencies to 

iterate. Do either of you have anything to add on this as my time 

runs out? 

Mr. LORMEL. Well, just if I may, in terms of a working group, the 

Association of Certified Anti–Money Laundering Specialists has a 

FinTech working group that is exploring some of these issues now. 

Mr. BAER. I guess maybe I will end with a discouraging note. 

Senator SCHATZ. Thanks. 

[Laughter.] 

Mr. BAER. To what I was saying earlier, I mean, I think before 

this can really be realized, there are a lot of great vendors out 

there with great AI approaches and other types of approaches, but 

there really is a break on the system in the sense that there is no 

sense from the bank regulatory agencies that banks are going to 

25 

be allowed to shift from the old rules-based system where they file 

thousands and thousands of SARs to a new smarter system. And 

so what you are effectively telling them is you have to double your 

budget. You are not going to get any—— 

Senator SCHATZ. You have got to do both. 

Mr. BAER. Yeah. And so somebody in charge—and that is really 

our core recommendation for all this. Somebody has got to step up 

and say, ‘‘I am in charge, and we want you to stop filing SARs 

where the yield is effectively 0 percent for law enforcement and 

start filing higher’’—— 

Senator SCHATZ. Got it. Thank you. 

Chairman CRAPO. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman, and I appreciate 

you having this. This is something I need to learn more about, and 

we have got a lot of intersection with it on the Intelligence Committee side. And I was really disappointed when Senator Schatz 

came in and jumped the line again, but he actually asked really 

good questions. 

[Laughter.] 

Senator SCHATZ. You seem so surprised. 

Senator WARNER. I know. 

One, I am glad to see the consensus around beneficial ownership 

and the need for new rules. I thought I was also hearing, similar 

to what Mr. Baer has said, that, you know, we need to move from 

this rules-based approach to a more collaborative approach, and actually perhaps with some of the smaller institutions shift some of 

the—shift more of the data to some central point and allow that 

to be analyzed. 

Ms. Lowe, I think earlier on didn’t you push back on that and 

felt that—I thought you made some comments that you thought 

this responsibility ought to stay with the bank examiners. Could 

you explain, if I heard it right? 

Ms. LOWE. Sure. I actually think it is important to shift that information, you know, to, for example, FinCEN because I think they 

need to be looking at that intelligence across different banks. What 

are they seeing as far as trends? Where do you have certain— 

again, you will have clients that have accounts at many different 

banks in order to not raise suspicion, for example. So I think that 

that is a really important shift, and I think it is important that 

FinCEN do that. 

But what is also important is the banks not be absolved of their 

responsibility of doing their own analysis as well because they have 

so much more information about the client and, you know, the 

risks that that client may pose and what they should expect—— 

Senator WARNER. But how would you get at the problem of the 

$100 million bank that has got seven AML individuals and only 

four lenders? There has got to be some way we can move this from 

the rules-based, check-the-box approach. 

Ms. LOWE. Right, and I think that that has a lot to do with the 

examinations. I go back to the examinations. And, you know, it is 

more work for the regulators to actually accept that they cannot do 

a one-size-fits-all, check-the-box approach when you have an entirely risk-based system. And so that shift needs to happen, and it 

will be a big one. 

26 

Senator WARNER. Let me move to two other areas, if I can. I may 

ask for an extra minute since I waited so long. 

One, we are seeing all the problems with the existing system and 

how we need to change and modernize machine learning and AI. 

I also see that back in August of 2015, FinCEN talked about extending this type of anti–money laundering activities toward registered investment advisers, and then back in 2017 there was some 

motion, some need to look at bringing real estate into the fold as 

well. 

As these proposals around registered investment advisers, 

around real estate move forward, are they being moved forward 

with kind of more modern forward thinking? Or how can we avoid, 

if we were to take in these two industries, simply going back to a 

check-the-box type approach? If I could get each of you to quickly 

address that. 

Mr. BAER. Actually, I am glad you mentioned real estate because 

I think one of the major reasons to support beneficial ownership 

legislation is most of these companies do not establish bank accounts so it is not really that much about the banks. What they do 

is they put real estate in, or jewelry or art or whatever. So there 

is clearly a need to expand the scope of potential money laundering. You know, cryptocurrencies right now—— 

Senator WARNER. That is what I was going to come to next. 

Mr. BAER. ——is certainly going to be an area of great concern, 

and there are a lot of other financial institution types that are not 

necessarily subject to the customer due diligence rule, or if they are 

subject to it, are not examined for it. So there clearly is a sense 

that a lot of this is being pushed out of the largest banks and the 

banks that are best able to detect bad behavior to places where it 

is a little less—— 

Senator WARNER. And how do we get that right? Having seen a 

great deal of Russian activity in terms of using real estate, wearing 

my other hats, how do we get that right? What is the regime that 

we ought to be looking at? Since, clearly, I would think that the 

real estate industry and the financial investment advisory industry 

would say, oh, my gosh, look at the burden this has put on us on 

the banking side, we want nothing about that. Who is doing the 

best thinking, Ms. Lowe, on real estate and investment advisers? 

Ms. LOWE. So on the real estate end of things, FinCEN has had 

geographic targeting orders in place in Florida, California, Texas, 

and New York in specific counties to have title insurers—which are 

part of that industry, right?—determine the beneficial owners of 

any entity that is purchasing high-value real estate and then provide that information to FinCEN. 

FinCEN found that they had crossover where 30 percent of the 

beneficial owners identified by those title companies, title insurance companies, had SARs filed on them already by banks. So it 

tells you just the sort of saturation of what we are talking about 

here. 

Apart from investment advisers, there is a list of what are called 

‘‘designated nonfinancial businesses and professions,’’ or DNFBPs, 

that FinCEN has identified as sort of nonbanks that play a role in 

access to the financial system and should have money-laundering 

regimes in place that essentially require them—— 

27 

Senator WARNER. But are those industries fighting back 

against—I would think they do not—— 

Ms. LOWE. Many of them are, yes. 

Senator WARNER. Let me also, since my time has expired, have 

you also address—and, Mr. Baer, you raised this. You know, we are 

seeing how we try to move from a rules-based system to a more collaborative system, but, you know, we are about to be overwhelmed 

with bitcoin and other kind of cryptocurrencies. How are we preparing—how is the system preparing for this whole new movement? And I would love to hear briefly from each of you? With that, 

I—— 

Mr. BAER. I think we are all looking at each other on that one. 

I will admit to a certain amount of bank myopia. Actually, I do not 

know how this system is preparing for cryptocurrencies. I am not 

sure there is a way to prepare. 

Ms. LOWE. I can say—— 

Mr. BAER. Go ahead. 

Ms. LOWE. So FinCEN—I am sorry, not FinCEN. FATF has actually been looking at this quite closely. The last two private sector 

meetings that I attended, there were breakout sessions specifically 

on this and how do we regulate in this area. You know, FinCEN 

has done some regulation, and we are the first country to actually 

have put some regulation with respect to cryptocurrencies in one 

part of the transaction. And I think that that is a good discussion 

to have with FinCEN about how effective that has been. I really 

could not tell you. I think, again, I would discuss that with 

FinCEN. 

There have been moves to make the cryptocurrencies or the technology, et cetera, actually more anonymous. The biggest problem 

with it is that you are talking about movement of funds in a very 

anonymous way. 

So the underlying technology of blockchain has a lot of different 

potential positive uses, and because it is a closed system, that does 

not allow you to go back and amend something. So you can only 

amend going forward, and you have to sort of explain why you are 

doing that, right? 

So a lot of financial institutions are adopting the underlying 

technology of blockchain for various applications, and I think that 

that would actually be a really good hearing to have to understand 

the difference between what is the cryptocurrencies and dangers 

posed versus the technology, the underlying technology itself, and, 

you know, how do we draw the line and how do we regulate in a 

way that allows that technology to be used in a really positive 

way—I think it can be really used in a positive way in 

anticorruption as well—versus the dangers of the anonymity of the 

actual currencies that are traded using that technology. 

Senator WARNER. I would hope, Mr. Chairman, that we could 

take a look at this and maybe get ahead of it rather than chasing 

the issue after the fact. 

Chairman CRAPO. Definitely, and we should. 

Well, that concludes our questioning. I want to thank our witnesses again for coming. Both your written and your oral testimony 

has been very helpful. As you can see, there is a lot of very serious 

interest in this issue on this Committee, and we will be working 

28 

to try to find a way to improve and strengthen and make our approach to this more efficient, both in terms of the burden that is 

carried by those who engage in our anti–money laundering efforts 

and in terms of the results that we get in terms of achieving the 

objectives. 

I have a couple of quick announcements. For those Senators who 

want to ask questions following the hearing, those will be due by 

January 16th, Tuesday. And to the witnesses, you will probably get 

some follow-on questions. I ask you to respond to them very 

promptly. 

With that, the hearing is adjourned. Thank you. 

[Whereupon, at 11:25 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

29 

1See PwC Global Anti–Money Laundering available at http://www.pwc.com/gx/en/services/ 

advisory/consulting/forensics/economic-crime-survey/anti-money-laundering.html (‘‘According to 

new figures from WealthInsight, global spending on AML compliance is set to grow to more than 

$8 billion by 2017’’); FBI FY2017 Budget Request at a Glance available at https:// 

www.justice.gov/jmd/file/822286/download; ATF FY2017 Budget Request at a Glance available at https://www.justice.gov/jmd/file/822101/download. 2See article by Bob Werner and Sabreen Dogar, ‘‘Strengthening the Risk-Based Approach’’, 

in TCH Q3 2016 Banking Perspectives issue; available at: https://www.theclearinghouse.org/research/banking-perspectives/2016/2016-q3-banking-perspectives/strengthening-the-rba. 

PREPARED STATEMENT OF GREG BAER 

PRESIDENT, THE CLEARING HOUSE ASSOCIATION

JANUARY 9, 2018 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, my 

name is Greg Baer and I am the President of the Clearing House Association and 

General Counsel of the Clearing House Payments Company. Established in 1853 

and owned by 25 large commercial banks, we are the oldest banking payments company in the United States, and our Association is a nonpartisan advocacy organization dedicated to contributing quality research, analysis and data to the public policy debate. 

The Clearing House is grateful that the Senate Banking Committee is holding 

this hearing to review our Nation’s anti–money laundering and countering the financing of terrorism (AML/CFT) regime. 

Introduction 

Our AML/CFT system is broken. It is extraordinarily inefficient, outdated, and 

driven by perverse incentives. A core problem is that today’s regime is geared towards compliance expectations that bear little relationship to the actual goal of preventing or detecting financial crime, and fail to consider collateral consequences for 

national security, global development, and financial inclusion. Fundamental change 

is required to make this system an effective law enforcement and national security 

tool, and reduce its collateral damage. 

The U.S. AML/CFT regulatory regime, circa 2017, is a system in which banks 

have been deputized to act as quasi law-enforcement agencies and where the largest 

firms collectively spend billions of dollars each year, amounting to an annual budget 

somewhere between that of the ATF and the FBI. 1 One large bank may employ 

more individuals dedicated to BSA/AML/OFAC compliance than the combined staffs 

of Treasury’s Office of Terrorism and Financial Intelligence, OFAC, and FinCEN. 

However, in talking to senior executives at banks large and small, their primary 

concern is not how much they spend, but how much they waste. And that waste 

derives from a series of perverse incentives embedded in the current system. 

As an analogy, think of the collective resources of the banks as a law enforcement 

agency where officers are evaluated solely based on the number of tickets they write 

and arrests they make, with no consideration of the seriousness of the underlying 

crimes or whether those arrests lead to convictions. Imagine further that suspension 

or firing is most likely in the event that a ticket is not written or an arrest not 

made, or if a resulting report is not filed in a timely manner. 

To appreciate how misdirected the system has become, it’s helpful to first consider 

what kind of incentives should be at its heart. From a public policy perspective, any 

rational approach to AML/CFT would be risk-based, devoting the greatest majority 

of resources to the most dangerous financial crimes and illicit activity. For example, 

law enforcement and national security officials would prefer that banks allocate significant resources to so-called financial intelligence units (FIUs)—basically, in-house 

think tanks devoted to finding innovative ways to detect and prevent serious criminal misconduct or terrorist financing—or to following up on high-value suspicious 

activity reports; or SARs. 

Unfortunately, our AML/CFT regulatory system is focused elsewhere. Large banks 

have been pushed away from risk-based approaches, because their performance is 

not graded by law enforcement or national security officials, but rather by bank examiners, who do not know of or consider their successes. 2 Instead, those examiners 

focus on what they know and control: policies, procedures, and quantifiable 

metrics—for example, the number of computer alerts generated, the number of 

SARs filed, and the number of compliance employees hired. This means that a firm 

can have a program that is technically compliant, but is not effective at identifying 

suspicious activity, or is producing adverse collateral consequences. The converse is 

also true (and frequently true in practice). 

30 

3See 31 U.S.C. 5318(a)(2) and (h)(2). As recently as 2014, the Secretary delegated that authority to FinCEN. See Treasury Order 108-01 (July 1, 2014). 4See 31 CFR §1010.810(b). 5 As in other areas, regulators have imposed requirements through guidance or manuals that 

are not published for comment, and can conflict with valid FinCEN rules. See TCH letter to 

the Federal banking agencies, ‘‘Appropriate Implementation of FinCEN’s Customer Due Diligence Rule’’, (December 14, 2017); available at https://www.theclearinghouse.org//media/ 

TCH/Documents/TCH%20WEEKLY/2017/ 

%2020171214lTCHlLetterlCDDlRulelImplementation.pdf. See also The Clearing House 

Letter to FinCEN, Re: RIN 1506-AB15—Advance Notice of Proposed Rulemaking on Customer 

Due Diligence Requirements for Financial Institutions (June 11, 2012); available at https:// 

www.theclearinghouse.org/-/media/files/association%20documents%202/ 

20120611%20tch%20comments%20on%20customer%20due%20diligence.pdf. 6See ‘‘SAR Stats’’, available at https://www.fincen.gov/fcn/Reports/SARStats. The total 

number of SARs filed in 2017 was 1,867,269. 7See 12 CFR 208.62, 211.5(k), 211.24(f), and 225.4(f) (Board of Governors of the Federal Reserve System) (Federal Reserve) 12 CFR 353 (Federal Deposit Insurance Corporation) (FDIC) 

12 CFR 748 (National Credit Union Administration) (NCUA) 12 CFR 21.11 and 12 CFR 163.180 

(Office of the Comptroller of the Currency) (OCC) and 31 CFR 1020.320 (FinCEN) for Federal 

As a result, we have banks filing SARs that are in less than 10 percent of cases 

followed up on in any way. For certain categories of SARs, the yield is close to 0 

percent. Meanwhile, given the draconian consequences of missteps and prohibitively 

high cost of compliance, banks are exiting regions or businesses categorized by regulators as high risk. 

Specific Problems With the Status Quo 

Background. The BSA/AML regime is primarily codified in the Bank Secrecy Act 

(BSA), enacted in 1970 and amended periodically since then. The Act requires financial institutions to keep certain records and make certain reports to the Government, including reports on cash transactions greater than $10,000. In the 1990s, the 

law was amended to require financial institutions to detect and report their customers’ ‘‘suspicious’’ transactions. Finally, in 2001, the USA PATRIOT Act amended 

the BSA and imposed additional requirements on financial institutions to, among 

other things, verify and record information relating to the identity of their customers; and conduct enhanced due diligence on correspondent banks, private banking clients and foreign senior political figures. 

Congress granted authority to implement the BSA to the Secretary of the Treasury, thereby designating an agency with both financial and law enforcement expertise as its administrator. 3 The Secretary in turn delegated most of these functions 

to FinCEN. The Secretary was also given authority to examine financial institutions 

for BSA compliance, which Treasury then delegated to various regulators according 

to institution type. 4 This has resulted in a regime where banking agency examiners, 

with their safety-and-soundness focus, evaluate the BSA/AML policies, procedures, 

and processes at the institutions they supervise, while Treasury and law enforcement officials use the information supplied by financial institutions to mitigate domestic and international illicit finance threats. 5

SAR Filings. A key obligation of banks under the current BSA reporting regime— 

and the key area of focus by bank examiners—is the filing of SARs. The current 

SAR reporting regime went into effect in April 1996 as a way for banks to provide 

leads to law enforcement. The process typically begins with an alert generated by 

a bank’s monitoring system, with a SAR filed in the event that investigation determines that the activity is suspicious. For example, negative media reports on an existing bank customer could trigger an alert, prompt an investigation by a bank compliance department, and result in a SAR filing. 

In the current regulatory and enforcement climate, bank compliance officers have 

powerful incentives to trigger as many alerts and file as many SARs as possible, 

because those metrics demonstrate a quantifiable culture of compliance. (There appears to be no case of a bank being sanctioned for filing spurious SARs.) And even 

where no grounds for a SAR filing are found, financial institutions can also spend 

a significant amount of time documenting, for review by their examiners, why they 

closed an alert without filing a SAR. 

What gets measured gets done, and providing valuable intelligence to law enforcement or national security agencies does not get measured; writing policies and procedures and filing SARs does. So, almost two million SARs are filed per year. 6

Worse yet, SAR filing rules and metrics fail to consider the relative severity of the 

offense. SAR dollar thresholds have not changed in 21 years, and there is no dollar 

threshold for so-called insider abuse (say, a teller stealing a small amount of 

money). 7 No Federal law enforcement agency would ever prosecute the large and 

31 

SAR regulations. The SAR requirement became effective April 1, 1996, and dollar thresholds 

have not been raised since. 

growing majority of offenses to which SAR filings relate, and this is one reason the 

‘‘yield’’ on SARs is generally reported to be well under 10 percent, and close to 0 

percent for many types of SARs. 

In practice, almost all banks hire one of a handful of vendors who construct rules 

for generating alerts: for example, three cash deposits between $5,000 and $10,000 

in a 3-week period, or a wire transfer over $1,000 to a high-risk country (Mexico, 

for example). These crude rules generate numerous alerts, and bank investigators 

must then clear the alert or file a SAR. And examiners will be critical if the thresholds for a given bank are set at a level that does not generate a large number of 

alerts; so, in the event that a $1,000 threshold is not generating many alerts, the 

bank may be told to lower the threshold to $250, or even $0. Of course, it is widely 

understood that sophisticated criminals know these rules, as the software is for sale 

and widely distributed, and its rules do not change much over time. 

Consider the potential for revolutionary change that artificial intelligence therefore presents. AI does not search for typologies but rather mines data to detect 

anomalies. It gets progressively smarter; it would not be easily evaded; and different 

banks with different profiles would end up producing different outcomes. The current system is not progressing from typology to anomaly, however, because there 

has been no signal whatsoever from the regulatory agencies that dollars can be 

shifted from the existing, rules-based system to a better one. 

To be clear, this is not a criticism of bank examiners, but rather of the role the 

current system forces them to play. From a political and personal risk perspective, 

they are in a no-win situation. On the one hand, they are excluded when the bank 

they examine is pursuing real cases with law enforcement, national security or intelligence community officials, and therefore receive no credit when those cases are 

successful. But if something goes wrong—if a corrupt official or organization turns 

out to be a client of the bank they examine—the examiner faces blame. Thus, from 

an examiner and banking agency perspective, the only possible safe harbor is to demand more policies and procedures, ensure that a lot of alerts are generated and 

SARs filed, and encourage the bank to investigate exhaustively any client deemed 

high risk. While all other aspects of banking—for example, credit risk management—have risk appetites and tolerances, for AML/CFT, there is none. And because 

banks know that the easiest way to get in trouble is to fail to file a SAR when examiners subsequently determine they should have, they probably spend more time documenting decisions not to file SARs—papering the file—than they do following up 

on SARs they do file. In other words, they are incentivized to follow the noise, not 

the signal. 

Enforcement trends have only served to exacerbate the impact of the perverse incentives underlying our system; AML/CFT-related fines on U.S. banks have increased exponentially over the past 5 years. Certainly, there have been some egregious cases where enforcement action was warranted, but many enforcement actions 

taken involve no actual money laundering. Rather, they are based on a banking 

agency finding that an insufficient number of alerts were being generated by bank 

systems or that not enough SARs were filed. But the primary problem with this enforcement history is not the size and number of fines that are imposed periodically, 

but rather how those fines and accompanying consent orders incentivize financial 

firms to allocate their AML/CFT resources. Such orders uniformly result in the hiring of more compliance personnel, the retention of consultants, the drafting of more 

policies and procedures, and the direct involvement of the board of directors, with 

resources reallocated to those functions, and away from more proactive ones. 

Derisking. Nowhere is this set of perverse incentives more clear than in the push 

for banks to eliminate clients in countries or industries that could end up creating 

political risk to examining agencies. A recent set of articles in The Economist details 

the unfortunate consequences that the misalignment in AML/CFT expectations and 

standards has created as financial institutions have worked to balance fear of enforcement and supervisory expectations with the AML compliance costs of maintaining a global business. As the writers note, ‘‘[d]erisking chokes off financial flows that 

parts of the global economy depend on. It undermines development goals such as 

boosting financial inclusion and strengthening fragile States. And it drives some 

transactions into informal channels, meaning that regulators become less able to 

spot suspicious deals. The blame for the damage that derisking causes lies mainly 

32 

8See ‘‘The Great Unbanking: Swingeing Fines Have Made Banks Too Risk-Averse’’, The Economist, July 6, 2017, available at https://www.economist.com/news/leaders/21724813-it-timerethink-anti-money-laundering-rules-swingeing-fines-have-made-banks-too-risk-averse. See also 

‘‘A Crackdown on Financial Crime Means Global Banks Are Derisking’’, The Economist, July 8, 

2017, available at https://www.economist.com/news/international/21724803-charities-andpoor-migrants-are-among-hardest-hit-crackdown-financial-crime-means. 9This number does not include other employees dedicated to anti–money laundering or economic sanctions compliance in Bank of America’s lines of businesses, operations or technology 

teams. The over 800 employees in Global Financial Crimes Compliance at Bank of America is 

greater than the combined authorized full-time employees in Treasury’s Office of Terrorism and 

Financial Intelligence (TFI) and the Financial Crimes Enforcement Network (FinCEN). 10SAR Stats, supra n. 6. 

with policymakers and regulators, who overreacted to past money-laundering scandals.’’ 8

The causes of derisking are clear: the systems, processes, and people required to 

manage examiner expectations for clients deemed to be of ‘‘higher risk’’, are extremely costly. For example, a bank may prepare a lengthy report on a customer 

only to be criticized for not further documenting the grounds on which it decided 

to retain the customer. Institutions are therefore required to make difficult decisions, because it is often times too expensive to build out this infrastructure to support higher risk accounts. And this does not even include the risk of massive fines 

and reputational damage in the event a customer designated high-risk actually commits a criminal act. 

Similarly, domestically, banks of all sizes report that customer due diligence 

(CDD) requirements have dramatically increased the cost of opening new accounts, 

and now represent a majority of those costs. Of course, disproportionate and heightened account opening requirements make low-dollar accounts for low- to moderateincome people much more difficult to offer and price. While the connection is not 

immediately apparent, AML/CFT expense now is clearly an obstacle to banking the 

unbanked, and a reason that check cashers and other forms of high-cost, unregulated finance continue to prosper. The problem, of course, is that bank examiners 

and Federal prosecutors seeking record fines do not internalize those costs. And 

those in the Government who do internalize those costs play no role in examining 

the performance of financial institutions. 

To put some numbers to the issue, one AML director recently testified that his 

firm employs 800 individuals worldwide fully dedicated to AML/CFT compliance, detection and investigation work, as well as economic sanctions compliance. 9 Today, 

a little over half of these people are dedicated to finding customers or activity that 

is suspicious. The remainder—and the vast majority of employees dedicated to these 

efforts in the business and operations teams that support the firm’s AML program— 

are devoted to perfecting policies and procedures; conducting quality assurance over 

data and processes; documenting, explaining and governing decisions taken relating 

to their compliance program; and managing the testing, auditing, and examinations 

of their program and systems. 

The Great Opportunity Being Lost 

This lack of focus on the goals of the system is especially disheartening in an age 

in which emerging technology has the potential to make the AML/CFT regime dramatically more effective and efficient. One of the most pressing needs in enhancing 

the U.S. regime is to enable financial institutions to innovate their anti–money 

laundering programs and coordinate that innovation with their peers. As noted 

above, artificial intelligence (AI) and machine learning could revolutionize this area, 

and banks continue to discuss various concepts for greater sharing of information. 

When the SAR requirement (and its predecessor the criminal referral form) was 

first implemented, relatively few reports were filed, and each SAR was read by 

someone in law enforcement. Now, with banks and other financial institutions employing tens of thousands of people and using computer monitoring to flag potentially suspicious activity, almost two million SARs are filed per year. 10 Law enforcement generally reads SARs only if they are specifically flagged by the institution, 

or if a word search identifies it as relevant to an existing investigation. 

Thus, the role of a SAR in law enforcement has changed completely, which is not 

necessarily a bad development. Because so much more data is available, there is extraordinary potential for the use of AI and machine learning to improve the system, 

as previously described. But there are obstacles. AI strategies require feedback 

loops, which do not exist in the current system. In addition, there are barriers to 

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11See TCH and FSR letter to the Treasury on its ‘‘Review of Regulations’’, (‘‘2017 Joint 

Trades Letter to Treasury on Review of Regulations’’) July 31, 2017, available at https:// 

www.theclearinghouse.org/sitecore/content/tch/home/issues/articles/2017/07/ 

20170731%20tch%20and%20fsr%20comment%20on%20fincen%20and%20ofac%20regulations. 12 Id. 13See The Clearing House, ‘‘A New Paradigm: Redesigning the U.S. AML/CFT Framework To 

Protect National Security and Aid Law Enforcement’’, (TCH AML/CFT Report) (February 2017), 

available at https://www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/ 

2017/20170216lTCHlReportlAMLlCFTlFrameworklRedesign.pdf. See also TCH press 

release ‘‘The Clearing House Publishes New Anti–Money Laundering Report’’, (February 16, 

2017), available at https://www.theclearinghouse.org/press-room/in-the-news/ 

29170216%20tch%20aml%20cft%20report. 

tions. 11 As noted above, resources are trapped elsewhere and several AML executives have reported that efforts to construct novel approaches to detecting illegal behavior have resulted in examiner criticism. Examiners have now also begun applying to bank AML models the same model risk governance rules they adopted for 

capital measurement, even though models are much more dynamic and have no financial reporting consequence; as a result, it now takes months, as opposed to 

weeks, to change an AML model to capture new behaviors, which serves as a major 

disincentive to innovation. 12

In sum, banks will be reluctant to invest in systems unless someone in the Government can tell them that such systems will meet the banking examiners’ expectations, and can replace old, outdated methods—in other words, that they will be rewarded, not punished, for innovation. Until then, we have a database created for 

one purpose and being used for another. 

To get a sense of the potential for improvement, note that one bank has publicly 

reported that it receives follow-up requests from law enforcement on approximately 

7 percent of the SARs it files, which is consistent with other reports we have received. More importantly, for some categories of SARs—structuring, insider abuse— 

that number is far lower, approaching 0 percent. But no one can afford to stop filing 

SARs in any category, because examination focuses on the SAR that was not filed, 

not the quality or importance of the SAR that was filed. 

Furthermore, in resolving this issue, we also must deal with the ‘‘last piece of the 

puzzle’’ problem. Law enforcement will report anecdotally that it sometimes finds 

a low-dollar SAR of use as part of a larger investigation—not as a lead but as the 

last piece in a large puzzle. However, it is important to consider the opportunity 

cost of that SAR—the resources necessary to produce it, and whether those resources, if allocated elsewhere, would produce the first piece in a more important 

puzzle. As an analogy, if law enforcement rigorously enforced jaywalking rules, it 

would occasionally capture a wanted fugitive, but no one would consider that a good 

use of finite law enforcement resources. Again, a core problem with the current regime is that there is an absence of leadership making choices like these. 

The Beginning of a Solution 

In early 2017, TCH issued a report offering recommendations on redesigning the 

U.S. AML/CFT regime to make it more effective and efficient. This report reflects 

input from a wide range of stakeholders, including foreign policy, development and 

technology experts. 13

The most important recommendation in the report is for the Department of the 

Treasury to accept—or, better yet, claim—responsibility for the system. That includes convening on a regular basis the end users of SAR data—law enforcement, 

national security and others affected by the AML/CFT regime including the State 

Department—and setting goals and priorities for the system. Treasury is uniquely 

positioned to balance the sometimes conflicting interests relating to national security, the transparency and efficacy of the global financial system, the provision of 

highly valuable information to regulatory, tax and law enforcement authorities, financial privacy, financial inclusion, and international development. 

Such a process has a clear precedent. The National Security Strategy (NSS) is a 

document prepared periodically by the National Security Council (NSC) for submission to Congress which outlines the major national security concerns of the United 

States and how the Administration plans to deal with them. The strategy is developed by the NSC through an iterative, interagency process to help resolve internal 

differences in foreign policy/national security agendas and effectively communicate 

priorities to a number of different audiences. There’s also the National Intelligence 

Priorities Framework (NIPF), which is used to establish national priorities for the 

34 

14See Intelligence Community Directive Number 204—‘‘Roles and Responsibility for the National Intelligence Priorities Framework’’, (September 13, 2007); available at https:// 

www.dni.gov/files/documents/ICD/ICDl204.pdf. 15See ‘‘Commercial Banks in the U.S., Economic Research of the Federal Reserve Bank of St. 

Louis’’ available at https://fred.stlouisfed.org/series/USNUM. 16 In addition, in 1986, Congress granted the Federal banking agencies authority to prescribe 

regulations requiring banks to comply with the Bank Secrecy Act, and examine for such compliance. See 31 CFR §1010.810. As the rule notes ‘‘[o]verall authority for enforcement and compliance, including coordination and direction of procedures and activities of all other agencies exercising delegated authority under this chapter, is delegated to the Director, FinCEN.’’ Id. 

§1010.810(a). See also 12 U.S.C. §1818(s). 

intelligence community. 14 We believe that measurable outcomes or goals should be 

clearly and specifically defined for each component of our Nation’s AML/CFT regime 

(including the anti–money laundering programs in financial institutions), and then 

agreed upon ways to measure the achievement of those outcomes or goals should 

be set and reported. From these outcomes or goals, priorities should be set regularly 

for the AML/CFT regime and promptly revisited when new risks emerge. We believe 

this is the best way to build a regime that is ultimately effective in achieving the 

desired outcome of a robust and dynamic national AML/CFT regime that can efficiently and quickly adapt to address new and emerging risks. For financial institutions, we believe that such an exercise would change the focus from technical compliance with regulations or guidance, to building anti–money laundering programs 

that achieve the clearly articulated desired and measurable outcomes or goals of the 

regime. And we believe that setting measurable outcomes or goals, and then tracking progress to the achievement of these goals, is the best way to build anti–money 

laundering programs and a national AML/CFT regime that are both effective and 

efficient. 

Reform must also recognize that of the roughly one million SARs filed annually 

by depository institutions (banks and credit unions), approximately half are filed by 

only four banks. Whereas a small to mid-sized bank might file a handful of SARs 

per year, the largest banks file roughly one SAR per minute. These are the same 

banks that are internationally active, and therefore present almost all of the most 

difficult policy questions with respect to derisking. Certainly, reform is warranted 

for smaller firms, where the cost of filing that handful of SARs is wildly disproportionate to its benefit. But if the goal is to catch dangerous criminals, identify terrorist activity, and reduce collateral damage to U.S. interests abroad, FinCEN need 

focus its examination energy on only a very few firms. This creates an extraordinary 

opportunity. 

We estimate that an examination team of only 25–30 people at FinCEN could replicate the existing work of the Federal banking agencies and the IRS (for the largest 

MSBs) at the largest, most internationally active institutions. More importantly, a 

dedicated FinCEN exam team for this small subset of large institutions could receive appropriate security clearances, meet regularly with end users and other affected parties, receive training in big data and work with other experts in Government. They in turn would be supervised by Treasury officials with law enforcement, 

national security, and diplomatic perspectives on what is needed from an AML/CFT 

program—not bank examiners with no experience in any of those disciplines. And 

when FinCEN turned to writing rules in this area, it would do so informed by its 

experience in the field. It would see the whole battlefield, and promote innovative 

and imaginative conduct that advanced law enforcement and national security interests, rather than auditable processes and box checking. 

Remarkably, this arrangement is exactly what Congress intended and authorized. 

In the Bank Secrecy Act, Congress granted FinCEN, not the banking agencies, authority to examine for compliance. However, over 20 years ago, FinCEN delegated 

its supervisory authority to the Federal banking agencies, while retaining enforcement authority. At the time the delegation was made, FinCEN’s decision was logical, even inevitable. The agency had few resources, and insufficient knowledge of 

the banking system. Furthermore, the Nation had over 10,000 banks, and those 

banks were more alike than different. 15 Restrictions on interstate banking meant 

that there were no truly national banks, and U.S. banks generally were not internationally active. As a result, there was no real basis by which FinCEN could have 

distinguished among banks. Given the choice between supervising 10,000 banks or 

none, it logically chose none, effectively sub-contracting its statutory duties in this 

area to the banking agencies. 16

Importantly, the benefits of a FinCEN examination function would extend well beyond the handful of banks it examined. Priorities set and knowledge learned could 

be transferred to regulators for the remaining financial institutions. And innovation 

started at the largest firms, with encouragement from FinCEN, would inevitably 

35 

17See Testimony of Lloyd DeVaux before the House Financial Services Committee Subcommittee on Financial Institutions and Consumer Credit, June 28, 2017, available at https:// 

financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-ldevaux-20170628.pdf. 18See FATF Anti–money laundering and counterterrorist financing measures, Mutual Evaluation of the United States (December 2016) at 18 available at http://www.fatf-gafi.org/media/ 

fatf/documents/reports/mer4/MER-United-States-2016. 

benefit smaller firms. The result of FinCEN assuming some supervisory authority 

would be a massive cultural change, as the focus shifted to the real-world effectiveness of each institution’s AML/CFT program, rather than the number of SARs filed 

or number of policies written. That change would start with those banks under sole 

FinCEN supervision, but would eventually spread to all institutions. 

(In that regard, I testified last year alongside a community banker who reported 

that his three-branch bank has four lending officers—and six AML compliance officers. 17 While my testimony has focused on challenges faced by the largest banks, 

the AML/CFT regime is no more rational when imposed on the smallest.) 

Relatedly, TCH recommends that Treasury undertake a review of the BSA/AML 

reporting regime to ensure information of a high degree of utility is reported to law 

enforcement as well as encourage the exchange of AML/CFT information between 

the Government and the private sector as well as between and among financial institutions. We applaud FinCEN’s recently announced ‘‘Exchange’’ program which 

aims to strengthen public–private sector AML/CFT information sharing by convening regular briefings between FinCEN, law enforcement and institutions. Such 

sharing not only makes financial institutions’ programs more effective and efficient, 

it assists in focusing their resources on important matters. 

Finally, one important change to the current system that requires new legislation 

is ending the use of shell companies with anonymous ownership. Here, the United 

States trails the rest of the world, and has been criticized by the Financial Action 

Task Force for being a shelter for criminals or kleptocrats seeking to launder money 

by adopting the corporate form and cloaking their ownership. 18 There may be valid 

reasons why corporate owners would want to keep their ownership secret from the 

broader public; however, it is difficult to imagine a valid reason why corporate owners would want to keep their ownership secret from the State incorporating them, 

law enforcement, and a financial institution that is legally obligated to determine 

that ownership in the exercise of its BSA/AML obligations. The Clearing House 

strongly urges Congress to adopt such legislation promptly, and is pleased to see 

bicameral, bipartisan support for it. 

In conclusion, I thank you for inviting me today and focusing Congressional attention on such an important topic. I look forward to your questions. 

PREPARED STATEMENT OF DENNIS M. LORMEL 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, DML ASSOCIATES, LLC, AND FORMER

CHIEF, FBI FINANCIAL CRIMES PROGRAM

JANUARY 9, 2018 

Good morning Chairman Crapo, Ranking Member Brown, and distinguished 

Members of the Committee. Thank you for the opportunity to testify before you 

today. My name is Dennis M. Lormel. I have been engaged in the fight against 

money laundering, financial crimes, terrorist financing and other forms of illicit finance for 45 years. I served in the U.S. Government for 31 years, 28 of which I 

served as a Special Agent in the Federal Bureau of Investigation (FBI). I amassed 

extensive investigative experience in complex and labor intensive financial investigations as a street agent, first line supervisor, middle manager, and senior executive. In 2000, I was promoted to Chief of the Financial Crimes Section, in the FBI’s 

Criminal Division. Following the terrorist attacks of September 11, 2001, I formulated, established and led the Terrorist Financing Operations Section (TFOS) within 

the FBI’s Counterterrorism Division. During my FBI career, I was the direct beneficiary of Bank Secrecy Act (BSA) data to include currency transaction reports 

(CTRs) and suspicious activity reports (SARs). I experienced firsthand the value 

BSA data brought to investigations. This was especially true after 9/11. One of our 

important initiatives was a datamining project which included SAR reporting. For 

the past 14 years, I have been a consultant, primarily working in the financial services industry, in the anti–money laundering (AML), terrorist financing and financial 

crimes prevention community. In this capacity, I have worked with private sector 

clients to improve the effectiveness and efficiency of BSA reporting. 

My Government investigative and private sector consulting experience has provided me a unique opportunity to understand and appreciate two very distinct perVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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spectives regarding the BSA. Two of the principal stakeholders of the BSA are law 

enforcement and financial institutions. Putting this in the context of the flow and 

utilization of financial information, law enforcement is the back end user and beneficiary of BSA data. Financial institutions serve as the front end repository and custodian of financial intelligence. Financial institutions also serve the critical function 

of being the monitor for identifying and reporting suspicious activity and other BSA 

data to law enforcement. Simply put, law enforcement uses BSA data to predicate 

or enhance investigations from a tactical standpoint. Law enforcement also uses 

BSA data for strategic purposes. From a simplistic standpoint, the flow of BSA data 

that is continuously filtered to law enforcement is invaluable. When you layer the 

complexities of regulatory compliance requirements over the monitoring and filtering process financial institutions must follow, the effectiveness and efficiency of 

BSA reporting from the front end monitor to the back end beneficiary, becomes 

flawed. 

My point is that the BSA system is not broken. The system is fraught with many 

inefficiencies but it works. Law enforcement consistently receives valuable intelligence from BSA data. The challenge is that the BSA system can and should be 

much more effective and efficient. In this context, I applaud the Committee for dedicating the time to assess the effectiveness and efficiency of BSA enforcement and 

considering reform measures to strengthen BSA reporting requirements. 

I’d like to take the opportunity to commend the Clearing House for having issued 

their report in February 2017 ‘‘A New Paradigm: Redesigning the U.S. AML/CTF 

Framework to Protect National Security and Aid Law Enforcement’’. I believe the 

report is a good point of reference to initiate discussion for reform consideration. I 

laud the Clearing House for recognizing the importance of including all stakeholders 

in the discussion. I was not involved in the two symposiums held to formulate the 

report. One concern I have about the report is the actual extent to which law enforcement was included as a contributing stakeholder. In my view, law enforcement 

is the most important stakeholder because the BSA was intended to assist law enforcement. When the report was issued, I contacted then current law enforcement 

executives in positions like I held and none were included in the deliberations. I encourage the Committee to include a variety of active and former law enforcement 

executives in your ongoing dialogue and efforts to strengthen the BSA. 

The BSA was passed in 1970 with the legislative purpose of generating reports 

and records that would assist law enforcement in following the money and developing prosecutable criminal cases. Since passage of the BSA, additional legislation 

has periodically been enacted to enhance regulations. Most notably, passage of the 

USA PATRIOT Act established a host of new measures to prevent, detect, and prosecute those involved in money laundering and terrorist financing. Going forward, deliberations to enhance the BSA should focus on systemic vulnerabilities, evolving 

technology, emerging trends and opportunities to leverage public and private partnerships and information sharing with an eye on continuing to enhance law enforcements investigative ability. 

As noted in the introduction of the BSA, ‘‘the implementing regulations under the 

BSA were originally intended to aid investigations into an array of criminal activities, from income tax evasion to money laundering. In recent years, the reports and 

records prescribed by the BSA have also been utilized as tools for investigating individuals suspected of engaging in illegal drug and terrorist financing activities. Law 

enforcement agencies have found CTRs to be extremely valuable in tracking the 

huge amounts of cash generated by individuals and entities for illicit purposes. 

SARs, used by financial institutions to report identified or suspected illicit or unusual activities are likewise extremely valuable to law enforcement agencies’’. This 

statement is a true reflection of BSA reporting. However, there is a troubling back 

story about perceived regulatory expectations that have resulted in systemic inefficiencies. 

Regardless of the extent or effectiveness of BSA regulations, criminals and terrorists must use the financial system to raise, move, store and spend money in order 

to sustain their illicit operations and enterprises. The reality is that no matter how 

robust an anti–money laundering (AML) program is, it cannot detect all suspicious 

activity. The BSA standard is that financial institutions maintain AML programs 

that are reasonably designed to detect and report suspicious activity. One of the regulatory challenges confronting financial institutions today is the question: What constitutes a reasonably designed AML program? Regulatory expectations, either real 

or perceived, have caused financial institutions to lose sight of the purpose of BSA 

reporting and have consequently led to many of the systemic inefficiencies of BSA 

reporting. 

In using the financial system, criminals and terrorists are confronted with distinct 

contrasts. On one hand, the financial system serves as a facilitation tool enabling 

37 

bad actors to have continuous access to funding. On the other hand, the financial 

system serves as a detection mechanism. Illicit funds can be identified and interdicted through monitoring and investigation. Financing is the lifeblood of criminal 

and terrorist organizations. At the same time, financing is one of their major 

vulnerabilities. At the basic core level of the front end and back end data process 

flow, BSA reporting works and is more apt to serve as the intended detection mechanism. The more convoluted and distracting the regulatory process becomes, the 

greater the likelihood that the financial system serves as a facilitation tool for criminals and terrorists. 

There are a number of vulnerabilities or high risk areas in the financial system 

that criminals and terrorists exploit. I categorize them as criminal activity and facilitation tools bad actors use to exploit their ill-gotten gains derived from their 

criminal activity. The biggest crime problems we encounter include fraud and money 

laundering. Most criminal activity, other than select violent crimes, includes elements of fraud and money laundering. Drug trafficking, human trafficking, corruption, and other crimes contain elements of fraud and require money laundering. 

Some of the more significant facilitation tools include wire transfers, correspondent 

banking, shell companies (beneficial ownership), illegal money remitters (informal 

value transfer systems), non-Government organizations, credit and debit cards, and 

electronic mechanisms. In my experience, one of the biggest areas of vulnerability 

in the financial system is identifying illegal money remitters. 

One facilitation tool that consistently garners Congressional attention is the issue 

of beneficial ownership. Year after year, potential bills are introduced regarding 

beneficial ownership. I strongly encourage the Committee to consider beneficial ownership legislation as an enhancement to the BSA. Throughout my law enforcement 

career, I dealt with the challenge of shell companies and identifying true beneficial 

owners. Based on my experience, I believe beneficial ownership should be required 

by Secretaries of States, at the point of incorporation. On May 11, 2016, the Financial Crimes Enforcement Network (FinCEN) issued Customer Due Diligence Requirements for Financial Institutions (the COD Rule). The rule strengthens existing 

customer due diligence (CDD) requirements and requires banks to identify and 

verify the beneficial owners of legal entity customers. Financial institutions are in 

the process of implementing COD requirements. If identification of beneficial ownership were required at point of incorporation, the burden on financial institutions 

would be lessened. 

Regarding the BSA, it is important that all stakeholders be engaged in the discussion and deliberation to improve the effectiveness and efficiency of BSA reporting 

and enforcement. More importantly, all stakeholders should be involved in breaking 

down real or perceived regulatory impediments. In each of our areas of responsibility, all BSA stakeholders should strive to exploit the financial vulnerability of 

criminals and terrorists by ensuring the financial system serves as a detection 

mechanism disrupting illicit funding flows. Although the BSA system works, it is 

flawed and lacks the effectiveness and efficiency it was intended to achieve. 

The starting point toward improving the effectiveness and efficiency of BSA reporting is to improve the current system through building meaningful and sustainable public and private sector partnerships beginning with BSA stakeholders, including the financial services industry, regulators, policy makers, sanctioning authorities, intelligence experts, law enforcement, legislatures and other stakeholders. 

We need to start by improving the efficiencies of our current system by breaking 

down impediments. We then need to determine what enhancements to regulations 

should be considered. 

Building meaningful and sustainable partnerships begins with understanding perspectives. Each stakeholder partner possesses a perspective based on their professional responsibilities and experience. Each of our perspectives will be somewhat 

unique. Understanding and blending the perspectives of our partners will enable us 

to establish a middle ground to improve or build efficiencies upon. As this process 

evolves, we can leverage the capabilities and capacity of our partners. This type of 

evolution sets the stage for developing innovative ideas and proactive measures. 

One of the inherent disadvantages we have in our financial system and AML environment is that we are reactive. Criminals and terrorists have the advantage of 

being proactive. Our ability to add innovative ideas and proactive measures to an 

otherwise reactive system can achieve impactful investigative results. In fact, there 

have been recurring innovative and proactive law enforcement investigations. I 

speak from firsthand experience when I talk about developing proactive techniques. 

I can point to specific proactive law enforcement initiatives following 9/11 that were 

the direct result of innovative public and private sector partnerships. My emphasis 

here is we can be innovative within the current framework. We can also improve 

the current landscape through enhancements to encourage and/or incentivize innoVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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vation. For example, financial institutions conduct baseline transaction monitoring 

to alert to anomalies that can lead to identification of suspicious activity. By developing rule sets and scenarios that are targeted to specific transactions or financial 

activity, we are more likely to identify specific or targeted suspicious activity regarding specific crime problems such as human trafficking. Financial institutions are reluctant to employ targeted monitoring initiatives because of concern for the potential regulatory expectations or other perceived impediments such innovative thinking could incur. 

Included as an attachment to my testimony is an article I wrote in 2011 for publication by the Association of Certified Anti–Money Laundering Specialists (ACAMS) 

titled ‘‘Perspectives. Partnerships and Innovation’’. As an example of innovative and 

proactive targeted monitoring, the article details the public and private partnership 

of a special AML investigative team at JPMorgan Chase (JPMC) in 2009, with 

Homeland Security Investigations (HSI), Immigration and Customs Enforcement 

(ICE). I provide extensive training to the financial services industry regarding AML, 

terrorist financing, fraud, investigations, suspicious activity reporting and related 

topics. I frequently site the JPMC and ICE collaboration as one of the best models 

for partnerships and innovation. One of the accomplishments of this collaboration 

was the effective and efficient use of BSA data based on targeted monitoring against 

human trafficking. The attached article also provides a sense of leveraging perspective and, the regulatory and collateral challenges financial institutions face by endeavoring to be innovative. 

As an extension of public and private partnerships, we should consider how to improve information sharing. The PATRIOT Act provided us with information sharing 

vehicles such as Section 314(a) where financial institutions can share financial information with law enforcement and Section 314(b) where financial institutions can 

share information with each other. Efforts should be made to enhance Section 314 

information sharing in the current environment. In addition, any proposed enhancements to the BSA should consider additional information sharing mechanisms. The 

more we can do to enhance information sharing, the more meaningful information 

will be for law enforcement and the more detrimental to criminals and terrorists. 

During their plenary session in June 2017, the Financial Action Task Force (FATF) 

stressed the importance of information sharing to effectively address terrorist financing. I have always been a huge proponent of information sharing to the extent 

legally allowable. 

One of the most productive examples of public and private sector partnership, and 

information sharing, is the Joint Money Laundering Intelligence Task Force 

(JMLIT) in the United Kingdom (U.K.). JMLIT was formed by the Government National Crimes Agency (NCA) in partnership with the financial sector to combat high 

end money laundering. JMLIT was established as a business-as-usual function in 

May 2016. It has been developed with partners in Government, the British Bankers 

Association, law enforcement and more than 40 major U.K. and international banks. 

I’m hopeful that the U.S. can assess and work through information sharing and privacy concerns in order to replicate the U.K. JMLIT model. 

With respect to terrorist financing, any legislative enhancement to the BSA 

should consider facilitating obtaining security clearances for select financial institution personnel. In most instances, law enforcement is precluded from sharing classified information with financial institutions. If financial institutions had select personnel with a security clearance and they could gain access to select classified information, they would be able to either search for specific financial information or establish targeted monitoring initiatives to identify specific financial intelligence that 

would be meaningful to classified or otherwise sensitive counterterrorism investigations. 

Throughout my career, I have worked closely with financial institution AML and 

fraud compliance professionals. I have the utmost respect for their dedication and 

commitment to protecting the integrity of their financial institutions and for identifying the misuse of the financial system by bad actors. Next to my former law enforcement colleagues, I hold my friends in AML and fraud compliance in the highest 

regard. It is important to note that the BSA shortcomings we face are systemic 

problems caused by multiple factors and not by groups of individuals. One of the 

positive trends evolving within financial institutions, in part, founded on the dedication factor of AML professionals that I complimented, is the formation of financial 

intelligence units and/or special investigations teams established to deal with terrorist financing and emergency response situations such as the Panama Papers, the 

FIFA scandal and human trafficking. In addition to developing proactive mechanisms, like targeted monitoring, these teams have developed ‘‘urgently’’ reactive capabilities to respond to terrorist and emergency situations requiring immediate response. As I mentioned earlier, AML programs are inherently reactive. One of the 

39 

best reactive mechanisms we possess is negative news reporting. For example, when 

terrorist incidents like the attacks in New York in October and December 2017 occurred, as soon as the names of the perpetrators are announced, these special investigations teams immediately run the perpetrator names through their systems and 

should they identify accounts or transactional activity involving those individuals, 

they immediately contact law enforcement. 

Like the JPMC and ICE human trafficking targeted monitoring program I mentioned, I’m aware of a major bank that has formed a special investigative team to 

similarly search for human trafficking that could be related to a forthcoming major 

sporting event. I’ m not at liberty to further identify the financial institution or circumstances. However, it is important to note that financial institutions and law enforcement do participate in targeted monitoring projects and when they are able to 

do so, BSA data flows from the front end monitor (a financial institution) to the 

back end beneficiary (law enforcement) in a timely and, effective and efficient manner. I encourage all financial institutions to establish special investigations or critical 

incident response teams. I teach and view these teams analogous to law enforcement Special Weapons and Tactics (SWAT) teams. SWAT officers receive regular intensive training to deal with dangerous emergency response situations. Most SWAT 

officers have other primary law enforcement assignments, and SWAT is a collateral 

duty. Financial institution SWAT or critical incident response or special investigations teams should also receive special training for dealing with emergency response 

and targeted proactive investigative situations. Regardless of the size of a financial 

institution, all financial institutions should establish special investigative teams to 

identify and report targeted suspicious activity. Whether the team is a unit or one 

investigator, all financial institutions should develop emergency response capabilities. 

In my training programs regarding money laundering, fraud and terrorist financing, I stress the importance of situational awareness. Situational awareness is being 

aware of and responsible for your physical surroundings regarding your personal 

safety and security. If you see something, say something. The same principles apply 

to money laundering, fraud and terrorist financing. You need to be situationally 

aware of and understand the flow of funds for illicit purposes. Much the same, we 

all need to be situationally aware of the vulnerabilities to the financial system and 

ensure the BSA is as effective and efficient as it can be. 

The most important BSA report is a SAR. In most instances, the biggest regulatory compliance breakdown resulting in some sort of enforcement or regulatory action is the failure to file SARs or to adequately file SARs. I cannot underscore 

enough that law enforcement is the direct beneficiary of SARs. Regardless of systemic inefficiencies, law enforcement consistently benefits from SAR filings. 

SARs are used tactically to predicate and/or enhance criminal investigations. 

SARs are also used strategically for analytical purposes. When attempting to measure effectiveness and efficiency of SAR filing, we cannot solely rely on the percentage of SARs filed versus the number of SARs used to predicate or enhance an investigation. We must also factor in how SARs are used strategically for trend analysis 

and analytical purposes. Finding accurate metrics to determine the effectiveness 

and efficiency of SAR filing is extremely difficult. 

When I was in law enforcement, I used SARs for both strategic and tactical purposes. When I was Chief of TFOS at the FBI, we established a financial intelligence 

unit. I wanted to know on a recurring basis what were the emerging threat trends, 

as well as emerging crime problems. SARs were one of the data sets we used for 

such trend analysis. We also used SARs for tactical purposes in furtherance of investigations. We used financial intelligence, some of which was derived from BSA 

data, to include SARs and CTRs, for tactical proactive investigations and for tactical 

reactive or more traditional ‘‘books and records’’ ‘‘follow the money’’ investigations. 

We used datamining technology for both strategic and tactical initiatives. I believe 

that the FBI continues to use BSA data for strategic and tactical investigative purposes. 

I developed a flow chart I use for training purposes describing the ‘‘lifecycle’’ of 

a SAR. It tracks a SAR from the point of origin when it’s filed with FinCEN through 

both regulatory and law enforcement review and investigative tracks. During their 

lifecycle, some SARs go directly to support investigations and some remain in the 

SAR database. A number of SARs that go into the SAR database will be used to 

support investigations at later times. Regardless of whether SARs are used to support investigations, they will be used in datamining initiatives to develop trend 

analysis or other strategic analyses. 

Following my retirement from the FBI and as I have gained more of a financial 

institution perspective, based on my experience as a consultant, I have become more 

40 

sensitive to the perceived lack of feedback to financial institutions from FinCEN and 

law enforcement regarding the value of SARs and how SARs should be written to 

get law enforcements attention. FinCEN has done a good job of discussing the value 

of SARs in their SAR Activity Review publications. In recent years, FinCEN has recognized financial institution personnel as the front end provider and law enforcement agents as the back end consumer for outstanding investigations involving BSA 

data. 

When I was Chief of Financial Crimes, and subsequently TFOS, I had frequent 

meetings with Jim Sloan. During that time period, Mr. Sloan was Director of 

FinCEN. We often discussed developing a SAR feedback mechanism from law enforcement through FinCEN to financial institutions. There were many impediments 

that existed at the time, much as they continue to exist today, that precluded us 

from developing a consistent feedback mechanism. Some impediments include the 

ongoing nature and secrecy of Federal grand jury investigations, the time lapse from 

when a SAR was filed and an investigation completed, resource constraints and 

other factors. Feedback regarding SARs warrants further consideration. This is an 

area where the Committee should consider dialogue with FinCEN and senior law 

enforcement executives. 

The law enforcement utilization of SARs, as I have described how I used SARs 

as an FBI executive, was more at a program level than at the grass roots investigations level. At the program level there is a greater use of datamining and advanced 

analytics. At the grass roots field level, SARs are dealt with more in the form of 

individual manual reviews where each SAR is physically reviewed. For example, 

every U.S. Attorney’s Office has a SAR review team. Even though the SAR review 

teams use excel spreadsheets and other analytics, they review SARs by hand. The 

reason this is important for the Committee is at the program level, I was more inclined to want to see more SARs filed. For our datamining purpose, more was better. At the grass roots level, SAR review teams would prefer to see less numbers 

of SARs filed. In this context, less is better. As a field agent and middle manager, 

I reviewed SARs manually, and I understand the grass roots perspective as well as 

the program perspective. Therefore, it is incumbent that as the Committee proceeds, 

you speak to a variety of law enforcement stakeholders to gain the best context 

available. 

One final issue where law enforcement should be the primary stakeholder to potential legislation is the issue of CTR and SAR reporting thresholds. Since SARs 

were first implemented, the reporting thresholds have been the same. Periodically, 

banking associations and financial institutions have recommended that reporting 

thresholds be adjusted to account for inflation. I strongly believe that CTR and SAR 

reporting thresholds should remain as they are. Law enforcement would lose valuable financial intelligence if thresholds are raised. This is especially true for terrorist financing, where our primary threat is from homegrown violent extremists. 

My sense is that when we identify homegrown violent extremists and financial institutions run their names, a high percentage of them will have transactional activity 

involving CTRs. 

As I’ve stated, at the core level, the flow of BSA data from the front end provider 

(financial institutions) to the back end consumer (law enforcement) is good. When 

financial institutions can be proactive and more targeted in their monitoring and 

reporting, the BSA data they provide is more effective and efficient. When the data 

flow becomes convoluted and more constrained, the system becomes more flawed 

and ineffective and inefficient. 

Thank you again for affording me the opportunity to testify today. I look forward 

to responding to any questions you have. 

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PREPARED STATEMENT OF HEATHER A. LOWE 

LEGAL COUNSEL AND DIRECTOR OF GOVERNMENT AFFAIRS, GLOBAL FINANCIAL

INTEGRITY

JANUARY 9, 2018 

Thank you for the opportunity to testify before you today on the subject of Combating Money Laundering and Other Forms of Illicit Finance and the Opportunities 

to Reform and Strengthen BSA Enforcement. I hope that my contributions to today’s 

hearing will help you take measured and informed decisions that are in the public’s 

interest with respect to the U.S.’s anti–money laundering (AML) regime as set forth 

in the Bank Secrecy Act (BSA). 

Money laundering is a vast subject and there are many different facets that it 

would be worthwhile for this Committee to examine. I will discuss some of those 

areas in my testimony today but, as I am sure you will discover as we delve deeper 

into the topic, there may be a great deal more that you wish to explore moving forward. I am happy to assist to the extent that I can. 

In my testimony, I will provide information and opinions regarding the following: 

Trends in compliance, Suspicious Activity Reports (SARs), Know Your Customer 

(KYC)/Customer Due Diligence (CDD), and the balance of activity and obligations 

between the Financial Crimes Enforcement Network (FinCEN) and the private sector. Some of my remarks will directly address recent proposals by The Clearing 

House in their publication ‘‘A New Paradigm: Redesigning the U.S. AML/CFT 

Framework to Protect National Security and Aid Law Enforcement’’, as I am sure 

that you are giving consideration to those proposals. (CFT refers to countering the 

financing of terrorism.) 

Some of the key points that I will be making in my testimony are: 

1. Money laundering and the technology that can help us combat it are both 

evolving and, in light of this, it is appropriate to consider whether changes to 

our regulatory structure should be made. Equally, however, it is critical that 

Congress consider and carefully weigh the potential benefits against potential 

negative ramifications before making decisions in this area. 

2. Enforcement against money laundering is primarily through identification of 

regulatory infractions as opposed to through criminal charges of actual money 

laundering. This may be because it is much easier to find evidence of regulatory infractions, the burden of proof is lower, and it is far less costly for the 

Government than pursuing a criminal money laundering charge, and there is 

a clear dissuasive effect. Despite this, when we look at the cases where enforcement was merely through identification of deficiencies of AML systems and filing requirements, the hallmarks of serious criminal money laundering are 

there in the cases. As a result, decreasing the ability to enforce using the regulatory approach may have serious, negative repercussions on compliance and, 

ultimately, criminal access to the U.S. banking system. 

3. It is critical that information about the natural person(s) who own or control 

companies (the beneficial owners) is finally collected by either the State or Federal Government and is made available to law enforcement and to financial institutions. Companies with unknown or hidden ownership are the number one 

problem in the AML world and the U.S. cannot continue to allow our failure 

to act to put the U.S. and global financial system at risk. 

4. I would strongly caution against transferring responsibility for setting AML 

priorities for individual banks from those banks to FinCEN. Banks are best 

placed to understand their business and their systems and the money laundering risks inherent therein, and create the systems that work best in their 

business models to combat money laundering. FinCEN and/or other regulators 

should review those assessments but cannot be responsible for carrying them 

out. 

5. The Clearing House recommends greater information sharing among banks 

and with the Government in a number of ways. While we generally support 

greater sharing of information in the AML area, it must be done with appropriate privacy safeguards. Where it may result in a person being denied banking services at all, there must be a system for redress for people to be able 

to restore that access if they can demonstrate that they are involved in legitimate activity. 

6. Transferring raw banking data from banks to FinCEN to analyze (with appropriate privacy safeguards) is not a bad idea. However, it is essential that we 

do not absolve banks of the responsibility to carry out their own analysis as 

well, which they have the ability to review within the context of the additional 

47 

1This includes insured banks, commercial banks, agencies or branches of a foreign bank in 

the U.S., credit unions, savings associations, corporations acting under section 25A of the Federal Reserve Act 12 U.S.C. 611, trust companies, securities broker-dealers, futures commission 

merchants (FCMs), introducing brokers in commodities (IBs), and mutual funds. FATF Mutual 

Evaluation Report of the United States, December 2016, available at http://www.fatf-gafi.org/ 

media/fatf/documents/reports/mer4/MER-United-States-2016.pdf. 

client information that they have, because they are the gatekeepers to the financial system. The Federal Government cannot do this alone. 

7. AML compliance and reporting is undertaken by a wide range of entities and 

persons, going far beyond the banking sector. Any proposed changes should 

consider the implications for all of these types of entities and persons. 

8. Some types of entities and persons should be required to have AML programs 

in place that currently do not, such as those involved in real estate closings, 

lawyers, and others. The banking sector cannot and should not carry this responsibility alone, especially where these persons act as a proxy to open the 

door to the financial system for criminals and their money. 

9. Suspicious Activity Reports are meant to be just that, reports of ‘‘suspicious’’ 

activity. Requiring bank employees to determine if activity is in fact illegal before filing a SAR would be counterproductive for a number of reasons, including increasing the burden on bankers who would consequently have to make 

a new, legal determination. 

10. Congress should request from the various regulators data regarding formal 

and informal enforcement actions pertaining to AML/BSA violations and deficiencies so that they are able to independently asses the appropriateness of 

the enforcement regime currently in place. 

11. Both small banks and large banks have been the subject of major money laundering cases. 

12. Money laundering and sanctions violation cases over the past few years relate 

to willful, knowing, and egregious violations of U.S. laws and regulations that 

have resulted in U.S. and foreign banks granting access to hundreds of millions of dollars in funds supporting genocide and funds supporting major, violent South American drug cartels into our system, to name a few examples. 

The fines that have resulted from these cases have been seen by the banking 

industry as heavy and so banks have begun to take AML regulations that 

have been in place for many years more seriously as the possibility and repercussions of enforcement have increased. I would therefore remind Members of 

Congress that the regulatory ‘‘burden’’ has not actually been increasing, the 

threat of being found out is what has actually increased. 

Preface: Who Has AML Compliance Responsibilities? 

One thing to keep in mind for the purposes of AML is that the term ‘‘financial 

institution’’ (FI) is defined very broadly and encompasses a much wider range of 

types of entities than most people realize. Being classified as a financial institution 

means that an entity must generally have some sort of AML compliance in place, 

with the main types of FIs 1 being required to have an AML compliance program, 

conduct customer due diligence and know your customer checks, monitor accounts, 

and file suspicious activity reports and currency transaction reports. I have included 

the definition of ‘‘financial institutions’’ at the end of this testimony for information. 

Today you have before you representatives from three banking associations, but it 

is important to consider that any changes to the AML/CFT regime will affect a 

much wider range of entities and persons, such as currency exchanges, casinos, 

dealers in precious metals, stones or jewels, pawn brokers, and insurance companies, which you should also factor into your decision making. 

There are also a few persons that ought to have U.S. AML obligations but currently do not. Although banks serve as an immediate gateway into the U.S. financial system and must therefore bear significant responsibility for preventing criminals and other wrongdoers from finding safe haven here, they shouldn’t bear that 

responsibility alone. Other actors that handle large sums of money, such as persons 

involved in real estate transactions, escrow agents, investment advisors, lawyers, 

corporate service providers, and accountants must also take responsibility for knowing with whom they are doing business and guard against their services being used 

to launder dirty money. Excluding these nonbank sectors renders the U.S. financial 

system vulnerable to serious, ongoing money laundering threats as shown by multiple media reports about how, for example, anonymous ownership of high-value real 

48 

2See, e.g., The New York Times series ‘‘Towers of Secrecy’’ available at https:// 

www.nytimes.com/news-event/shell-company-towers-of-secrecy-real-estate. 3 Can be accessed at http://www.cbsnews.com/news/anonymous-inc-60-minutes-steve-kroft-investigation/. 4 18 U.S.C. §§1956–1957. 5The Currency and Foreign Transactions Reporting Act of 1970, 31 U.S.C. §5311 et seq. (regulations at 31 CFR Ch. X). 6 Exemption of examination reports from public availability. See 12 CFR §261.14 (Federal Reserve Board); 12 CFR §309.5(g)(8) (FDIC); 12 CFR §4.12(b)(8) (OCC). 7Prohibition on banks disclosing information from their examination reports. See 12 CFR 

§261.20(g), 12 CFR §261.2(c)(1) (Federal Reserve Board); 12 CFR §350.9 (FDIC); 12 CFR §18.9 

(OCC). 

estate facilitates money laundering, 2 a 60 Minutes segment showing how lawyers 

facilitate money laundering by corrupt foreign Government officials, 3 and of course 

the Panama Papers which disclosed how corporate formation agents and lawyers 

help wrongdoers hide and launder criminal proceeds. 

Technically, persons involved in real estate closings are already classified as FIs 

per the definition established by the USA PATRIOT Act in 2001, but they were 

given a ‘‘temporary exemption’’ (which had no sunset clause) from AML compliance 

requirements in 2002. Despite Treasury conducting a comment period with respect 

to AML compliance in the real estate sector in 2003, they have not removed that 

temporary exemption. Congress should consider doing so. 

Addressing the money laundering risks posed by these nonbank sectors and actors 

would finally bring us in line with international anti–money laundering standards— 

agreed to by the U.S., as a leading member of the Financial Action Task Force 

(FATF), the international anti–money laundering standard-setting body. In FATF 

parlance, most of these persons are referred to as ‘‘Designated Non-Financial Businesses and Professions’’. Members of FATF, including the U.S., are supposed to require most of these persons to have AML compliance programs, and many of its 

member countries have already done so. 

I. Trends in Compliance 

A. Understanding Regulatory Enforcement Data 

As you know, the money laundering realm is governed by statutes which both 

criminalize the act of laundering money 4 and impose civil and criminal penalties 

for the failure of a financial institution to have an effective AML program. 5 Under 

Federal law, the type, nature, and scope of a financial institution’s AML systems 

and controls depend upon the institution’s risk profile, which differs significantly for 

banks that, for example, serve a local, rural community versus a global institution 

that operates in high-risk foreign environments. A financial institution’s risk profile 

depends upon its assessment of the types of risks it faces, which are a function of 

where it operates, what products and services it offers, and what clients it takes 

on, among other variables. 

Developing accurate risk assessments and AML compliance regimes is therefore 

an art and not a science, and requires a great deal of judgment. It is the job of the 

regulators to determine if a financial institution has gotten it right—whether the 

FI’s risk assessment is comprehensive and reasonable, whether its AML systems 

and controls are appropriately responsive to those risks, and whether those systems 

and controls are effective. The examination reports that result from regulators’ reviews are highly confidential and exempt from public records requests, 6 although 

this Committee has the authority to review those examination reports should it 

want to review their content and reasonableness. 7

My organization was hired by a third party in 2015 to undertake a confidential 

study of AML enforcement in the U.S. and the U.K. between 2001 and 2015. That 

study was carried out by myself and our Policy Counsel Elizabeth Confalone. I have 

permission to share some of our observations from that report with you today, but 

unfortunately I am unable to share the entire report. 

One of our primary observations was that, apart from the rather small number 

of publicly available deferred prosecution agreements (DPAs) and nonprosecution 

agreements (NPAs) that financial institutions have entered into with respect to 

AML-related activity, it is extremely difficult to determine the number and nature 

of the formal and informal enforcement actions taken by regulators in response to 

BSA/AML deficiencies because (i) very little information about informal actions is 

available to Congress or the public, (ii) information about formal actions is not in 

a machine-readable format—meaning that one must open and read every file to 

know what the infraction(s) was, and (iii) ‘‘actions’’ taken by regulators do not always indicate misconduct—an ‘‘action’’ for the FDIC terminating deposit insurance 

for a banking unit whose deposits were transferred to another bank within the 

49 

8Financial Crimes Enforcement Network, Mission Statement, available at http:// 

www.fincen.gov/aboutlfincen/wwd/mission.html. 9Technically, the DPAs and NPAs are ‘‘cases’’ and the FinCEN notices are ‘‘actions,’’ however 

for ease of reference we will use the term ‘‘actions’’ here. 10 In a few instances there was both a FinCEN action, as well as a DPA or NPA relating to 

the same bank activity, and we have counted those as one case each because they cover the 

same bank activity. 

group is lumped together with an ‘‘action’’ for the systemic violation of U.S. sanctions laws. 

A second observation was that, based upon a review of the enforcement actions 

that could be identified as related to AML deficiencies, the Federal Government 

rarely charged a financial institution with the criminal offense of money laundering, 

favoring instead a finding that the institution had violated Federal requirements to 

have an effective AML program and report suspicious activity to law enforcement. 

This was the approach even when the hallmarks of criminal money laundering 

seemed clearly present in the cases. This may be because it is easier to prove deficiencies in AML compliance than it is to meet the criminal standard of proof for 

money laundering. In light of this, it is important to carefully consider how, for example, shifting responsibility for AML risk analysis for FIs and aggregate data analysis from the private sector to FinCEN (as has been proposed in different ways by 

The Clearing House) could hamper the Government’s use of civil enforcement actions to combat money laundering, which uses far less time and fewer Government 

resources than criminal prosecution would entail, with important dissuasive results. 

B. What Does an Overview of Selected Enforcement Tell Us? 

The best source of data on AML/BSA-specific enforcement actions providing sufficient detail for adequate analysis are (i) nonprosecution agreements (NPAs) and deferred-prosecution agreements (DPAs), and (ii) FinCEN data. My organization, Global Financial Integrity, reviewed those data sets in order to conduct a more detailed 

analysis of AML/BSA-specific violations and trends in enforcement. I will discuss 

each of these in turn. 

FinCEN Enforcement Actions 

Unlike bank regulatory agencies that tend to be more concerned with ensuring 

the general health and stability of our financial system, FinCEN’s specific mission 

is to ‘‘safeguard the financial system from illicit use and combat money laundering 

and promote national security.’’ 8 As a result, FinCEN’s enforcement actions relate 

solely to issues involving money laundering and illicit finance. 

Given the available data, we analyzed 61 separate actions 9 against 52 different 

banks. 10 There were 26 American banks subject to FinCEN actions, and 26 foreign 

banks and U.S. branches and offices of foreign banks that were subject to FinCEN 

actions. Each case involved multiple failings over a period of years, making categorization of the violations challenging. 

Within the FinCEN actions, the most common thread was a failure to file suspicious activity reports, however the violations were usually accompanied by a large 

range of other AML system violations such as a failure to carry out customer due 

diligence, failure to verify the source and use of funds, failure to identify red flag 

activity, failure to have an adequate AML program, failure to have enough compliance staff, and failure to train staff, among other deficiencies. 

Among the full body of 61 cases, 13 of the actions included problems relating to 

money service businesses (MSBs) (mainly foreign) and the processing of the cash 

and monetary instruments by those MSBs, including issues with the identification 

and risk-rating of MSB clients. Ten of the actions involved problems with the management of foreign correspondent accounts and the processing of the cash and monetary instruments for correspondent accounts, including the identification and riskrating of the clients. Several banks had violations relating to their failure to file required currency transaction reports, and there were a hodge-podge of other specific 

violations as well, such as fraud and problematic trade finance activity. Five of the 

actions involved banks that had foreign Politically Exposed Person (PEP) clients, 

some coupled with failures to carry out adequate customer due diligence on those 

PEPs, to verify the source and use of funds, or monitor the client accounts appropriately. 

The FinCEN actions contained damning details illustrating the banks’ failures, 

but were always drafted to focus on the civil law violations as opposed to the activity that might, in fact, be criminal. For example, The Foster Bank, based in Chicago, was sanctioned by FinCEN for violations relating to having an ineffective 

money laundering program in place. Illustrating the types of activity that Foster’s 

AML deficiencies permitted to occur, the FinCEN action states: 

50 

11FinCEN, ‘‘Assessment of Civil Money Penalty Against the Foster Bank’’, Case No. 2006- 

8, at 5, http://www.fincen.gov/newslroom/ea/files/foster.pdf. 12FinCEN, ‘‘In the Matter of North Dade Community Development Federal Credit Union’’, 

Number 2014-07, at 7, 8, 9, Nov. 25, 2014 (hereinafter, ‘‘FinCEN North Dade Enforcement Action’’), http://www.fincen.gov/newslroom/ea/files/NorthDadelAssessment.pdf. 

For example, from April 1999 through August 2002, one customer who operated a sportswear business purchased approximately $674,390 in cashier’s checks, all individually purchased below the $3,000 Bank Secrecy Act 

record-keeping threshold for monetary instrument transactions. Concurrently, from April 1999 through August 2002, the same customer engaged 

in a pattern of structured transactions involving over $6,199,616 in cash deposits in amounts under $10,000 per deposit. Ultimately, in December 2002, 

the Bank discovered that this customer had conducted nearly $10 million 

in cash transactions between April 1999 and November 2002. 

Another Foster customer routinely made cash deposits in the amounts of 

$9,900 up to four times daily. The Bank retained no documentation in its 

file to support a legitimate business reason for these deposits. 

Other customers engaged in large aggregate cash transactions, totaling an 

average of $300,000 to $600,000 per month, at least some of which appeared to be designed to avoid currency transaction reporting. Foster did 

not have documentation supporting the legitimacy of the customers’ banking activities and failed to file timely suspicious activity reports for these 

customers. 11

This description indicates that that these customers were engaging in activities 

that were likely illegal, given the lengths that they went to in order to the avoid 

money laundering reporting requirement that deposits of $10,000 or more be reported to FinCEN on a Currency Transaction Report (CTR). The FinCEN action is 

concerned with Foster’s failure to identify these avoidance techniques, but we can 

find no corresponding case in Illinois where the bank is actually charged with the 

criminal act of laundering money for its clients. At the time we conducted this research, we did not find any records relating to prosecution of persons in Illinois who 

used the accounts at Foster Bank, although a case against an individual might not 

mention the bank’s name. Therefore, while this case has multiple hallmarks of 

money laundering activity, there was no prosecution for the laundering that we 

could find. Further, we were unable to find evidence that these clients’ activities 

were even investigated by Illinois State or Federal authorities. 

Having reviewed the FinCEN actions, we are under the impression that the vast 

majority of the sanctioned banks knew or should have known (as is the standard) 

that their services were being used to launder proceeds of some sort of illegal activity (although they may not have known precisely what kind of illegal activity), and 

that some of the banks may have either been established for that specific purpose, 

or the banks’ business was somehow taken over by those clients. This misconduct 

is most evident in the cases relating to small banks, where in several cases the clients that were engaging in activity that should have raised red flags and caused 

the banks to file SARs were a large percentage of the small bank’s business. 

For example, North Dade Community Development Federal Credit Union was a 

nonprofit community development bank based in North Dade County, Florida, with 

$4.1 million in assets. As a community development bank, its clients were supposed 

to be limited to people who live, work or worship in the North Dade County area. 

North Dade had only one branch and only five employees. Despite its small, local 

focus, North Dade was servicing multiple money service businesses that were located outside of its geographic field of membership and that were engaging in highrisk activities. For example, records showed ‘‘(1) deposits in excess of $14 million 

in U.S. cash that was physically imported into the United States on behalf of nearly 

40 Mexican currency exchangers, and (2) hundreds of millions of dollars in wire 

transfers to foreign bank accounts of MSBs located in Mexico and Israel.’’ 12 It is 

difficult to believe that the bank’s five staff members were unaware of the likelihood 

that the bank was being used to launder money via their MSB clients, and it is 

wholly possible that the bank was either established to carry out illegal activity or 

was overtaken by criminal clientele. 

DPAs and NPAs 

We also reviewed deferred prosecution agreement and nonprosecution agreements 

(DPAs and NPAs) related to BSA/AML violations, which we drew from the University of Virginia School of Law’s Federal Organizational Prosecution Agreements colVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
51 

13 Brandon L. Garrett and Jon Ashley, ‘‘Federal Organizational Prosecution Agreements’’, 

University of Virginia School of Law, at http://lib.law.virginia.edu/Garrett/prosecutionlagreements/. 

lection. 13 As you know, NPAs and DPAs represent a step beyond agency enforcement actions. They represent settlements of criminal and civil cases brought by the 

Government against corporations where the corporation generally admits to certain 

facts, agrees to take certain remedial measures, and often pays a fine in exchange 

for the Government deferring or discharging the prosecution. In the case of NPAs, 

the matter is settled once the Government has signed the agreement. In the case 

of DPAs, the Government has the option of renewing the prosecution if the company 

does not implement the required remedial measures or continues to otherwise act 

unlawfully. 

The DPAs and NPAs we reviewed settled actual cases against banks brought by 

the U.S. Department of Justice. We reviewed 36 DPAs and NPAs involving banks. 

Eleven of those did not involve AML/BSA-related infractions. Eight of the agreements related to sanctions-busting violations, where the banks were stripping wires 

of key information, re-routing the wires, or taking other actions to evade U.S. sanctions laws. Fourteen cases involved money laundering violations, ten of which were 

also the subject of FinCEN actions, and therefore included in the analysis above. 

Only four banks were the subject of money laundering-related DPAs/NPAs that did 

not have a corresponding FinCEN action. Five of the cases were against large, international banks for aiding and abetting large-scale tax evasion by Americans. Several 

cases were included in the count of both the sanction violations and money-laundering categories because their conduct and the terms of their agreements included 

both types of violations. 

Several of the money laundering cases involved funds being moved from developing or middle income countries into the U.S. via money service businesses or correspondent banking activities. The majority of the countries involved were South or 

Central American (mainly focusing on the Black Market Peso Exchange) or Middle 

Eastern. One case involved a bank in Nigeria and one case involved Russian banks. 

The countries that arise in these cases are not surprising in light of the American 

political priorities of fighting drug crime and terrorist financing. 

Some Useful Perspective 

Lastly in this section, I’d like to remind Members of the Committee that although 

the headline-grabbing figures relating to BSA/AML enforcement for FIs’ may seem 

large, they pale in comparison to some of the egregious, willful violations taking 

place. Two examples: HSBC USA was fined a mere $1.9 billion in 2012 for: 

• Failing to have required money laundering controls applied to over $200 trillion 

in wire transfers it received over a 3-year period (that’s about 3x global GDP), 

• Of which $670 billion came from Mexico, which it had classified as a low risk 

country for money laundering although the U.S. Department of State and 

many, many others classify it as high risk, and 

• Of which $881 million was determined to be proceeds of drug trafficking by 

the Mexican Sinaloa Cartel and the Columbian Norte de Valle Cartel. 

• Bear in mind that we have no idea what other percentage of that $200 trillion 

was dirty money flowing through HSBC USA because the AML controls were 

turned off. 

• Failing to have the required money laundering controls in place with respect 

to the purchase of $9.4 billion in cash from its Mexican subsidiary. 

• Processing wire transfers with inadequate information that were the result of 

other HSBC subsidiaries’ efforts to ensure that U.S. dollar transactions from 

sanctioned countries like Iran and Libya were cleared in the U.S. 

BNP Paribas, France’s largest bank, was fined $8.9 billion in 2014 for: 

• Processing over $190 billion in transactions through its New York office for clients in the sanctioned countries of Sudan, Iran, and Cuba, 

• at one point providing over half of the banking services in use by the Sudanese 

Government, enabling this Government, sanctioned by the U.S. for perpetrating genocide, to process its oil money (denominated in dollars) and continue to purchase the weapons it needed and pay its soldiers to continue to 

engage in mass-murder, and 

• knowingly providing banking services in U.S. dollars for people subject to individual and specific sanctions. 

52 

C. Conclusion of Analysis and Recommendation 

Our analysis of the AML enforcement data showed that small banks, even local 

banks, can be and are used to move illicit funds in the same way that large, international banks are used. In addition, our analysis of the DPAs, NPAs, and FinCEN 

actions establishes that banks of all sizes knowingly and intentionally facilitate the 

movement of illicit funds. In none of the cases reviewed does it appear that the bank 

was unwittingly involved in the movement of illicit money, many of which appeared 

to have been the subject of previous regulatory warnings. SAR filing violations were 

a factor in almost every single one of these cases, but they were far from the most 

serious violations. 

Due to the limitations on access to data, our analysis is incomplete. Additional 

analysis should be undertaken prior to making major alterations to the existing U.S. 

AML regime. We therefore recommend that the Members of the Committee undertake a more in-depth review of the AML enforcement data prior to making any policy changes. This review could include requesting each regulator to identify which 

of their formal and informal enforcement actions over the last 10 years relate to 

AML/BSA or sanctions violations and to include information in the searchable/sortable data fields indicating the type of infraction involved and the laws or regulations 

that were violated. In addition, we recommend that the Committee obtain the documents related to a sample of the formal and informal enforcement actions taken by 

each agency to get a better sense of the misconduct involved and the quality of enforcement actions taken. Finally, it would be ideal if all the regulators adopted the 

same fields and display format on their website. This will allow for more effective 

and efficient Congressional oversight moving forward, and make it easier for FIs to 

search the data to identify evolving criminal methods and trends. 

II. Suspicious Activity Reports (SARs) 

The Nature of SARs. Suspicious Activity Reports (SARs) are an important part of 

the BSA/AML framework, but the nature of SAR filing has changed over time and 

could be reviewed. It is important for the Committee to understand that SARs were 

intended to be just that, reports of suspicion of criminal activity. They are not called 

illegal activity reports, because FI employees are not required to determine if the 

activity they are seeing is actually illegal. Instead, FI employees are supposed to 

file reports where they see something out of the ordinary and simply have a suspicion that there is a problem. Requiring bank employees to go further and make 

a determination that an activity is actually illegal would be an unrealistic and unwarranted expectation. There is no ‘‘bright line’’ test for when a SAR should be filed 

because that is contrary to the intended nature of a SAR. 

The Clearing House has nevertheless proposed that further guidance be provided 

by FinCEN to ‘‘relieve financial institutions of the need to file SARs on activity that 

is merely suspicious without an indication that such activity is illicit.’’ That recommendation would fundamentally change the nature of SAR reports and would actually make bank employees’ tasks much more difficult and risky. After all, it clearly requires a greater amount of effort and legal analysis to determine whether an 

activity is, in fact, illicit rather than merely suspicious. 

One source of tension in this area appears to be that law enforcement wants SARs 

to include as much information as possible, in as standard a format as possible, and 

that their demands for greater detail and specificity have grown over time. FI employees may not have the desired level of detail that law enforcement would like, 

but that is simply a reality of money laundering cases which often involve hidden 

conduct and individuals. The SAR instructions properly allow FI employees to indicate on the form that the information is ‘‘unknown’’; that option should be honored 

by law enforcement rather than trying to require FI employees to become detectives 

uncovering illegal conduct. 

The Sharing of SARs. The Clearing House has proposed that new regulations 

allow FIs to share SAR information among foreign affiliates and branches. GFI supports this recommendation; its importance was made clear in the HSBC case. A related issue, however, is what actions FI’s affiliates and branches are required or 

permitted to take in response to receiving this information. I understand that there 

have been cases where a person’s accounts have been closed by a bank because it 

received information that another bank identified the person as suspicious, making 

it difficult for that person to establish banking relationships elsewhere. If FIs are 

permitted to close accounts based upon suspicions communicated to them by other 

banks, Congress should ensure that there is some mechanism for appeal or redress 

for individuals wishing to establish their bona fides. Such closure of accounts may 

also serve to ‘‘tip off’’ the account holder that they are the subject of a SAR, contrary 

to the SAR confidentiality requirements. 

53 

Integrating New Technology. I am in favor of exploring the ways in which today’s 

(and tomorrow’s) technology can be used to innovate in the AML compliance sphere 

and believe that the Government should be supporting such innovation (usually referred to as ‘‘FinTech’’). Northern Europe seems to be leading in this space, and it 

would be helpful to create a better environment for such innovation in the U.S. I 

therefore support the creation of a technological ‘‘sandbox’’, as has been proposed by 

The Clearing House and has been implemented in the U.K. The U.K. structure appears to have some specific safeguards to protect consumers, however, which they 

consider to be an integral part of their system. I have not had an in-depth look at 

the U.K. program, however regulators presented it at a recent FATF industry consultation meeting I attended. They stressed the importance of ensuring that consumers were protected at all times as innovative approaches were being tested, and 

the U.S. should do the same. It is important to note that, in the House of Representatives, Members are discussing legislative language that does not require any of the 

safeguards present in the U.K. system, potentially giving FIs an unlimited safe harbor for the use of any new technology with no Government oversight. This is a significant danger because if an FI spends the money to integrate new technology that, 

it turns out, isn’t as effective as alternative methods, they would have no incentive 

to change their approach. They would incur some unwelcome cost for doing so and 

they’d have the security of an unlimited safe harbor, so there would be no incentive 

to act. 

III. Know Your Customer (KYC)/Customer Due Diligence (CDD) 

As part of their customer due diligence, or CDD, procedures, FIs are supposed to 

know their customers by engaging in Know Your Customer, or KYC, procedures. In 

banking terms, knowing your customer is more than just knowing who the owners 

or controllers of the company are (known as ‘‘beneficial ownership’’ information), it 

is also understanding how that legal or natural person will be using the account 

so that the account can be appropriately monitored for possible money laundering 

activity. Establishing the expected normal use of the account is imperative if the 

FI is to effectively monitor for suspicious activity going forward. Moreover, characteristics of the beneficial owner of the account (such as nationality/residence, whether a politically exposed person (PEP), etc.), the type of business using the account, 

whether that business is cash intensive, and many other factors all contribute to 

an account’s risk profile, and that risk profile determines what type and level of 

monitoring the account will be subject to. 

Beneficial Ownership Information. Knowledge of the beneficial owner(s) of a company holding an account is a critical question in KYC, however. Therefore, one 

Clearing House proposal that GFI wholeheartedly supports is its proposal that information about the beneficial owners of U.S. companies—the actual individuals who 

own or control those companies—should be collected at the time that companies are 

incorporated in the U.S. and that this information should be made available to law 

enforcement and financial institutions. This is an issue that has been gaining visibility and urgency on a global level. This is because anonymous companies, or companies with hidden owners, are the most frequently used vehicle for money laundering. That’s why identifying who owns or controls a company is a fundamental 

step necessary to combat the problem. 

In response to the global movement towards greater corporate ownership transparency, in May 2016, the U.S. Treasury Department adopted a regulation which 

more explicitly requires banks to obtain beneficial ownership information beginning 

in May 2018. Unfortunately, that regulation includes some significant loopholes and 

so has not been deemed compliant with international AML standards in the most 

recent evaluation of the U.S. AML system by the IMF. Hopefully, Treasury will be 

making improving that regulation a priority in order to bring the U.S. into compliance with international AML standards and ensure that true beneficial ownership 

information is being collected. 

But whether or not the U.S. improves its regulation, U.S. banks that operate in 

other countries are already subject to strong corporate transparency standards that 

are only getting stronger. As a result, the multinational banks that belong to The 

Clearing House want beneficial ownership information for U.S.-formed entities to be 

collected by either those who incorporate the companies or by an appropriate Government entity so that they can use the information as a key data point in their 

customer due diligence process. While we do not support banks being allowed to rely 

exclusively on this information in their customer due diligence procedures, the information could and should be an extremely helpful starting point in the ‘‘know your 

customer’’ process and as a tool to verify information supplied by the client. Accordingly, we strongly support The Clearing House beneficial ownership proposal, which 

is soon to be the subject of bipartisan legislation in the House and Senate. 

54 

I wanted to note that in discussions of relevant legislative text in the House of 

Representatives, some Members have been pushing the idea that law enforcement 

should only have access to information about the beneficial owners of companies if 

they can produce a summons or subpoena, while at the same time not discussing 

any limitations on availability of the information to the banks. As a fundamental 

principle, U.S. law enforcement should have free access to beneficial ownership information because it is critical information they have been requesting for years, as 

evidenced by their many letters of support for beneficial ownership bills introduced 

over the past 10 years. We should not, under any circumstances, have a situation 

in which the banks have easy access to this information and our law enforcement 

does not. I would also note that last month, the European Union adopted legislation 

which requires all 28 EU Member States to create registers of beneficial ownership 

information and for that information to be made available to the public, including 

law enforcement and financial institutions. The U.K. already has such a public registry in place, and countries such at Ghana, the Ukraine, Afghanistan, Kenya, and 

Nigeria are all actively working on putting the same in place. At this point, free 

access by law enforcement and banks must be seen as a minimum standard. 

IV. The Balance of Activity and Obligations Between FinCEN and the Private Sector 

The Clearing House has proposed that (i) for the large multinational FIs, all enforcement power should be consolidated within FinCEN, (ii) data collection and 

analysis should be shifted from the private sector to FinCEN, and (iii) for the large 

multinational FIs, FinCEN/Treasury should establish priorities for each FI on an 

annual basis, review progress with each FI every 3 months, and oversee any examination of an FI. I’ll address each in turn. 

Consolidation of AML Enforcement Power. While the proposal to consolidate AML 

enforcement power in FinCEN has surface appeal, it would also be at odds with a 

major principle in Federal law regulating FIs. Federal law now authorizes different 

functional regulators to regulate different FI activities in order to make use of their 

specialized expertise. For example, the SEC is given primacy over securities activities at FIs because it understands the securities markets and their inherent risks. 

Similarly, the Commodity Futures Exchange Commission oversees AML issues affecting commodity trading, and State insurance regulators examine AML issues affecting FI insurance activities, again because each regulator is expert in their own 

field. If AML enforcement power were instead consolidated in FinCEN, the sectorspecific AML experts now working at the individual regulators would have to be 

transferred to FinCEN, swelling its ranks and reach. There are strengths and weaknesses to continuing the current disaggregated AML oversight system versus concentrating AML oversight at FinCEN, and the issues and tradeoffs would need to 

be carefully thought through. 

Data Collection and Analysis Transferral to FinCEN. The suggestion that FinCEN 

be given access to bulk data transfers from FIs to enable it to analyze AML trends 

and patterns across institutions is another potentially useful idea. But questions 

about the effectiveness and cost of this proposal include whether FinCEN currently 

has the technological capability and personnel needed to perform that type of data 

analysis or whether it would need to be built, which could be a significant expense. 

In addition, charging FinCEN with industrywide data collection and analysis should 

not be seen as a way for banks to absolve themselves of their AML obligations. The 

banks would retain their position as the primary gateway into the U.S. financial 

system, so the first level of responsibility to safeguard the system against money 

laundering abuses must remain with the individual banks who open their accounts 

to individuals and entities around the world. 

Requiring FinCEN To Establish AML Priorities. The third proposal, to essentially 

charge FinCEN with establishing annual AML priorities for every large multinational bank and monitoring every bank’s progress every 3 months, is extremely 

ill-advised. The FI understands its own business and products better than anyone 

else. It is therefore best-placed to determine what its AML risks are and how best 

to address those risks within the systems that it has created. We support the idea 

of an FI working with FinCEN/Treasury to discuss those risks in the context of national and global trends observed by FinCEN, and whether adjustments might be 

made as a result, however. In addition, reviewing each FI’s progress in AML every 

3 months seems like far too short a time frame to observe how an FI is progressing 

in this respect, however, and entirely impractical from a Government resource allocation perspective. 

Creates Bigger Government. Overall, it is critical that the Committee understand 

that changes of the magnitude suggested by The Clearing House would require a 

significant appropriation from the Federal budget to pay for, among other things, 

55 

14 ‘‘The Street, the Bull, and the Crisis’’ is available at https:// 

www.secwhistlebloweradvocate.com/pdf/Labaton-2015-Survey-reportl12.pdf. 

a very large staff increase and procedural and technological improvements at 

FinCEN. In addition, many new regulations would have to be drafted to give effect 

to these changes. The result would be a much bigger Government agency and a bigger FinCEN impact on AML activities. Careful analysis is needed to determine 

whether the benefits of each of these changes would outweigh the costs. 

V. Conclusion 

In conclusion, positive changes can be made to the AML regulatory structure, but 

they must be made carefully, with good data, and only after thinking through as 

many of the potential ramifications as possible. 

Unfortunately for the banking community, many of the high profile, incredibly 

egregious cases that involve the biggest banks in the world have eroded public trust 

that banks will indeed act in a manner that is law-abiding and actively try to turn 

away proceeds of crime. Even many bankers lack faith in their institutions. The 

Members of this Committee may find a 2015 study by the University of Notre Dame 

and the law firm of Labaton Sucharow, entitled ‘‘The Street, the Bull, and the Crisis’’, to be of interest. The researchers surveyed more than 1,200 U.S. and U.K.- 

based financial services professionals to examine views on workplace ethics, the 

nexus between principles and profits, the state of industry leadership and confidence in financial regulators. As the report states, ‘‘The answers are not pretty. 

Despite the headline-making consequences of corporate misconduct, our survey reveals that attitudes toward corruption within the industry have not changed for the 

better.’’ 14

Some of the banks that have been the subject of these high-profile, egregious 

cases are members of The Clearing House, whose proposals for regulatory change 

are before this Committee. That does not necessarily mean that the proposed 

changes are unwarranted, but it is the responsibility of Congress to make informed 

decisions about the extent to which each of these proposals is also in the public interest. Deregulation for the sake of deregulation in the AML area is most certainly 

not in the public’s interest. Making it easier for banks, knowingly or unknowingly, 

to take in greater inflows of drug money, the proceeds of human trafficking, the illgotten gains of foreign dictators, and terror financiers is not in the best interest of 

anyone. 

Thank you for the opportunity to share my views on such an important topic. 

56 


10918006.eps
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10918007.eps
58 

1 Existing statutory authority appears to allow for such an assessment and affected institutions should see a corresponding reduction in the assessment they currently pay to prudential 

regulators for supervision of this function. The Independent Offices Appropriation Act provides 

general authority for a Government agency to assess user fees or charges by administrative regulation, based on the value of the service to the recipient. See 31 U.S.C. §9701. OMB Circular 

No A-25 provides further guidance regarding ‘‘user fees’’ (‘‘A user charge . . . will be assessed 

against each identifiable recipient for special benefits derived from Federal activities beyond 

those received by the general public.’’). See OMB Circular No. A-25 Revised. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM GREG BAER 

Q.1. Shifting BSA Oversight Back to FinCEN—One Clearing House 

recommendation is to have FinCEN’s BSA oversight authority over 

large banks—originally delegated to Federal banking agencies over 

20 years ago—returned to FinCEN. But it seems clear FinCEN 

does not have the bandwidth to make such a radical change. 

Can you describe your organization’s effort to assess what this 

change would require, in terms of additional Federal funding and 

personnel, or new assessments on big banks? Why should we redo 

wholesale a system that has been working reasonably well, and put 

in place the kind of centralized examination teams you suggest, 

when examiners have expertise and experience with these large entities, and have been doing this job successfully for many years? 

A.1. While it would be a significant undertaking for FinCEN to examine all financial institutions subject to the BSA, we instead recommend that FinCEN retake exam authority for large international financial institutions that present complex cross-border 

issues and file a majority of SARs. We estimate that an examination team of only 25–30 people at FinCEN could replicate the existing work of the Federal banking agencies and the IRS (for the largest MSBs) at these institutions. More importantly, a dedicated 

FinCEN exam team for this small subset of large institutions could 

receive appropriate security clearances, meet regularly with law 

enforcement and other end users, receive training in big data analytics and work with other experts in Government. They, in turn, 

would be supervised by Treasury officials with law enforcement, 

national security, and diplomatic perspectives on what is needed 

from an AML/CFT program—not bank examiners who frequently 

bring no experience in any of those disciplines. Furthermore, when 

FinCEN turned to writing rules in this area, it would do so informed by its experience in the field. It would see the whole field, 

and promote innovative and imaginative conduct that advanced 

law enforcement and national security interests, rather than 

auditable processes and box checking. Funding such an exam team 

could be accomplished many ways, including: (i) assessing financial 

institutions for examinations costs; 1 or (ii) establishing a centralized team funded pro rata by each of the affected agencies but reporting directly and solely to the FinCEN Director. 

This recommendation aims to address one of the fundamental 

drivers of the inefficiency in the U.S. AML/CFT regime—the fact 

that the end users of the information generated by banks (e.g., law 

enforcement and national security officials) have no say in how 

banks allocate their resources and provide financial intelligence to 

them. Therefore, examiners do not have insight into the utility of 

the material provided by banks, law enforcement AML/CFT priorities, or the degree to which banks can innovate their compliance 

59 

programs in order to provide better leads to law enforcement. Instead they focus on auditable policies, procedures, and metrics. 

From a political and personal risk perspective, examiners are in 

a no-win situation. On the one hand, they are excluded when the 

bank they examine is pursuing real cases with law enforcement, 

national security or intelligence community officials, and therefore 

receive no credit when those cases are successful. But if something 

goes wrong—if a corrupt official or organization turns out to be a 

client of the bank they examine—the examiner faces blame. Thus, 

from an examiner and banking agency perspective, the only possible safe harbor is to demand more policies and procedures, ensure 

that a lot of alerts are generated and SARs filed, and encourage 

the bank to investigate exhaustively any client deemed high risk. 

Given that banks have been complying with AML/CFT requirements for decades, examiners are also fairly comfortable with the 

current technological and programmatic aspects of the regime, so 

rather than encourage institutions to make innovative programmatic changes to detect high-risk financial crimes, the examiner focuses on auditing processes like the number of computer 

alerts generated, SARs filed and compliance employees hired. As a 

result, banks of all sizes generate a lot of SARs that are of little 

to no use to law enforcement. 

Importantly, the benefits of a FinCEN examination function 

would extend well beyond the handful of banks it examined. Priorities set and knowledge learned could be transferred to regulators 

for the remaining financial institutions. And innovation started at 

the largest firms, with encouragement from FinCEN, would inevitably benefit smaller firms. The result of FinCEN assuming some 

supervisory authority would be a massive cultural change, as the 

focus of exams shifted to the real-world effectiveness of each institution’s AML/CFT program, rather than the number of SARs filed 

or number of policies written. That change would start with those 

banks under sole FinCEN supervision, but would eventually spread 

to all institutions. 

Q.2. Protecting Information Shared Among Banks—With any increase in information sharing between financial institutions beyond 

that allowed under current law would come an increased responsibility for those institutions to protect consumer and commercial 

data. 

What additional steps are needed to ensure that expanding information sharing among banks doesn’t put customers at greater risk 

of data theft, or of unjustified exclusion from the financial system 

because of inaccurate information being shared? Should we consider a more formal redress mechanism for persons debanked as a 

result of increased information sharing? Has the Clearing House 

surveyed its members to assess, over the last 5 years or so, how 

many 314b inquiries were made, and how many responded to, by 

member banks? If not, could you do such an informal survey and 

provide to the Committee that data? 

A.2. Financial institutions work very hard to ensure that their customers can conduct their financial transactions in a safe and secure 

manner, while protecting their privacy. U.S. banks are subject to 

a host of regulatory and other requirements and devote substantial 

60 

2See FinCEN ‘‘Section 314(b) Fact Sheet’’, (314(b) Fact Sheet) November 2016, available at 

www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf. 3See 31 CFR 1010.540(b)(4)(ii). 

4See 314(b) Fact Sheet, supra n. 2. 

time and investment to safeguarding customer data—and have 

every incentive to do so. We believe that greater information sharing is fully consistent with the important privacy risks of bank customers. If a customer has an account at multiple banks, each of 

those banks is already monitoring those accounts for suspicious activity. Allowing a bank that believes that it has detected suspicious 

activity to consult the other relevant banks would allow it to develop a more complete picture of the customer’s financial activity, 

and in many cases would result in a SAR not being filed. (For example, one bank might see suspicious wire transfers to another 

country, while a second bank might explain that it banks a company owned by that customer in that country, so the transfers are 

entirely appropriate.) Of course, in some cases, a more complete 

picture might confirm initial suspicions, and lead to a higher quality SAR filing. 

We do not believe there should be concerns about information 

sharing on SARs leading to customers becoming unbanked. Sharing 

would only occur if there was already cause for suspicion, and 

would occur only among those banks that currently share the customer. Even in the event that all those banks, as a result of the 

sharing, decide to close the customer’s accounts, this fact will not 

be disclosed to other banks or to the public. Thus, this case is not 

akin to credit reporting, where a customer’s experience with one 

bank affects his or her credit score, and thereby the ability to obtain credit from any bank. 

In order to be covered by the 314(b) safe harbor, financial institutions or an association of financial institutions must comply with 

a number of requirements, including: (i) annually registering with 

FinCEN and providing a point of contact for requests; (ii) taking 

reasonable steps to verify that the recipient institution is also registered with FinCEN; and (iii) ensuring that the information 

shared is adequately protected, secure and confidential. 2 In particular, FinCEN’s 314(b) regulation states that institutions who 

share under this program are to ‘‘maintain adequate procedures to 

protect the security and confidentiality of such information . . . 

[which] shall be deemed satisfied to the extent that a financial institution applies to such information procedures that the institution has established to satisfy the requirements of section 501 of 

the Gramm–Leach–Bliley Act (15 U.S.C. 6801), and applicable regulations issued thereunder, with regard to the protection of its customers’ nonpublic personal information.’’ 3 As a general matter, 

FinCEN notes that sharing under 314(b) must only be done to 

‘‘[i]dentify[] and, where appropriate, report[] on activities that may 

involve terrorist financing or money laundering; [d]etermine[] 

whether to establish or maintain an account, or to engage in a 

transaction; or [a]ssist[] in compliance with anti–money laundering 

requirements.’’ 4

While it would be difficult to provide you with data on the frequency of requests and responses as requests carry varying degrees 

of urgency and significance—some are critical and merit an instituVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
61 

5See Testimony of William J. Fox before the U.S. House Financial Services Subcommittees 

on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance, November 29, 

2017, available at financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-wfox20171129.pdf. 

tion’s immediate attention while others are more routine and can 

function as alerts—we note that FinCEN guidance suggests that financial institutions reference 314(b) in SAR narratives when it has 

assisted institutions in determining whether information is suspicious, so the agency may be able to provide you with a comprehensive assessment of the relative effectiveness of the program. 

Relatedly, our members have been told anecdotally by law enforcement that their investigative work, using 314(b) and other tools, 

has resulted in the production of highly useful information. 5

Finally, when dealing with financial inclusion concerns, we note 

that the present regulatory framework lends itself to overly conservative evaluations of risk. This is why TCH recommends that 

Treasury lead the regime as it is uniquely positioned to balance the 

sometimes conflicting interests relating to national security, the 

transparency and efficacy of the global financial system, the provision of highly valuable information to regulatory, tax and law enforcement authorities, financial privacy, financial inclusion, and 

international development. 

Q.3. SAR Filings—You noted in your testimony that currently the 

largest number of SARs being filed against banks are for insider 

threats and abuses such as deceptive and fraudulent sales practices, and seemed to suggest that was inappropriately high. But I 

note that in cases like Wells Fargo, which has recently been forced 

to pay out hundreds of millions in fines, penalties, and a class action settlement, the filing of SARs is often a useful tool to identify 

such patterns of misconduct among employees, and throughout a 

bank and its branches. 

Are there specific types of insider threats, deceptive or fraudulent practices, or other types of illicit conduct that you think should 

NOT be subject to SAR filings? 

A.3. We are aware of no case, including Wells Fargo, where SAR 

filings served as a ‘‘useful tool to identify . . . patterns of misconduct among employees, and throughout a bank and its 

branches.’’ Rather, our strong presumption is that SAR filings with 

respect to minor offenses in small dollar amounts are rarely if ever 

investigated by law enforcement. We do not know but strongly suspect that any post hoc SAR filings made by Wells Fargo have not 

resulted in any prosecution of employees subject to those filings, 

and that law enforcement, if it were interested in prosecuting or 

interviewing those employees, did not require a SAR filing to identify them. Again, this is only speculation, so we would strongly 

urge the Committee to ask FinCEN for data on the yield on SARs 

filed on insider abuse, and for examples of where such filings initiated or advanced a prosecution. 

None of this is to minimize the importance of enforcing the law 

against banks and their employees. We do question strongly whether resources deployed to filing SARs on insider abuse could be better deployed to innovative approaches to detecting more serious 

crimes. As a general matter, the current BSA/AML reporting reVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
62 

6See 31 U.S.C. §5311, which states that ‘‘[i]t is the purpose of this subchapter [the BSA] to 

require certain reports or records where they have a high degree of usefulness in criminal, tax, 

or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’ Note that the 

last clause was added by the USA PATRIOT Act in 2001. 7See The Clearing House, ‘‘Re: Request for Comments Regarding Suspicious Activity Report 

and Currency Transaction Report Requirements’’, (April 10, 2018), available at 

www.theclearinghouse.org/-/media/tch/documents/tch-weekly/2018/ 

20180410ltchlcommentlletterltolfincenlonlsarlandlctrlrequirements.pdf. 

gime should be reviewed and the investigation and reporting of activity of limited law enforcement or national security consequence 

should be deprioritized, while increasing law enforcement feedback, 

to allow financial institutions to re-allocate resources to higher 

value AML/CFT efforts. This effort corresponds with the statutory 

purpose of the BSA, which is to provide the Government with 

AML/CFT information that is of a ‘‘high degree of usefulness.’’ 6

TCH believes that the SAR regime should be modernized through 

the tailoring of various requirements and facilitation of the submission of raw data from financial institutions to law enforcement. 

This could be done in part by (i) providing guidance further clarifying that a SAR is not required simply because a transaction appears to have no economic, business, or lawful purpose; (ii) eliminating requirements to file SARs when there are single instances 

of structuring activity and under the 90-day continuing activity review requirements; (iii) reducing the number of fields deemed ‘‘critical’’ and ‘‘optional’’ to SAR and CTR filings, as each one imposes 

associated regulatory expectations and burdens with varying benefits; and (iv) reviewing, revising or retracting as necessary all existing SAR guidance to ensure it aligns with the priorities of law enforcement and the regime more broadly and clearly communicates 

expectations to institutions. CTR expectations should also be 

streamlined as, when coupled with the SAR regime, many may be 

of low law enforcement or national security value. 7

To get a sense of the potential for improvement, note that one 

bank has publicly reported that it receives follow-up requests from 

law enforcement on approximately 7 percent of the SARs it files, 

which is consistent with other reports we have received. More importantly, for some categories of SARs—structuring, insider 

abuse—that number is far lower, approaching 0 percent. However, 

no one can afford to stop filing SARs in any category because examiners focus on the SAR that was not filed, not the quality or importance of the SAR that was filed. A core problem with the current 

regime is that there is an absence of leadership making choices like 

these—therefore we also recommend that Treasury set priorities 

for the AML/CFT regime and allow financial institutions to deploy 

their resources in support of those priorities. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM GREG BAER 

Q.1. Our current money laundering regulatory regime evaluates financial institutions based on how they meet process-based metrics 

such as the filing of suspicious activity reports. As this hearing discussed, the drawback to this is that financial institutions end up 

focusing on meeting these metrics instead of developing innovations that will better catch the bad guys. One proposed way to enVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
63 

1See The Clearing House, ‘‘A New Paradigm: Redesigning the U.S. AML/CFT Framework To 

Protect National Security and Aid Law Enforcement’’, (TCH AML/CFT Report), February 2017, 

available at www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/2017/ 

20170216lTCHlReportl AMLlCFTlFrameworklRedesign.pdf. 2While legislative authorization would be helpful, we note that the Securities and Exchange 

Commission’s no-action letter regime appears to be established under broad authorities. See 

Nagy, Donna M., ‘‘Judicial Reliance on Regulatory Interpretations in SEC No-Action Letters: 

Current Problems and a Proposed Framework’’, Cornell Law Review, Vol. 83: 921, p. 931 which 

says ‘‘[i]n addition to rulemaking and adjudicatory powers of statutory origin, the SEC possesses 

inherent power to issue interpretations of the Federal securities laws and the SEC rules it has 

promulgated thereunder. This authority to make interpretive statements derives from 

Congress’s charge to the SEC to administer and enforce the Federal securities laws.’’ Available 

at www.lawschool.cornell.edu/research/cornell-law-review/upload/Nagy.pdf. 

3See 31 U.S.C. §5318(a)(7). 

courage innovation that focuses on results is to find ways to allow 

financial institutions to experiment with new anti–money laundering technologies without facing regulatory liability. For example, some have proposed a no-action letter system which would 

allow financial institutions to gain guidance from FinCEN and 

other regulators about the legality of proposed actions. How would 

such a system function and how could it encourage innovation? 

Would FinCEN need legislative authorization to implement a noaction letter process, either to issue no-action letters themselves or 

to have the authority to exempt financial institutions from any particular reporting requirements? 

A.1. TCH supports efforts to institute a no-action letter like process 

that resembles the Securities and Exchange Commission’s. 1 While 

rulemaking and the issuance of guidance are cumbersome processes that do not always promote innovation or dialogue with the 

industry, a no-action letter system could be more effective. It would 

allow individual financial institutions to ask particular questions 

about actions they plan to take, thereby spurring innovation; provide quick answers, thereby nurturing innovation; and increase the 

flow of information from industry to FinCEN. As with other areas 

of reform, Congressional efforts to encourage the establishment of 

a no-action letter process for Bank Secrecy Act-related issues would 

be helpful. 2 We note that the Bank Secrecy Act grants Treasury 

broad interpretive authority including to ‘‘prescribe an appropriate 

exemption from a requirement under this subchapter and regulations prescribed under this subchapter.’’ 3

More broadly, a cultural change is necessary in how banks are 

examined for compliance, and assessed for potential enforcement 

action. The current focus of examination is reviewing a sample of 

alerts and attempting to demonstrate that a SAR should have been 

filed in some of those cases. There is little to no focus on the value 

of the SARs the bank filed. There is little to no contact between 

examiners and the law enforcement and national security officials 

who use those SARs. We believe that any assessment of a firm’s 

AML/CFT program should include all that information, and that 

any examination criticisms (in the form of Matters Requiring Attention) or formal enforcement action should come only after a holistic review of the program, and not perceived compliance lapses 

in a particular area, particularly where there was no attempt to actually assist (as opposed to failure to detect) money laundering. We 

have proposed achieving that result for the largest, internationally 

active banks—which file the majority of SARs and present global 

derisking issues—by having FinCEN reclaim the examination auVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
64 

4See Financial Times op-ed by David Fein, ‘‘How To Beat the Money Launderers: Banks Must 

Work With Governments To Combat This Scourge’’, November 22, 2016, available at 

www.ft.com/content/569c2e26-adb9-11e6-ba7d-76378e4fef24. 5See TCH Banking Perspectives article by Juan C. Zarate and Chip Poncy, ‘‘Designing a New 

AML System’’, Q3 2016, available at www.theclearinghouse.org/research/banking-perspectives/ 

2016/2016-q3-banking-perspectives/a-new-aml-system. 6See 31 U.S.C. §5311, which states that ‘‘[i]t is the purpose of this subchapter [the BSA] to 

require certain reports or records where they have a high degree of usefulness in criminal, tax, 

or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’ Note that the 

last clause was added by the USA PATRIOT Act in 2001. 7We note that the U.K.’s Joint Money Laundering Intelligence Taskforce (JMLIT) has established the following operational priorities for its public–private sector information sharing partnership: (i) understanding and disrupting the funding flows linked to bribery and corruption; 

(ii) understanding and disrupting trade based money laundering; (iii) understanding and disrupting the funding flows linked to organized immigration crime, human trafficking and modern 

slavery; (iv) understanding and disrupting money laundering through capital markets; and (v) 

understanding key terrorist financing methodologies. See JMLIT website at 

www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/joint-money-launderingintelligence-taskforce-jmlit. 8See Testimony of William J. Fox before the U.S. House Financial Services Subcommittees 

on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance, November 29, 

2017, available at financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-wfox20171129.pdf. 

thority that Congress assigned it, rather than continuing to delegate it. For other banks, we believe FinCEN needs to set priorities 

and assist in reviewing the value of a firm’s program. 

Q.2. What should our risk tolerance be for the fact that the U.S. 

financial system facilitates crimes like human trafficking? Should 

we strive to have zero incidence of money laundering in our financial system? 

A.2. Financial institutions around the globe are proactively working among themselves and with the public sector to disrupt human 

trafficking networks. In a 2016 Financial Times op-ed, Standard 

Chartered’s Group General Counsel discussed the need for enhanced public–private sector sharing, noting that presentations 

from NGOs and Government agencies ‘‘have improved banks’ ability to detect potentially [human trafficking] related financial transactions. In turn, they have helped law enforcement disrupt trafficking networks.’’ 4 Such movements are also underway in the 

United States. 5

However, a core problem with the current regime is that it does 

not prioritize the allocation of financial institution resources to generate leads that are of a ‘‘high degree of usefulness’’ as required by 

the BSA. 6 Therefore, TCH recommends that Treasury set AML/ 

CFT priorities for the regime to assist financial institutions as they 

work to fulfill their statutorily mandated reporting obligations—including for potential human trafficking. 7 Furthermore, we encourage the development and improvement of public–private sector 

AML/CFT information sharing partnerships. The authorized and 

appropriate sharing of information between the Government and 

the private sector as well as the sharing of information between 

and among financial institutions is critical to efforts to address illicit finance. We note that the USA Patriot Act’s Section 314(b) private sector information sharing provisions have reportedly been 

useful in addressing human trafficking and other crimes. 8

Q.3. I’d like to understand better how technological innovation is 

transforming the fight against money laundering and how Government policy can help or hurt these efforts. 

65 

9 Id. 

In the health care context, I hear about how researchers have 

used machine learning and artificial intelligence to identify diseases and predict when they will occur, using data points that humans would have never put together. How have financial institutions or law enforcement officials been able to use of similar techniques to identify money laundering and how much more progress 

can be made in this front? 

Outside of AI and machine learning, how can recent FinTech innovations such as blockchain fight money laundering? 

What regulatory requirement or requirements—if any—most 

hinders the adoption of technological innovations? 

A.3. Financial institutions are in the early stages of exploring various ways to apply technological innovations to AML/CFT efforts. 

In particular, artificial intelligence has the potential to improve the 

way that banks identify suspicious activity. AI does not search for 

typologies but rather mines data to detect anomalies. It gets progressively smarter; it won’t be easily evaded; and different banks 

with different profiles would end up producing different outcomes. 

Our banks report that they are working to pilot AI solutions in 

this area, yet the experts that they need to work on these initiatives are instead required to validate their current programmatic 

processes to examiners. 9 Financial institutions need to be able to 

innovate their AML programs and coordinate that innovation with 

their peers. Yet, the most consequential impediment to innovation 

is the current regulatory structure as examiners focus on auditing 

banks’ policies, processes, and metrics versus encouraging financial 

institutions to shift their resources to developing innovative methods of detecting financial crime. 

Furthermore, some firms have expressed concerns that if they 

adopt new and more effective methods, and actually identify more 

illicit activity, they will be sanctioned by the banking agencies for 

failing to detect that conduct earlier. It is a reflection of the current 

dysfunction that this is an actual concern. 

This is why TCH believes that Treasury should take a more 

prominent role in coordinating AML/CFT policy and examinations 

across the Government and conduct a robust and inclusive annual 

or biennial process to establish AML/CFT priorities and provide an 

overarching purpose for the regime. Furthermore, we believe that 

FinCEN should retake exam authority for multinational, complex 

financial institutions. A dedicated FinCEN exam team for this 

small subset of large institutions could receive appropriate security 

clearances, meet regularly with law enforcement and other end 

users, receive training in big data analytics and work with other 

experts in Government. They, in turn, would be supervised by 

Treasury officials with law enforcement, national security, and diplomatic perspectives on what is needed from an AML/CFT program. 

This change would promote innovative and imaginative conduct 

that advanced law enforcement and national security interests, 

rather than auditable processes and box checking. Importantly, the 

benefits of a FinCEN examination function would extend well beyond the handful of banks it examined. Priorities set and knowledge learned could be transferred to regulators for the remaining 

66 

10See FIN-2013-G001 ‘‘Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies’’, March 18, 2013, available at www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf. 11For example, in January 2018, Yaya J. Fanusie and Tom Robinson published a memorandum on ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’. 

Available at: www.defend democracy.org/content/uploads/documents/ 

MEMOlBitcoinlLaundering.pdf. 

financial institutions. And innovation started at the largest firms, 

with encouragement from FinCEN, would inevitably benefit smaller firms. The result of FinCEN assuming some supervisory authority would be a massive cultural change, as the focus of exams shifted to the real-world effectiveness of each institution’s AML/CFT 

program, rather than the number of SARs filed or number of policies written. That change would start with those banks under sole 

FinCEN supervision, but would eventually spread to all institutions. 

Q.4. How much does bitcoin, blockchain, and other cryptocurrencies 

facilitate money laundering? How—if at all—should this impact our 

approach to combating money laundering in traditional banks? 

How can law enforcement officials best stop this newer form of 

money laundering? 

A.4. As a general matter, customers are using various tools to conduct transactions around the globe with bank and nonbank financial institutions. In 2013, FinCEN issued guidance indicating that 

a cryptocurrency ‘‘administrator or exchanger is an MSB under 

FinCEN’s regulations, specifically, a money transmitter, unless a 

limitation to or exemption from the definition applies to the person.’’ 10 We also note that in the past few years, FinCEN has levied 

enforcement actions against cryptocurrency exchangers. While TCH 

is not privy to data on the extent of money laundering within virtual currencies, we note that others are beginning to look into this 

issue. 11

Any review of the BSA/AML regime and its effectiveness should 

investigate the changing ways in which customers interact with financial institutions and ensure that statutory authorities are adequately tailored to address the evolving nature of illicit finance 

threats. 

Q.5. I’d like to discuss Suspicious Activity Reports (SARs). Today, 

around 2 million SARs are filed each year. While every SAR used 

to be read by law enforcement officials, that is no longer the case 

today. Financial institutions often complain that they rarely, if 

ever, receive feedback from law enforcement officials on the utility 

of any particular suspicious activity report that they file. This lack 

of feedback loops increases the burdens on financial institutions, 

who continue to file SARs that are of little utility to law enforcement officials. It also prevents financial institutions from developing better analytical tools to more precisely discern between the 

signal and the noise. 

What percentage of SARs are actually read by someone in law 

enforcement? 

How often do financial institutions receive feedback from law enforcement officials as to the utility of their SAR filing? 

While some have proposed reducing the number of SARs and 

CRT filings because they are often superfluous and are never read, 

67 

12See 31 U.S.C. §5311, which states that ‘‘[i]t is the purpose of this subchapter [the BSA] 

to require certain reports or records where they have a high degree of usefulness in criminal, 

tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’ Note that the 

last clause was added by the USA PATRIOT Act in 2001. 

others argue that this poses risks, because investigating minor infractions may still lead to significant law enforcement successes. 

How should policymakers resolve this conflict? 

A.5. TCH members report that they receive follow-up requests for 

additional information from law enforcement on their SAR filings 

in less than 10 percent of cases. For certain categories of SARs, the 

number of requests is close to 0 percent. It should be noted that 

a follow-up request does not mean that the SAR led to an arrest 

or conviction; it means only that someone in law enforcement wanted to learn more about the case. Our understanding is that 

FinCEN does not routinely research how SARs are used and what 

their yield is. Obviously, a more modern system would be more 

data-driven. 

While law enforcement is best placed to provide data on how 

many reports are read, we note that they are generally used by 

FinCEN and law enforcement for data searches and mining. While 

one BSA report may be the ‘‘last piece of the puzzle,’’ it’s important 

to consider the resources deployed for the production of that report 

and whether they would be better spent if redirected to produce the 

first piece in a more important puzzle. As an analogy, if law enforcement rigorously enforced jaywalking rules, it would occasionally capture a wanted fugitive, but no one would consider that a 

good use of finite law enforcement resources. Again, a core problem 

with the current regime is that there is an absence of leadership 

making choices like these. 

This is why TCH recommends that Treasury lead the regime by 

coordinating AML/CFT policy and examinations across the Government and conduct a robust and inclusive annual or biennial process 

to establish AML/CFT priorities that would form the basis for the 

deployment of financial institution resources. Relatedly, Treasury 

should undertake a review of BSA/AML reporting requirements to 

ensure information of a high degree of utility is reported to law enforcement, which conforms with financial institutions’ obligations 

under the BSA. 12

Q.6. How could regulators (1) set up better feedback loops between 

financial institutions and law enforcement officials that could help 

financial institutions better identify money laundering; and (2) empower financial institutions to act upon their improved ability to 

distinguish between useful and superfluous reports, including by 

filing fewer unnecessary SARs, without fearing regulatory consequences for doing so? 

Would a better feedback loop system exist if financial institutions 

employed more people with security clearances? If so, what, if anything, can the Federal Government do to facilitate this? 

A.6. There are substantial benefits to developing additional pathways, both formally and informally, for AML/CFT information 

sharing between various stakeholders in the public and private sector. Granting law enforcement and national security authorities opportunities to provide general feedback on the reports filed, and inVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
68 

13See The Clearing House, ‘‘A New Paradigm: Redesigning the U.S. AML/CFT Framework To 

Protect National Security and Aid Law Enforcement’’, (TCH AML/CFT Report), February 2017, 

available at www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/2017/ 

20170216lTCHlReportl AMLlCFTlFrameworklRedesign.pdf. 

corporating this feedback into supervisory evaluations of firms’ 

compliance, could assist financial institutions in targeting their resources to efforts that provide information that is of the greatest 

use in preventing illicit financing. We note that under the current 

regime, many large financial institutions operate financial intelligence units (FIUs) that employ former law enforcement or national security officials, yet still receive little to no useful feedback. 

It would also be helpful if a pathway for sharing information was 

established to allow financial institutions to efficiently share raw 

data with law enforcement, under a safe harbor, and with reforms 

made to current reporting requirements. The current regime is 

built on individual, bilateral reporting mechanisms grounded in the 

analog technology of the 1980s, rather than the more interconnected and technologically advanced world of the 21st century. 13 Therefore, providing such data in bulk would modernize the 

current regime and allow institutions to provide law enforcement 

with information in a timelier manner. Furthermore, it would allow 

law enforcement, using big data analytics, to effectively have access 

to and sift through large quantities of data more efficiently. 

Further coordination and information sharing between and 

among public sector authorities is critical to establishing AML/CFT 

priorities and providing an overarching purpose for the regime. In 

order to empower institutions to deploy resources to high-value activities, TCH recommends that Treasury take a more prominent 

role in coordinating AML/CFT policy and examinations across the 

Government and conduct a robust and inclusive annual or biennial 

process to establish AML/CFT priorities, which could form the 

basis of financial institution examinations. This is particularly important in the U.S. where law enforcement, national security, and 

financial institution oversight responsibilities are dispersed among 

multiple agencies. This stands in contrast to other approaches (e.g., 

the U.K.’s Joint Money Laundering and Intelligence Task Force 

(JMLIT)) that better address barriers to information sharing by 

bringing together relevant actors to share information as well as 

allowing financial institutions to follow-up on SAR activity, thereby 

potentially improving the effectiveness of financial institution reporting mechanisms. However, as alluded to above, with any public–private sector dialogue, and more generally, we believe that national authorities should speak with one voice when providing feedback as well as disseminating red flags, threats, and typologies to 

the private sector as disparate voices create confusion. 

Q.7. Often, financial institutions will derisk by refusing to serve 

customers that could be involved in illegal activity. As financial institutions start to share more information with each other, this 

practice could become more prominent and potential criminals 

could more frequently lose access to the United States’ financial 

system altogether. 

Are there instances in which derisking is actually unhelpful for 

law enforcement purposes, because it drives these criminals underground and makes it more difficult to track them? 

69 

14See ‘‘The Great Unbanking: Swingeing Fines Have Made Banks Too Risk-Averse’’, The 

Economist, July 6, 2017, available at www.economist.com/news/leaders/21724813-it-timerethink-anti-money-laundering-rules-swingeing-fines-have-made-banks-too-risk-averse. See also 

‘‘A Crackdown on Financial Crime Means Global Banks Are Derisking’’, The Economist, July 8, 

2017, available at www.economist.com/news/international/21724803-charities-and-poor-migrants-are-among-hardest-hit-crackdown-financial-crime-means. 

At the moment, do the regulators that evaluate and enforce financial institutions compliance with our Federal money laundering 

take this into account? 

Are there promising ways to increase cooperation between financial institutions, regulators, and law enforcement officials, so that 

financial institutions can make a more informed decision about 

when and how to derisk? 

Would financial institutions need to hire more employees with a 

top security clearance and/or a law enforcement background for 

this coordination to be effective? 

A.7. The current derisking trend is in part a reaction to Government and supervisory characterizations of correspondent banking 

as a high risk business and the evolving standards within the domestic and international community. 14 The causes are clear—the 

systems, processes, and people required to manage examiner expectations for clients deemed to be of ‘‘higher risk’’, are extremely costly. For example, a bank may prepare a lengthy report on a customer only to be criticized for not further documenting the grounds 

on which it decided to retain the customer. For certain regions or 

businesses it is often times too expensive to build out this infrastructure to support higher risk accounts. And this does not even 

include the risk of massive fines and reputational damage in the 

event a customer designated high-risk actually commits a criminal 

act. 

As discussed previously, TCH believes that Treasury should take 

a more prominent role in coordinating AML/CFT policy and examinations for the regime. That includes convening on a regular basis 

the end users of BSA data—law enforcement, national security, 

and others affected by the AML/CFT regime including the State 

Department—and setting goals and priorities for the system. 

Treasury is uniquely positioned to balance the sometimes conflicting interests relating to national security, the transparency and 

efficacy of the global financial system, the provision of highly valuable information to regulatory, tax and law enforcement authorities, financial privacy, financial inclusion, and international development. 

In addition, and as discussed above, TCH believes that greater 

information sharing will assist in further clarifying whether a customers’ activity is, in fact, suspicious. Presently the USA PATRIOT 

Act grants various statutory authorities, under Sections 314(a) and 

314(b) to allow for public–private and private–private sector sharing. While security clearances and additional staff may be helpful, 

we note that large financial institutions employ hundreds of staff 

members, some of whom are former law enforcement officials, to 

assist with compliance efforts yet it’s the ‘‘check-the-box’’ nature of 

70 

15See Testimony of William J. Fox before the U.S. House Financial Services Subcommittees 

on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance, November 29, 

2017, available at financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-wfox20171129.pdf. 1See Testimony of William J. Fox before the U.S. House Financial Services Subcommittees 

on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance, November 29, 

2017, available at financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-wfox20171129.pdf. 

the compliance regime that prevents them from utilizing these resources for more proactive AML/CFT efforts. 15

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM GREG BAER 

Q.1. How can we leverage technology to make the process simultaneously less onerous on banks while enhancing the outcomes of 

catching illegal behavior? Are there regulatory and legislative barriers to getting that down? 

A.1. Allowing financial institutions to innovate their AML programs is key to enhancing their ability to identify suspicious activity. The biggest barrier to innovation is the current exam paradigm. As one bank recently testified, from 2010–11 they were able 

to innovate the way in which they used technology to identify potentially suspicious activity. However, since then, they have found 

innovation difficult as regulatory guidance has been inappropriately applied to their programs and examiners have in turn rigorously enforced this guidance, thereby delaying the implementation 

of programmatic changes that used to take weeks to 9 months or 

a year. 1 Under the current AML/CFT regime, examiners focus on 

auditing banks’ policies, processes, and metrics versus encouraging 

financial institutions to shift their resources to developing innovative and effective methods of detecting financial crime. 

This is why TCH believes that Treasury should take a more 

prominent role in coordinating AML/CFT policy and examinations 

across the Government and conduct a robust and inclusive annual 

or biennial process to establish AML/CFT priorities and provide an 

overarching purpose for the regime. Furthermore, we believe that 

FinCEN should retake exam authority for multinational, complex 

financial institutions. A dedicated FinCEN exam team for this 

small subset of large institutions could receive appropriate security 

clearances, meet regularly with law enforcement and other end 

users, receive training in big data analytics and work with other 

experts in Government. They, in turn, would be supervised by 

Treasury officials with law enforcement, national security, and diplomatic perspectives on what is needed from an AML/CFT program. 

This change would promote innovative and imaginative conduct 

that advanced law enforcement and national security interests, 

rather than auditable processes and box checking. Importantly, the 

benefits of a FinCEN examination function would extend well beyond the handful of banks it examined. Priorities set and knowledge learned could be transferred to regulators for the remaining 

financial institutions. And innovation started at the largest firms, 

with encouragement from FinCEN, would inevitably benefit smaller firms. The result of FinCEN assuming some supervisory authority would be a massive cultural change, as the focus of exams shiftVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
71 

2See The Clearing House, ‘‘A New Paradigm: Redesigning the U.S. AML/CFT Framework To 

Protect National Security and Aid Law Enforcement’’, (TCH AML/CFT Report), February 2017, 

available at www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/2017/ 

20170216lTCHlReportl AMLlCFTlFrameworklRedesign.pdf. 

ed to the real-world effectiveness of each institution’s AML/CFT 

program, rather than the number of SARs filed or number of policies written. That change would start with those banks under sole 

FinCEN supervision, but would eventually spread to all institutions. 

Q.2. Financial institutions often complain that FinCEN, law enforcement officials, and prudential regulators do not tell them 

whether their BSA filings serve a useful purpose, or how the reports they submit are being used—and that the filings go into a 

black hole. Can you shed some light on the filings that you make 

or have used and what could be done to improve this process? 

A.2. TCH members report that they receive follow-up requests for 

additional information from law enforcement on their SAR filings 

in less than 10 percent of cases. For certain categories of SARs, the 

number of requests is close to 0 percent. It should be noted that 

a follow-up request does not mean that the SAR led to an arrest 

or conviction; it means only that someone in law enforcement wanted to learn more about the case. Our understanding is that 

FinCEN does not routinely research how SARs are used and what 

their yield is. Obviously, a more modern system would be more 

data-driven. 

TCH believes that the SAR regime and BSA filing requirements 

generally, should be modernized through the tailoring of various requirements and facilitation of the submission of raw data from financial institutions to law enforcement. The current regime is built 

on individual, bilateral reporting mechanisms grounded in the analog technology of the 1980s, rather than the more interconnected 

and technologically advanced world of the 21st century. 2 Therefore, 

providing such data in bulk would modernize the current regime 

and allow institutions to provide law enforcement with information 

in a timelier manner. Furthermore, it would allow law enforcement, using big data analytics, to effectively have access to and sift 

through large quantities of data more efficiently. 

Furthermore, additional pathways for AML/CFT information 

sharing between various stakeholders in the public and private sector should be developed. Granting law enforcement and national security authorities opportunities to provide general feedback on the 

reports filed, and incorporating this feedback into supervisory evaluations of firms’ compliance, could assist financial institutions in 

targeting their resources to efforts that provide information that is 

of the greatest use in preventing illicit financing. 

Further coordination and information sharing between and 

among public sector authorities is critical to establishing AML/CFT 

priorities and providing an overarching purpose for the regime. In 

order to empower institutions to deploy resources to high-value activities, TCH recommends that Treasury take a more prominent 

role in coordinating AML/CFT policy and examinations across the 

Government and conduct a robust and inclusive annual or biennial 

process to establish AML/CFT priorities, which could form the 

72 

basis of financial institution examinations. This is particularly important in the U.S. where law enforcement, national security, and 

financial institution oversight responsibilities are dispersed among 

multiple agencies. This stands in contrast to other approaches (e.g., 

the U.K.’s Joint Money Laundering and Intelligence Task Force 

(JMLIT)) that better address barriers to information sharing by 

bringing together relevant actors to share information as well as 

allowing financial institutions to follow-up on SAR activity, thereby 

potentially improving the effectiveness of financial institution reporting mechanisms. However, with any public–private sector dialogue, and more generally, we believe that national authorities 

should speak with one voice when providing feedback as well as 

disseminating red flags, threats, and typologies to the private sector as disparate voices create confusion. 

Q.3. Another compliance challenge often cited by banks is that they 

feel pressured by bank examiners and law enforcement authorities 

to exit certain business lines or cease offering certain services to 

customers viewed as presenting particular money-laundering 

vulnerabilities, i.e., severing corresponding banking relationships 

with foreign institutions in certain geographic areas, and also ending money services businesses (MSBs, i.e., check cashing, money 

transmitters, currency exchange outlets, etc.) 

As banks reevaluate their business relationships with MSBs in 

light of what they may view as a hostile regulatory landscape, 

what can we do to change this type of behavior/is this a prevalent 

problem in the industry? 

It is my understanding that there are times when law enforcement and the bank regulators work at cross purposes. That is, law 

enforcement might want a bank to continue banking an individual 

or company that they are following and building a case against but 

the bank regulators, whose incentives are to not be embarrassed by 

their regulated entities, force the banks to ‘‘derisk’’ or close those 

accounts. Is that actually the case? 

A.3. We do not have hard data on this question. With respect to 

specific customers, we have heard of cases where law enforcement 

asked a bank to keep an account open, and the bank agreed; we 

have also heard of cases where banks felt that the regulatory risk 

was too high, and declined. At a broader level, with respect to certain lines of business or regions, we do not believe there are cases 

where banks have agreed to remain engaged at law enforcement or 

other governmental request. For example, it has been reported that 

the State Department expressed considerable concern at the decision by banks to derisk foreign embassies in the United States, but 

the banks involved could not get sufficient assurance that the 

banking agencies would not sanction them if something went 

wrong, so closed or refused to open those accounts. 

Q.4. In terms of AML, we know that the success of AML is centric 

around whether or not the predicate crime of money laundering 

has been reduced, but we only really know how pervasive money 

laundering is on a reactive basis, i.e., when someone/some entity is 

caught. To that end, do you believe the advent/popularity of 

cryptocurrencies could affect the capture of money laundering/could 

73 

3See FIN-2013-G001 ‘‘Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies’’, March 18, 2013, available at www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf. 4For example, in January 2018, Yaya J. Fanusie and Tom Robinson published a memorandum on ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’. 

Available at: www.defend democracy.org/content/uploads/documents/ 

MEMOlBitcoinlLaundering.pdf. 5See U.S. Department of the Treasury Under Secretary Sigal Mandelker Speech before the 

Securities Industry and Financial Markets Association Anti–Money Laundering and Financial 

Crimes Conference, (Treasury Under Secretary Mandelker’s 2018 SIFMA Speech), February 13, 

2018, available at home.treasury.gov/news/press-release/sm0286. 

it affect AML? Do enforcement authorities have the technological 

capabilities to work with private industry to capture mal-actors? 

A.4. As a general matter, customers are using various tools to conduct transactions around the globe with bank and nonbank financial institutions. In 2013, FinCEN issued guidance indicating that 

a cryptocurrency ‘‘administrator or exchanger is an MSB under 

FinCEN’s regulations, specifically, a money transmitter, unless a 

limitation to or exemption from the definition applies to the person.’’ 3 We also note that in the past few years, FinCEN has levied 

enforcement actions against cryptocurrency exchangers. While TCH 

is not privy to data on the extent of money laundering within virtual currencies, others are beginning to look into this issue. 4 In addition, in a recent speech, Treasury Under Secretary for Terrorism 

and Financial Intelligence Sigal Mandelker provided an example of 

cryptocurrencies being used for money laundering and terrorist financing stating that ‘‘law enforcement authorities recently arrested 

a woman in New York who used Bitcoin to launder fraud proceeds 

before wiring the money to ISIS.’’ 5

Any review of the BSA/AML regime and its effectiveness should 

investigate the changing ways in which customers interact with financial institutions and ensure that statutory authorities are adequately tailored to address the evolving nature of illicit finance 

threats. 

Q.5. In your opinion, do you think that the overall AML regime has 

been effective? Additionally, what do you see as the best way to ensure future effectiveness? 

Is it to have Treasury be the lead to: 

1. Define with other stakeholders specific and clear national priorities of the regime; and 

2. Determine, working with other stakeholders, clear and measurable objectives of the regime in light of those priorities. Should 

Treasury or someone else have to report those measurements 

against the objectives back to Congress? 

A.5. The U.S. AML/CFT regime is broken. It is extraordinarily inefficient, outdated, and driven by perverse incentives. A core problem 

is that today’s regime is geared towards compliance expectations 

that bear little relationship to the actual goal of preventing or detecting financial crime, and fail to consider collateral consequences 

for national security, global development, and financial inclusion. 

Fundamental change is required to make this system an effective 

law enforcement and national security tool, and reduce its collateral damage. 

The Department of the Treasury should reclaim responsibility for 

the system. That includes convening on a regular basis the end 

74 

users of SAR data—law enforcement, national security, and others 

affected by the AML/CFT regime including the State Department— 

and publicly setting goals and priorities for the system. Treasury 

is uniquely positioned to balance the sometimes conflicting interests relating to national security, the transparency and efficacy of 

the global financial system, the provision of highly valuable information to regulatory, tax, and law enforcement authorities, financial privacy, financial inclusion, and international development. 

In addition, FinCEN should retake exam authority for multinational, complex financial institutions. Relatedly, Treasury should 

review the BSA/AML reporting regime to ensure information of a 

high degree of utility is reported to law enforcement as well as encourage the exchange of AML/CFT information between the Government and the private sector as well as between and among financial institutions. Finally, one important change to the current 

system is the passage of legislation ending the use of shell companies with anonymous ownership. 

Q.6. Mr. Baer, does the current process of having FinCEN delegate 

authority to the bank regulators work? What are the challenges 

and deficiencies of the current system and how best do we improve 

outcomes? 

Does the current system take full advantage of technological advancements? 

How does BSA affect financial institutions of different size, with 

different staff and tech resources? 

A.6. Congress in the Bank Secrecy Act explicitly vested sole regulatory, examination, and enforcement authority in the Treasury Department, an agency with considerable financial but also law enforcement and national security knowledge—not the banking agencies. Congress rightly saw that this was an altogether different 

mission, requiring different expertise. However, decades ago, an 

understaffed and underfunded FinCEN delegated all examination 

authority to the banking agencies, and then abdicated any oversight role in how they conducted it. 

The result is a system where the end users of suspicious activity 

reports, or SARs—law enforcement and national security—have little or nothing to say when a bank’s compliance is evaluated. Examiners are generally not permitted to know which SARs are valued 

by the end users, and so focus on what they do know: policies and 

procedures. 

For example, banks know that examiners test compliance by reviewing alerts and trying to identify cases where a SAR was not 

filed but arguably should have been. Therefore, they reportedly 

spend more time documenting decisions not to file SARs than they 

do following up on SARs they do file. In other words, they focus on 

the noise, not the signal. And they continue to use antiquated, consultant-devised, rules-based systems—rules known to the bad guys, 

by the way—rather than innovative artificial intelligence approaches, largely because the former are conducted under policies 

and procedures that have passed muster with regulators. 

Furthermore, under this regime no one sets priorities—unlike 

any law enforcement or national security agency in the world. According to bank analysis—there is little to no governmental analVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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6See Testimony of Lloyd DeVaux before the House Financial Services Committee Subcommittee on Financial Institutions and Consumer Credit, June 28, 2017, available at 

financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-ldevaux-20170628.pdf. 

ysis—the great majority of SAR filings receive no uptake from law 

enforcement. For certain categories of SARs—structuring, insider 

abuse—the yield is close to 0 percent. And those categories now 

represent a majority of the SARs filed. 

BSA/AML reform would benefit institutions of all sizes. In 2017, 

TCH testified before the House with a community banker who reported that his three-branch bank has four lending officers and six 

AML compliance officers. While TCH represents 25 large commercial banks, the regime is no more rational for smaller banks. 6

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM GREG BAER 

Q.1. What are the costs and benefits of having bank examiners assess bank compliance with the Bank Secrecy Act’s (BSA) requirements instead of having anti–money laundering (AML) and combating the financing of terrorism (CFT) experts at the Financial 

Crimes Enforcement Network (FinCEN) examine bank compliance 

programs? 

A.1. As you know, Congress assigned examination authority to the 

Treasury Department given its considerable financial, law enforcement, and national security knowledge. The benefit of delegation is 

clear: there are thousands of banks in the country, and bank regulators already have examiners assigned to them. Thus, they can efficiently add AML/CFT compliance to the list of items for which 

they examine. It would be inefficient for FinCEN to examine the 

vast majority of these banks, who present few issues. 

On the other hand, for the largest, multinational banks, we believe that the equation is quite different. We estimate that an examination team of only 25–30 people at FinCEN could replicate the 

existing work of the Federal banking agencies and the IRS (for the 

largest MSBs) at these institutions. More importantly, a dedicated 

FinCEN exam team for this small subset of large institutions could 

receive appropriate security clearances, meet regularly with law 

enforcement and other end users, receive training in big data analytics, and work with other experts in Government. They, in turn, 

would be supervised by Treasury officials with law enforcement, 

national security, and diplomatic perspectives on what is needed 

from an AML/CFT program—not bank examiners with no experience in any of those disciplines. And when FinCEN turned to writing rules in this area, it would do so informed by its experience in 

the field. It would see the whole battlefield, and promote innovative 

and imaginative conduct that advanced law enforcement and national security interests, rather than auditable processes and box 

checking. 

Importantly, the benefits of a FinCEN examination function 

would extend well beyond the handful of institutions it examined. 

Priorities set and knowledge learned could be transferred to regulators for the remaining financial institutions. And innovation 

started at the largest firms, with encouragement from FinCEN, 

would inevitably benefit smaller firms. The result of FinCEN asVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
76 

1 Existing statutory authority appears to allow for such an assessment and affected institutions should see a corresponding reduction in the assessment they currently pay to prudential 

regulators for supervision of this function. The Independent Offices Appropriation Act provides 

general authority for a Government agency to assess user fees or charges by administrative regulation, based on the value of the service to the recipient. See 31 U.S.C. §9701. OMB Circular 

No. A-25 provides further guidance regarding ‘‘user fees’’ (‘‘A user charge . . . will be assessed 

against each identifiable recipient for special benefits derived from Federal activities beyond 

those received by the general public.’’). See OMB Circular No. A-25 Revised. 2See ‘‘The Great Unbanking: Swingeing Fines Have Made Banks Too Risk-Averse’’, The Economist, July 6, 2017, available at www.economist.com/news/leaders/21724813-it-time-rethinkanti-money-laundering-rules-swingeing-fines-have-made-banks-too-risk-averse. See also ‘‘A Crackdown on Financial Crime Means Global Banks Are Derisking’’, The Economist, July 8, 2017, 

available at www.economist.com/news/international/21724803-charities-and-poor-migrants-areamong-hardest-hit-crackdown-financial-crime-means. 

suming some supervisory authority would be a massive cultural 

change, as the focus of exams shifted to the real-world effectiveness 

of each institution’s AML/CFT program, rather than the number of 

SARs filed or number of policies written. That change would start 

with those banks under sole FinCEN supervision, but would eventually spread to all institutions. 

Funding such an exam team could be accomplished many ways, 

including (i) assessing financial institutions for examinations 

costs; 1 or (ii) establishing a centralized team funded pro rata by 

each of the affected agencies but reporting directly and solely to the 

FinCEN Director. 

Q.2. Is there a way to maintain a top-shelf effective AML/CFT policy while maintaining a commitment to increase access to financial 

products for the underbanked and immigrants who rely on remittance services? 

A.2. With respect to remittances, the current derisking trend is in 

part a reaction to Government and supervisory characterizations of 

correspondent banking as a high risk business and the evolving 

standards within the domestic and international community. 2 The 

causes are clear—the systems, processes, and people required to 

manage examiner expectations for clients deemed to be of ‘‘higher 

risk’’, are extremely costly. While those who care about poverty or 

international development might conclude that the benefits of allowing remittances exceed the costs, in the form of potential money 

laundering, banking agencies in our experience have not undertaken such a cost-benefit analysis. Thus, they impose documentation requirements and expectations that make certain lines of business uneconomical. 

We believe more research is warranted on how AML/CFT requirements affect the unbanked. Our understanding is that AML 

customer due diligence requirements are a substantial, perhaps 

majority, cost of opening an account. For low-dollar deposit accounts for lower income people, that can make the account difficult 

to offer and price. 

Q.3. I’m interested in the ways in which technology can aid AML 

compliance efforts. What are some of the innovative technologies 

that you’ve seen that hold some promise for either the Government 

or the private sector? 

What are the barriers to either the Government or the private 

sector adopting these technologies? 

What can we be doing as legislators to ensure that we promote 

technological innovation in this sector? 

77 

3 Id. 

A.3. Financial institutions are in the early stages of exploring various ways to apply technological innovations to AML/CFT efforts. 

In particular, artificial intelligence has the potential to improve the 

way that banks identify suspicious activity. AI does not search for 

typologies but rather mines data to detect anomalies. It gets progressively smarter; it won’t be easily evaded; and different banks 

with different profiles would end up producing different outcomes. 

Our banks report that they are working to pilot AI solutions in 

this area, yet the experts that they need to work on these initiatives are instead required to validate their current programmatic 

processes to examiners. 3 Furthermore, they lack feedback from the 

public sector on the BSA reports that they file—such feedback 

would assist institutions in tuning their systems to provide more 

targeted leads to law enforcement. Financial institutions need to be 

able to innovate their AML programs and coordinate that innovation with their peers. Yet, the most consequential impediment to 

innovation is the current regulatory structure as examiners focus 

on auditing banks’ policies, processes, and metrics versus encouraging financial institutions to shift their resources to developing innovative methods of detecting financial crime. Banks will be reluctant to invest in systems unless someone in the Government can 

tell them that such systems will meet the banking examiners’ expectations, and can replace old, outdated methods—in other words, 

that they will be rewarded, not punished, for innovation. 

While there are instances where legislation is needed, in many 

cases agencies already have existing authority to address some of 

the concerns outlined during the hearing. For example, TCH believes that Treasury should take a more prominent role in coordinating AML/CFT policy and examinations across the Government, 

a step currently within their existing authority, to conduct a robust 

and inclusive annual or biennial process to establish AML/CFT priorities, which would form the basis for financial institution exams. 

Furthermore, we believe that FinCEN should retake exam authority for multinational, complex financial institutions, which is also 

within their current authorities. A dedicated FinCEN exam team 

for this small subset of large institutions could receive appropriate 

security clearances, meet regularly with law enforcement and other 

end users, receive training in big data analytics and work with 

other experts in Government. They, in turn, would be supervised 

by Treasury officials with law enforcement, national security, and 

diplomatic perspectives on what is needed from an AML/CFT program. This change would promote innovative and imaginative conduct that advanced law enforcement and national security interests, rather than auditable processes and box checking. Importantly, the benefits of a FinCEN examination function would extend well beyond the handful of institutions it examined. Innovation started at the largest firms, with encouragement from 

FinCEN, would inevitably benefit smaller firms. The result of 

FinCEN assuming some supervisory authority would be a massive 

cultural change, as the focus of exams shifted to the real-world effectiveness of each institution’s AML/CFT program, rather than the 

number of SARs filed or number of policies written. That change 

78 

4See FIN-2017-A003, ‘‘Advisory to Financial Institutions and Real Estate Firms and Professionals’’, August 22, 2017, available at www.fincen.gov/sites/default/files/advisory/2017-08-22/ 

Risk%20in%20Real%20 Estate%20AdvisorylFINAL%20508%20Tuesday%20%28002%29.pdf. 

would start with those banks under sole FinCEN supervision, but 

would eventually spread to all institutions. 

Q.4. The regulatory definition of ‘‘financial institution’’ has been expanded several times over the years, both by FinCEN rulemaking 

and by legislation by Congress. 

Should the definition of financial institutions be expanded to include other sectors? If so, which sectors? 

Could these changes be made via FinCEN rulemaking or should 

legislation be passed? 

A.4. As a general matter, the BSA/AML regime should be reviewed 

and its effectiveness investigated to account for the changing ways 

in which customers interact with bank and nonbanks and ensure 

that statutory authorities are adequately tailored to address the 

evolving nature of illicit finance threats. 

Such a review could be undertaken by Treasury without Congressional action, with recommendations on further administrative, legislative, or regulatory changes that need to be made to improve the 

efficiency and effectiveness of the AML/CFT regime. 

Q.5. In August 2017, FinCEN issued an advisory encouraging real 

estate brokers to share information with them that could be helpful 

in AML efforts, while noting they are not required to do so under 

current law. 

How do we increase information sharing between real estate brokers and FinCEN? 

Geographic Targeting Orders (GTOs), which impose additional 

record keeping and reporting requirements on domestic financial 

institutions or nonfinancial trades or businesses in a specific geographic area for transactions involving certain amounts of United 

States currency or monetary instruments, have been deployed since 

2016 to target high-end real estate sectors in major metropolitan 

areas by requiring U.S. title insurance companies to identify the 

natural persons behind shell companies used to pay ‘‘all cash’’ for 

high-end residential real estate. 

Are GTOs an effective tool or would regulation be a preferable 

way to cover the real estate sector? 

A.5. As previously mentioned the AML/CFT regime should be reviewed and adequately tailored to address the evolving nature of 

illicit finance threats, including those in the real estate sector. 

There are substantial benefits to developing additional pathways, 

both formally and informally, for AML/CFT information sharing between various stakeholders in the public and private sector. 

While we are not privy to any data on the effectiveness of 

FinCEN’s GTO program, when discussing money laundering in the 

real estate sector we would urge Congress to pass legislation that 

prohibits the forming of companies with anonymous ownership. 

Such companies can be used by criminals to ‘‘mask their identities, 

involvement in transactions, and origins of their wealth, hindering 

law enforcement efforts to identify individuals behind illicit activity.’’ 4

79 

5See FIN-2013-G001 ‘‘Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies’’, March 18, 2013, available at www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf. 6For example, in January 2018, Yaya J. Fanusie and Tom Robinson published a memorandum on ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’. 

Available at: www.defenddemocracy.org/content/uploads/documents/ 

MEMOlBitcoinlLaundering.pdf. 7See U.S. Department of the Treasury Under Secretary Sigal Mandelker Speech before the 

Securities Industry and Financial Markets Association Anti–Money Laundering and Financial 

Crimes Conference, (Treasury Under Secretary Mandelker’s 2018 SIFMA Speech), February 13, 

2018, available at home.treasury.gov/news/press-release/sm0286. 

Q.6. Cryptocurrency exchanges are money services businesses supervised by State regulators and subject to Federal AML and CFT 

laws. 

Should FinCEN play an enhanced role in assessing the compliance of cryptocurrency exchanges, or are State regulators sufficiently equipped to handle compliance monitoring? 

What additional tools could we give regulators and law enforcement? 

How prevalent is money laundering in cryptocurrency markets? 

A.6. As a general matter, we believe that Treasury should take the 

lead in coordinating AML/CFT priorities and exams for all financial 

institutions, including cryptocurrency exchanges. Customers are 

using various tools to conduct transactions around the globe with 

bank and nonbank financial institutions and having one agency 

leading the regime would help coordinate disparate regulatory and 

law enforcement perspectives. 

In 2013, FinCEN issued guidance indicating that a 

cryptocurrency ‘‘administrator or exchanger is an MSB under 

FinCEN’s regulations, specifically, a money transmitter, unless a 

limitation to or exemption from the definition applies to the person.’’ 5 We also note that in the past few years, FinCEN has levied 

enforcement actions against cryptocurrency exchangers. While TCH 

is not privy to data on the extent of money laundering within virtual currencies, we note that others are beginning to look into this 

issue. 6 Finally, in a recent speech, Treasury Under Secretary for 

Terrorism and Financial Intelligence Sigal Mandelker provided an 

example of cryptocurrencies being used for money laundering and 

terrorist financing stating that ‘‘law enforcement authorities recently arrested a woman in New York who used Bitcoin to launder 

fraud proceeds before wiring the money to ISIS.’’ 7 As circumstances change AML/CFT authorities and requirements should 

be flexible and tailored enough to adapt to evolving threats. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM GREG BAER 

Q.1. Gaming and tourism are some of Nevada’s top industries. In 

the State of Nevada, our gaming operators employ thousands of 

hard working Nevadans, and the industry as a whole domestically 

supports 1.7 million jobs across 40 States. Qualified casinos, like financial institutions, are also subject to Banking Secrecy Act requirements. Organizations within Nevada have suggested that 

gaming operators would welcome a review of BSA requirements, 

which they find to be burdensome. They look forward to this Committee’s thoughtful, bipartisan, review of BSA requirements that 

80 

takes into account the security imperative for robust anti–money 

laundering efforts, as well as the impact those requirements have 

on all industries. For example, the Suspicious Activity Report 

(SAR) ($5,000) and the Currency Transaction Report (CTR) 

($10,000) levels were set years ago. Some have recommended increasing these to correspond with inflation. Others believe that 

would be too high but do support a higher amount than currently. 

One of the top priorities of the gaming industry is to remove the 

requirement for a detailed factual narrative for structuring in the 

suspicious activity forms. What do you think of this recommendation? 

A.1. We strongly support that recommendation. We note that when 

the SAR regime was implemented in the mid-1990s it was based 

on the concept of providing law enforcement a narrative analytical 

lead, but SARs are instead used today as a source for word 

searches and datamining by FinCEN and law enforcement. This is 

particularly true with respect to structuring. Our understanding is 

that the yield on structuring SARs is close to zero, as most cash 

transactions are entirely legitimate. Thus, resources invested in 

constructing a narrative is wasted. To the extent that datamining 

identifies a structuring transaction as truly suspicious, then law 

enforcement can contact the bank and obtain whatever detail is 

necessary. 

Q.2. Do you have specific recommendations regarding how the 

gaming industry can benefit from greater communication with Government agencies and law enforcement? Is there something the 

Federal Government can do to share information with casinos and 

others filing SARs about broad benefits that may occur because of 

some of the 58,000 SAR forms filed by gaming firms. 

Would the creation of a Qualitative Feedback Mechanism help 

reduce money laundering and terrorist financing? Should the Secretary of the Treasury establish a mechanism to communicate 

anti–money laundering (AML) and countering terrorism financing 

(CTF) priorities to financial institutions, gaming establishments 

and Federal financial regulators? Could such a mechanism provide 

qualitative feedback on information shared by financial institutions 

with the Department of Treasury, including CTRs and SARs? 

Please describe the pros and cons of such a system. 

A.2. There are substantial benefits to developing additional pathways, whether through a qualitative feedback mechanism or some 

other structure, for improved AML/CFT information sharing between various stakeholders in the public and private sector. As the 

Financial Action Task Force recently noted ‘‘[l]ack of guidance and 

feedback by public sector authorities on information shared by the 

private sector may hinder private sector’s ability to effectively monitor transactions and provide well-developed reports to FIUs . . . 

[and] may also impede or discourage information sharing between 

different private sector entities, or between private and public sectors, and vice versa, e.g., because regulatory expectations are unVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
81 

1See ‘‘FATF Guidance: Private Sector Information Sharing’’, November 2017, p.26, available 

at www.fatf-gafi.org/media/fatf/documents/recommendations/Private-Sector-Information-Sharing.pdf. 2See The Clearing House, ‘‘A New Paradigm: Redesigning the U.S. AML/CFT Framework To 

Protect National Security and Aid Law Enforcement’’, (TCH AML/CFT Report), February 2017, 

available at www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/2017/ 

20170216lTCHlReportl AMLlCFTlFrameworklRedesign.pdf. 

clear or because there is insufficient information available about 

risks.’’ 1

For example, the absence of public sector feedback on SARs in 

the current regime is hindering financial institutions’ ability to 

tune their systems to provide more targeted leads to law enforcement. Granting law enforcement and national security authorities 

opportunities to provide general feedback on the reports filed, and 

incorporating this feedback into supervisory evaluations of firms’ 

compliance, could assist financial institutions in targeting their resources to efforts that provide information that is of the greatest 

use in preventing illicit financing. 

It would also be helpful if a pathway for sharing information 

were established to allow financial institutions to efficiently share 

raw data with law enforcement along with reforms to SAR and 

other BSA reporting requirements. As discussed in the TCH AML/ 

CFT report, the current regime is built on individual, bilateral reporting mechanisms grounded in the analog technology of the 

1980s, rather than the more interconnected and technologically advanced world of the 21st century. 2 Therefore, providing such data 

in bulk would modernize the current regime and allow institutions 

to provide law enforcement with information in a timelier manner. 

Furthermore, it would allow law enforcement, using big data analytics, to effectively have access to and sift through large quantities 

of data more efficiently. 

Further coordination and information sharing between and 

among public sector authorities is also critical to establishing AML/ 

CFT priorities and providing an overarching purpose for the regime. Therefore, TCH recommends that Treasury take a more 

prominent role in coordinating AML/CFT policy and examinations 

across the Government and conduct a robust and inclusive annual 

or biennial process to establish AML/CFT priorities and provide an 

overarching purpose for the regime. This is particularly important 

in the U.S. where law enforcement, national security, and financial 

institution oversight responsibilities are dispersed among multiple 

agencies. This stands in contrast to other approaches (e.g., the 

U.K.’s Joint Money Laundering and Intelligence Task Force 

(JMLIT)) that better address barriers to information sharing by 

bringing together relevant actors to share information as well as 

allowing financial institutions to follow-up on SAR activity, thereby 

potentially improving the effectiveness of financial institution reporting mechanisms. 

Q.3. The Office of the Comptroller of the Currency mentioned in its 

2018 Banking Operating Plan that financial institutions should not 

inadvertently impair financial inclusion. But, as of September 

2017, the OCC has not identified any specific issues they plan to 

address. We know that derisking has become an epidemic across 

many communities and industries, such as communities along the 

Southwest border, humanitarian organizations aiding Nations 

82 

3See ‘‘The Great Unbanking: Swingeing Fines Have Made Banks Too Risk-Averse’’, The Economist, July 6, 2017, available at www.economist.com/news/leaders/21724813-it-time-rethinkanti-money-laundering-rules-swingeing-fines-have-made-banks-too-risk-averse. See also ‘‘A Crackdown on Financial Crime Means Global Banks Are Derisking’’, The Economist, July 8, 2017, 

available at www.economist.com/news/international/21724803-charities-and-poor-migrants-areamong-hardest-hit-crackdown-financial-crime-means. 

wracked with violence, and remittances providers that serve fragile 

Nations like Somalia. 

What type of guidance could the OCC, FinCEN, FDIC, and the 

Federal Reserve provide to help banks meet the banking needs of 

legitimate consumers and businesses that are at risk of losing access—or have already lost access? 

A.3. The current derisking trend is in part a reaction to Government and supervisory characterizations of correspondent banking 

as a high risk business and the evolving standards within the domestic and international community. 3 The causes are clear—the 

systems, processes, and people required to manage examiner expectations for clients deemed to be ‘‘higher risk’’ are extremely costly. 

For example, a bank may prepare a lengthy report on a customer 

only to be criticized for not further documenting the grounds on 

which it decided to retain the customer. Institutions are therefore 

required to make difficult decisions, because it is often times too 

expensive to build out this infrastructure to support higher risk accounts. And this does not even include the risk of massive fines 

and reputational damage in the event a customer designated highrisk actually commits a criminal act. 

Similarly, domestically, banks of all sizes report that customer 

due diligence (CDD) requirements have dramatically increased the 

cost of opening new accounts, and now represent a majority of 

those costs. Of course, disproportionate and heightened account 

opening requirements make low-dollar accounts for low- to moderate-income people much more difficult to offer and price. While 

the connection is not immediately apparent, AML/CFT expense 

now is clearly an obstacle to banking the unbanked, and a reason 

that check cashers and other forms of high-cost, unregulated finance continue to prosper. The problem, of course, is that bank examiners do not internalize those costs. And those in the Government who do internalize those costs play no role in examining the 

performance of financial institutions. 

As noted in my testimony, TCH believes that Treasury should 

take a more prominent role in coordinating AML/CFT policy and 

examinations for the regime. That includes convening on a regular 

basis the end users of BSA data—law enforcement, national security, and others affected by the AML/CFT regime including the 

State Department—and setting goals and priorities for the system. 

Treasury is uniquely positioned to balance the sometimes conflicting interests relating to national security, the transparency and 

efficacy of the global financial system, the provision of highly valuable information to regulatory, tax and law enforcement authorities, financial privacy, financial inclusion, and international development. 

In addition, while the AML/CFT regime is supposed to be riskbased, particularly in the context of correspondent banking relationships, it is instead perceived as being ‘‘zero miss or tolerance.’’ 

83 

Supervisors must reaffirm the risk-based nature of the regime and 

make clear that isolated failures to identify potentially suspicious 

activity should not call into question a bank’s entire BSA/AML/ 

OFAC compliance framework. Furthermore regulators should continue to clarify correspondent banking and other regulatory expectations and should provide banks with greater certainty that the 

banks’ good-faith application of clear regulatory guidance and expectations will ensure that banks are found by their regulators and 

auditors to be in compliance with those requirements. 

Q.4. Last year, the Countering Iran’s Destabilizing Activities Act of 

2017 (P.L. 115-44) was enacted. In Section 271, it required the 

Treasury Department to publish a study by May 1, 2018, on two 

issues: 

Somali Remittances: The law required the U.S. Department of 

Treasury to study if banking regulators should establish a pilot 

program to provide technical assistance to depository institutions 

and credit unions that wish to provide account services to money 

services businesses serving individuals in Somalia. Such a pilot 

program could be a model for improving the ability of U.S. residents to make legitimate funds transfers through easily monitored 

channels while preserving strict compliance with BSA. 

Sharing State Banking Exams: The law also required Treasury 

to report on the efficacy of money services businesses being allowed 

to share certain State exam information with depository institutions and credit unions to increase their access to the banking system. 

Have you or your organization been involved with these Treasury 

studies? 

A.4. TCH has not received a request to participate in this study. 

Q.5. What advice did you give—or would you give—on the pilot 

studies? 

A.5. We encourage the Treasury Department to solicit input from 

the industry on each of these studies to ensure that any recommendations incorporate private sector perspectives. 

Q.6. In 2016, William and Margaret Frederick were moving from 

Ohio to Las Vegas. Unfortunately, it is alleged that the title company they used in Columbus, Ohio, fell for an email scam and 

wired the $216,000 profit from their home sale to a hacker, not to 

the Fredericks. William is 83 and Margaret is 75 and as of October, 

they were still trying to get their money back. While the Fredericks’ tale is now a court case to determine who was responsible 

for the fraudulent information, we know that the Fredericks’ experience is ‘‘very typical’’ of scams that divert an estimated $400 million a year from title companies into bogus accounts. 

Please describe the responsibilities of financial firms to avoid 

these frauds? 

What penalties should be assessed and by which agencies when 

financial firms enable theft? 

What is the role for the Consumer Financial Protection Bureau 

to ensure financial firms protect their customers’ money and information? 

84 

4We note that the U.K.’s Joint Money Laundering Intelligence Taskforce (JMLIT) has established operational priorities for its public–private sector information sharing partnership 

www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/joint-money-launderingintelligence-taskforce-jmlit. 

A.6. Wire transfers are a ‘‘push’’ payment in which a bank customer instructs its bank to pay another party. Under the law that 

applies to wire transfers, Uniform Commercial Code Article 4A, a 

bank is liable for losses resulting from unauthorized wire transfer 

instructions unless the bank and its customer have entered into a 

commercially reasonable security procedure agreement and the 

bank follows those procedures when it receives instructions. Generally banks enter into these agreements with their customers and 

have security procedures in place to verify that instructions are in 

fact the instructions of their customer. 

In the unfortunate case described above, the instruction from the 

title company was authorized. However, the title company had 

been deceived, through means outside of the bank’s control, into 

paying the wrong party. Legally it is not the bank’s responsibility 

to determine if its customer has been deceived into paying a fraudulent actor. However, banks do not want their customers to be victims of fraud. In response to the increase in fraud attacks on their 

corporate and institutional customers banks have conducted extensive educational campaigns using in-person sessions, webinars, and 

conference calls to alert customers to fraud schemes and the steps 

customers can take to avoid fraud losses. These measures that customers are encouraged to take include verifying the authenticity of 

email, telephone, or other communications before relying on those 

communications to instruct wire transfers. Failure to take these 

precautions can result in a customer’s authorized wire transfer instruction to its bank that is based upon information received from 

a criminal. 

Q.7. In 2014, FinCEN issued an advisory with human trafficking 

red flags, to aid financial institutions in detecting and reporting 

suspicious activity that may be facilitating human trafficking or 

human smuggling. 

To what extent do you assess that financial institutions are currently utilizing these red flags, in order to better assess whether 

their banks are being used for to finance human trafficking? If institutions are not widely utilizing the red flags, what actions is 

FinCEN taking to encourage them to do so? 

A.7. As previously discussed, TCH recommends that Treasury set 

AML/CFT priorities for the regime to assist financial institutions 

as they work to provide leads to law enforcement—including on 

human trafficking. 4

Financial institutions around the globe are proactively working 

among themselves and with the public sector to disrupt human 

trafficking networks. In a 2016 Financial Times op-ed, Standard 

Chartered’s Group General Counsel discussed the need for enhanced public–private sector sharing, noting that presentations 

from NGOs and Government agencies ‘‘have improved banks’ ability to detect potentially [human trafficking] related financial transactions. In turn, they have helped law enforcement disrupt trafVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00088 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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5See Financial Times op-ed by David Fein, ‘‘How To Beat the Money Launderers: Banks Must 

Work With Governments To Combat This Scourge’’, November 22, 2016, available at 

www.ft.com/content/569c2e26-adb9-11e6-ba7d-76378e4fef24. 6See TCH Banking Perspectives article by Juan C. Zarate and Chip Poncy, ‘‘Designing a New 

AML System’’, Q3 2016, available at www.theclearinghouse.org/research/banking-perspectives/ 

2016/2016-q3-banking-perspectives/a-new-aml-system. 7See Tom Keating and Anne-Marie Barry, ‘‘Disrupting Human Trafficking: The Role of Financial Institutions’’, Whitehall Report 1–17, Royal United Services Institute for Defence and 

Security Studies, March 2017, available at rusi.org/sites/default/files/ 

201703lrusildisruptinglhumanltrafficking.pdf. 8FinCEN implicitly acknowledges this in their 2014 human trafficking advisory when it says 

‘‘financial institutions may consider incorporating [FinCEN’s red flags] into their monitoring 

programs. In applying these red flags, financial institutions are advised that no single transactional red flag is a clear indicator of human smuggling or trafficking-related activity.’’ See 

www.fincen.gov/resources/advisories/fincen-advisory-fin-2014-a008. 9See Testimony of William J. Fox before the U.S. House Financial Services Subcommittees 

on Financial Institutions and Consumer Credit and Terrorism and Illicit Finance, November 29, 

2017, available at financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-wfox20171129.pdf. 

ficking networks.’’ 5 Such movements are also underway in the 

United States. 6

Furthermore, the U.K.’s Royal United Services Institute published a report in 2017 on the role financial institutions play in disrupting human trafficking. It studied efforts in both the U.K. and 

U.S. and notes the following: (i) the 2016 Dow Jones and ACAMS 

Global Anti–Money Laundering Survey found that ‘‘nearly 70 percent of respondents report their organizations have modified AML 

training and/or transaction monitoring to incorporate human trafficking and smuggling red flags and typologies,’’ with heavy U.S. 

participation in that survey; (ii) financial institution approaches to 

disrupting human trafficking networks are mixed as some adapt 

alerts and guidance; others create bespoke algorithms; and others 

utilize other sources of information such as law enforcement inquiries or negative media alerts; and (iii) many financial institutions 

are proactively investigating historic transaction records rather 

than relying on real-time monitoring as it may not be as effective 

in detecting potential trafficking. 7

The report also notes that barriers to financial institutions’ efforts to combat human trafficking include: (i) difficulties with automating triggers as most human trafficking-specific signals are similar to normal commercial activity; 8 (ii) concerns from financial institutions that they receive no regulatory credit for their efforts 

and instead will be penalized or censured; (iii) the diverse number 

of financial institutions and payment methods, in multiple jurisdictions, over which such high volume and small denomination activity can occur which makes it difficult to detect without law enforcement leads and greater information sharing; and (iv) the lack of 

formal law enforcement feedback as well as coordinated law enforcement-endorsed efforts to address human trafficking. 

As a general matter, the USA PATRIOT Act’s Section 314(b) private sector information sharing provisions have reportedly been 

useful in addressing human trafficking and other crimes. 9

Q.8. What are the pros and cons of reducing or eliminating the 

standards requiring SARs filing for insider abuse (i.e., employee 

misconduct)? 

The common expectation is that any financial institution subjected to a cyberattack would be in touch with law enforcement 

about whether or not it’s required to file an SAR. What are the 

86 

10See Testimony of Lloyd DeVaux before the House Financial Services Committee Subcommittee on Financial Institutions and Consumer Credit, June 28, 2017, available at 

financialservices.house.gov/uploadedfiles/hhrg-115-ba15-wstate-ldevaux-20170628.pdf. 

pros and cons of eliminating SAR filing requirement for 

cyberattacks against financial institutions? 

A.8. While we do not support eliminating SAR filings in all insider 

abuse cases, we do believe that those filing requirements should be 

further tailored, perhaps by making them subject to the same dollar thresholds as other submissions. We believe that this would 

allow firms to shift resources away from investigating activity that, 

even if it proved criminal, would almost certainly never be prosecuted, and towards innovative efforts to detect more serious offenses. We cannot think of a ‘‘con’’ for this change. 

Similarly, with respect to cyber, we presume that cyber SAR filings are of little to no utility, for the reasons you state. However, 

we would strongly urge the Committee to confirm this impression 

with law enforcement or FinCEN—that is, by asking them whether 

there are investigations where a SAR filing, as opposed to direct 

engagement with the firm, helped make a case. 

Q.9. Most of the cost of regulatory compliance for financial institutions has been in the BSA/AML area. Yet, when we talk of simplifying regulations for community banks, we have not addressed this 

issue even though our banks and credit unions tell us this is the 

most costly and complex. 

Can you give a percent of staff resources invested in AML/BSA 

compliance for financial institutions of less than $50 billion in assets? 

A.9. BSA/AML reform would benefit institutions of all sizes. In 

2017, TCH testified before the House with a community banker 

who reported that his three-branch bank has four lending officers 

and six AML compliance officers. While TCH represents 25 large 

commercial banks, the regime is no more rational for smaller 

banks. 10

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DENNIS M. LORMEL 

Q.1. Strengthening Financial Intelligence Tools—You have studied 

the financial underpinnings of recent terrorist attacks, like the 

2017 attack in Manchester, England, where a suicide bomber killed 

22 people and injured more than 100. Investigations in the aftermath of that event led to the arrest of a network of at least 15 

more suspects. At the time, you wrote it was unlikely our current 

AML and terror finance regimes could have alerted U.K. or U.S. 

authorities to this type of attack. 

What specific financial intelligence tools should we strengthen to 

detect and disrupt the planning and finance of such attacks? Is our 

current response capability sufficiently joined up, both within the 

United States and with key allies, so that key financial evidence 

is swiftly identified and shared with relevant law enforcement authorities? 

A.1. In attacks like Manchester, it is extremely unlikely that financial institutions would generate alerts through transaction moniVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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toring because the banking activity of most of the individuals involved would usually not raise any suspicion to cause an alert. The 

funding flowing through the account, particularly for homegrown 

violent extremists would be generated by their employment compensation, entitlement funds, or other sources that would usually 

not raise suspicion. If they were engaged in criminal activity, there 

would be more likelihood this type of funding might generate an 

alert as being potentially suspicious but that would be contingent 

on the funding flow. These types of individuals, for the most part, 

want to avoid detection. It’s usually not until after the event occurs, when names are reported in the media that financial institutions would identify transactional activity or account relationships 

through name identification of the negative news. 

I’ve written a number of articles with different ideas about identifying terrorist financing. It’s extremely difficult. I’m happy to forward a sampling of the articles to provide more context. The problem is most people, including individuals working in financial institutions do not adequately understand the funding flows nor are 

they familiar with terrorist financing typologies. We tend to look at 

terrorist financing more generically and do not visualize sources of 

funds, methods of moving funds or how terrorists access funds. I 

believe there are three funding streams with numerous variations 

of the three primary funding streams. 

I believe U.S. law enforcement and their international law enforcement do a good job of sharing and exchanging information. 

Law enforcement does not do as good a job sharing information 

with financial institutions. Part of the problem is a lack of capacity. 

Part of the problem is a good deal of information cannot be shared 

do to considerations to include grand jury secrecy and classified information. I have been a proponent for providing security clearances to select personnel in financial institutions dating back to 

when I formed and ran the Terrorist Financing Operations Section 

(TFOS) at the FBI. In fact, I recommended that the 9/11 Commission recommend that security clearances should be granted to 

bankers. They did not concur with this. I am still a firm believer 

that security clearances would lead to better information sharing. 

Financial institution AML personnel are very dedicated to identifying money laundering and terrorist financing. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM DENNIS M. LORMEL 

Q.1. I’d like to understand better the law enforcement context for 

the U.S.’s efforts to fight money laundering. 

Does the U.S. financial system substantially—even if inadvertently—facilitate human trafficking? 

A.1. The U.S. financial system does facilitate human trafficking. 

The financial system also serves as a detection mechanism. I conduct a lot of AML training, speak frequently at AML and terrorist 

financing conferences and write articles published mostly by the 

Association of Certified Anti–Money Laundering Specialists 

(ACAMS). I make the point that financial institutions are either facilitation tools or detection mechanisms. I stress that we need to 

do more to enhance detection and limit facilitation. 

88 

I believe that AML compliance professionals are dedicated to 

identifying money laundering and especially for heinous crimes 

such as human trafficking. In my response to Senator Cortez 

Masto’s questions, I spoke about proactive initiatives certain financial institutions have taken in partnership with law enforcement. 

Below is the answer I provided which puts context around my comment above about public–private partnerships. 

The Association of Certified Anti–Money Laundering Specialists 

(ACAMS) has made human smuggling a long time priority. They 

started a working group in 2010 with a group of major banks and 

Homeland Security Investigations. Bank analysts and Homeland 

Security Investigations analysts developed patterns of activity or 

typologies consistent with human smuggling. JPMorgan Chase had 

a team of special investigators who conducted targeted transaction 

monitoring and identified potential suspicious activity. ACAMS 

gave JPMorgan Chase and Homeland Security a special award in 

recognition of their outstanding collaboration. Another outstanding 

example of public–private sector partnerships occurred in January 

2018, in the run up to the Super Bowl. The ACAMS Minneapolis 

Chapter held a half-day long learning event focused entirely on 

human slavery/trafficking. I was proud to be the first speaker. U.S. 

Bank, Homeland Security Investigations, and the U.S. Attorney’s 

Office in Minneapolis collaborated to develop typologies to identify 

human sex trafficking specifically related to travel for the Super 

Bowl. These types of initiatives have a great impact on crime problems like human trafficking. I must give a cautionary comment, 

that this type of initiative is not as easy as it sounds. It can be 

costly; there are regulatory concerns and other impediments that 

must be overcome. The September issue of ACAMS Today magazine had a detailed article about the Minneapolis learning event. 

I would be happy to provide a copy of ACAMS Today if you’d like 

one. 

Q.2. What about terrorism? 

A.2. Like money laundering for human trafficking, financial institutions serve as either facilitation tools or detection mechanisms 

for terrorist financing. It is easier to develop typologies and red 

flags for human trafficking and other crimes than it is for terrorist 

financing. That is one reason I spend a considerable amount of my 

time teaching and writing about terrorist financing. Terrorist financing is very complex and multifaceted. I believe there are three 

basic funding streams and many variations of the three funding 

streams. What also needs to be considered is who you are dealing 

with, organizations or individuals. I have a great deal of content 

in terms of power point presentations and articles providing greater detail that I’m happy to share. 

AML professionals are vigilant and would like to identify potential terrorist financing but generally, they do not understand terrorism or the funding flows to be concerned about and how it impacts their institutions. This is not for a lack of trying. It’s an extremely complex issue. I encourage financial institutions to form 

specialized investigations teams, analogous to law enforcement 

SWAT teams to address issues like terrorist financing, human trafficking and transnational criminal organizations, as you inquire 

89 

about below. One of the problems we have in AML compliance is 

that we are inherently reactive. The more we can be ‘‘urgently’’ reactive and to the extent we can be proactive, the more detective 

and disruptive we can be. 

Q.3. What about drug cartels and violent gangs such as MS–13? 

A.3. I would characterize drug cartels, violent gangs, and organized 

crime organizations as either transnational criminal organizations 

or domestic criminal organizations. Either way, they would operate 

locally, regionally, and/or globally. Again, financial institutions 

serve as facilitation tools or detection mechanisms. Here, one of my 

principal concerns is the nexus between transnational criminal organizations and terrorist groups. I refer to this as the problem of 

convergence and diversification. Criminal and terrorist groups converge to act together in criminal activity or to share the same supply chains and channels for shipping illicit goods and for human 

smuggling and trafficking. As these hybrid operations mature, they 

diversify into more seemingly legitimate activity. This is where 

public–private partnerships become more important and meaningful. 

Q.4. Can you walk me through a typical case, either as an agent 

or as a field manager, where you used financial intelligence, such 

as suspicious activity reports, to catch these sort of criminals? 

A.4. Senator, thank you for this question because it goes to the 

heart of my January 9th written and oral testimony. Every day, 

law enforcement uses BSA data, either in the form of SARs, CTRs, 

8300s, or other BSA data, to predicate or enhance criminal investigations. I just attended the West Coast AML Forum annual conference in San Francisco (May 2–4, 2018). Three separate law enforcement case studies were presented that were built on SARs, 

CTRs, 8300s, and other BSA data. One case revolved around Ponzi 

schemes, one around Asian Organized Crime, and one around dark 

web internet sites selling illicit goods, including synthetic opioids. 

They were very compelling presentations demonstrating the importance of building evidence around BSA data. In addition to those 

presentations, I gave a presentation on terrorist financing and stated that the FBI relies extensively on SARs and CTRs for terrorist 

financing investigations. 

To more directly answer your question, as a hypothetical, as a 

law enforcement agent I receive a SAR about an investment fraud. 

I would run the subject name(s) and collateral identifying data 

through the SAR database and through my agency’s investigative 

indices. I may or may not get additional hits. However, if it’s an 

investment fraud, it most likely will have multiple victims, perhaps 

through multiple financial institutions. I would contact the financial institution(s) filing the SAR(s) and request the SAR decision 

documentation. I would attempt to establish predicating information to open a case to present to a prosecutor. I would get grand 

jury subpoenas for bank account records and begin my investigation to ‘‘follow the money.’’ As I proceed, it is likely I’ll identify 

CTRs and additional SARs. Through bank account analysis, I’ll 

likely identify other bank and credit card accounts and continue to 

build my links to co-conspirators. I’d continue to build financial evidence along with other evidence to include audio and video recordVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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ings, surveillance, interviews and other investigative steps to build 

my case. Often times an investigation as I’m describing could lead 

to an opportunity to establish an undercover operation where the 

undercovers provide money laundering services to the bad guys. I 

would continue to build my case to obtain an indictment and sustain a prosecution. At every step in the process, financial record 

and BSA data will be essential elements of the case. 

I used SAR and CTR information in terrorist financing following 

9/11 for purposes of developing strategic intelligence about current 

and emerging trends. We established a datamining initiative where 

we used SAR and CTR information with other buckets of information to develop said strategic intelligence. I believe that capability 

is more robust today than in the 2001–2003 timeframe. 

In training presentations I give regarding SARs, I have a flow 

chart about the lifecycle of a SAR. I would be happy to provide it 

to you and to provide a demonstration or explanation. 

Q.5. At the FBI, what percentage of the time would you estimate 

that unique leads are generated from AML tools, such as suspicious activity reports and currency transaction reports? 

A.5. I cannot give you a definitive answer of the current status of 

how SAR and CTR data is used at the FBI today. When I was 

Chief of the Terrorist Financing Operations Section (TFOS), following its formation and through 2003, we checked for and/or used 

SAR and CTR data extensively. One of the processes we established was that all terrorism cases had a financial sub-file and that 

SAR and CTR checks were made. Between December 2000 and 9/ 

11, while I was Chief of the Financial Crimes Section, we had an 

analyst checking the SAR database on a daily basis to find SARs 

we could take actionable steps with. We also had a pilot program 

regarding money laundering and running through the SAR database for SARs we could predicate investigations with and refer out 

to field offices. I participate in bank working group outreach meeting that TFOS has with financial institutions a few times a year. 

TFOS leaders discuss how SARs are used for their investigative 

targeting in terrorism cases. Although I cannot provide information 

about how other divisions within the FBI use SARs and CTRs, my 

sense is they are widely used. The FBI has a cadre of forensic accountants that work throughout the criminal and counterterrorism 

programs. My expectation is they regularly rely on BSA data in 

their financial investigations. 

Q.6. What should our risk tolerance be for the fact that the U.S. 

financial system facilitates crimes like human trafficking? Should 

we strive to have zero incidence of money laundering in our financial system? 

A.6. The Bank Secrecy Act specifically states that financial institutions have AML programs that are ‘‘reasonably designed’’ to identify and report suspicious activity. With the volume of transactions 

that take place on a daily basis it is impossible to identify all suspicious activity. Having a reasonably designed program is the appropriate standard. In a perfect world, we could consider a zero tolerance for money laundering standard. However, in the real world, 

that is an impossible standard. We should always strive to improve 

transaction monitoring and rely more on innovation to improve the 

91 

detection versus facilitation capabilities. In my view, ensuring that 

financial institutions develop and maintain ‘‘reasonably designed’’ 

AML standards is appropriate. 

Q.7. I’d like to understand better how technological innovation is 

transforming the fight against money laundering and how Government policy can help or hurt these efforts. 

In the health care context, I hear about how researchers have 

used machine learning and artificial intelligence to identify diseases and predict when they will occur, using data points that humans would have never put together. How have financial institutions or law enforcement officials been able to use of similar techniques to identify money laundering and how much more progress 

can be made in this front? 

A.7. I believe we need to embrace technology and use technological 

advances to better monitor for suspicious activity and to support 

criminal investigations. In the last few years, technology has been 

greatly enhances. We should be exploiting technology as much as 

we can to enhance monitoring and investigative capabilities. We 

need to ensure the legal and regulatory framework is in place to 

support technology. We must also ensure that individual privacy 

rights are not abused. I’m not a technology expert. I would encourage the Committee to hold hearings and briefings with technology 

experts and privacy rights advocates to determine what technologies can be exploited in a legal framework. 

I would also note, that no matter how advanced machine learning and artificial intelligence become, we will always need humans 

to conduct investigations and to make the decisions on filing SARs 

and other BSA decisions. 

Q.8. Outside of AI and machine learning, how can recent FinTech 

innovations such as blockchain fight money laundering? 

A.8. As I noted above, I am not an IT expert. However, FinTech 

needs to be included in the discussion about improving the effectiveness and efficiency of AML reporting requirements. I believe 

blockchain is only going to gain momentum and become more 

mainstream. We need to take a step back and better understand 

blockchain and accountability regarding blockchain and other 

emerging technology. I honestly believe, in listening to experts familiar with blockchain, that blockchain can be a tool to fight money 

laundering. 

Q.9. What regulatory requirement or requirements—if any—most 

hinders the adoption of technological innovations? 

A.9. As I noted above, I am not an IT expert. I’m not sure if it’s 

a regulatory problem as much as a cost consideration. Regardless 

of cost considerations, the problem is not regulations. Rather it is 

the regulators and the lack of clarity and leadership by regulators 

concerning regulatory expectations. My sense is financial institutions are concerned about potential regulatory consequences they 

may face for enhancing technology. There is concern that if new innovations will result in criticism that the older technology will be 

criticized for not having picked up the same level of alerts causing 

them to have to look back for potential suspicious activity perceived 

to be missed. At the ACAMS AML Conference held in Hollywood, 

92 

Florida, from April 9–11, 2018, during a regulator panel, one regulator advised that if financial institutions upgraded their transaction monitoring system, they should run the two systems in parallel for a period of time to ensure that if one system generates 

more alerts, the other is assessed to see if it missed alerts. That’s 

a cause for concern for two reasons, cost and perceived regulatory 

action against the financial institution. This is a deterrent and not 

an incentive to enhance technology. 

Q.10. How much does bitcoin, blockchain, and other 

cryptocurrencies facilitate money laundering? How—if at all— 

should this impact our approach to combating money laundering in 

traditional banks? How can law enforcement officials best stop this 

newer form of money laundering? 

A.10. As bitcoin, blockchain, and other cryptocurrency continue to 

emerge and gain popularity and usage, it will grow as a money 

laundering challenge. The initial reaction to bitcoin, blockchain, 

and other cryptocurrency, and its attractiveness to money 

launderers and criminals was its perceived anonymity. Experts 

have demonstrated that is not true and that they can identify people engaging in bitcoin and other cryptocurrency transactions. This 

is a money laundering deterrent. However, the more bitcoin and 

other cryptocurrencies are used, and the more they can be used in 

cash like manners, the more prevalent the money laundering challenge will become. Part of the problem is the extent to which the 

dark net can be used and the level of anonymity that bad guys can 

develop and exploit. 

Q.11. I’d like to discuss Suspicious Activity Reports (SARs). Today, 

around 2 million SARs are filed each year. While every SAR used 

to be read by law enforcement officials, that is no longer the case 

today. Financial institutions often complain that they rarely, if 

ever, receive feedback from law enforcement officials on the utility 

of any particular suspicious activity report that they file. This lack 

of feedback loops increases the burdens on financial institutions, 

who continue to file SARs that are of little utility to law enforcement officials. It also prevents financial institutions from developing better analytical tools to more precisely discern between the 

signal and the noise. 

What percentage of SARs are actually read by someone in law 

enforcement? 

A.11. First, to the statement above, the number of SARs read by 

law enforcement and feedback regarding SARs are two separate 

issues and should not be compared with each other or considered 

a metric for whether law enforcement reviews SARs. 

I cannot give a precise percentage for how many SARs are reviewed by law enforcement but based on my experience I confidently believe a very high percentage of SARs, if not all SARs, are 

reviewed in some fashion. At a macro level, a program level or for 

strategic purposes the FBI, IRS, and FinCEN possess analytics 

and/or datamining initiatives that scrub all SAR data. At the grassroots or field office level SARs that fall into the grassroots or field 

office jurisdictions throughout the U.S. are reviewed. I believe that 

most, if not all, SARs receive at least a cursory manual review. I 

think there are 94 U.S. Attorney’s Offices (USAOs) in the U.S. 

93 

Each USAO has at least one SAR review team. SAR review teams 

are composed of agents from Federal law enforcement agencies in 

each jurisdiction, most prominently IRS and FBI agents and/or analysts. In addition, field office personnel or State and local law enforcement review certain SARs independent of the SAR review 

teams. As an example, the Manhattan District Attorney’s Office 

has a SAR review team. I’m confident that most, if not all, SARs 

are reviewed by law enforcement. 

Q.12. How often do financial institutions receive feedback from law 

enforcement officials as to the utility of their SAR filing? 

A.12. Feedback from law enforcement to financial institutions regarding the value of SARs is problematic. I have frequently heard 

the same complaint from financial institutions. As noted above, the 

lack of feedback does not mean SARs were not reviewed or that 

SARs did not predicate and/or enhance law enforcement investigations. In response to the frustration on the part of financial institutions about the lack of SAR feedback, I always make it a point 

when I provide training to AML professionals to discuss how important SARs are to law enforcement. I also include in my presentations a flow chart I developed regarding the lifecycle of a SAR. 

As I mentioned in an earlier response to one of your questions, I’d 

be happy to provide the flow chart to you. 

When I was the Chief of TFOS in the FBI, I frequently met with 

then FinCEN Director James Sloan. We often spoke about developing a consistent feedback mechanism for financial institutions 

but were unable to develop an adequate mechanism to do so. There 

are a number of inherent impediments to establishing a feedback 

mechanism. Such include the nature of criminal investigations. 

From the point a SAR is filed to the point a case is concluded, it 

could be a period of one or more years. If a case is a Grand Jury 

investigation, information cannot be disclosed by law enforcement. 

Law enforcement lacks the resources to consistently provide feedback. There are always new cases to move forward with and investigators don’t have time to provide feedback. Impediments aside, 

they are no excuse for not providing feedback. I believe a feedback 

mechanism should be developed and implemented through FinCEN 

initiated by law enforcement. I concur with your comment that a 

SAR feedback mechanism would improve the quality of SAR submissions. I also believe that a SAR feedback would improve the morale of AML professionals who are involved in the SAR process. 

They would have a greater sense of accomplishment and satisfaction that their work contributes to law enforcement successes. 

Make no mistake; SARs play a significant role in investigations. 

Q.13. While some have proposed reducing the number of SARs and 

CRT filings because they are often superfluous and are never read, 

others argue that this poses risks, because investigating minor infractions may still lead to significant law enforcement successes. 

How should policymakers resolve this conflict? 

A.13. Having been the direct beneficiary of SARs and having used 

SARs at the program or macro level for strategic analysis, I’m a 

strong proponent that more SARs and CTRs are better. Agents who 

manually review SARs at the grassroots level would probably opine 

that less is better. In any event, a disparate SAR that may not 

94 

have a high financial loss from a consumer fraud or elderly fraud 

may likely be identifiable with similar SARs. When those SARs are 

aggregated, what was an insignificant fraud could escalate into a 

massive fraud case. I think policy makers should take a serious 

look at this issue. There are merits to both arguments. My opinion 

is there is more merit to not reducing the number of SARs filed, 

especially by increasing SAR thresholds. I am definitely staunchly 

against that alternative. 

Q.14. How could regulators (1) set up better feedback loops between financial institutions and law enforcement officials that 

could help financial institutions better identify money laundering; 

and (2) empower financial institutions to act upon their improved 

ability to distinguish between useful and superfluous reports, including by filing fewer unnecessary SARs, without fearing regulatory consequences for doing so? 

A.14. I do not believe regulators should have a role in SAR feedback or to have a voice in what a useful SAR is. Regulators have 

no authority over law enforcement, are not law enforcement and 

represent an impediment to law enforcement in the SAR process in 

certain regards. SARs are intended to assist law enforcement not 

the regulators. One criticism I have about regulators regarding 

SARs is that in a number of instances, financial institutions write 

SARs geared to what the regulators want versus what law enforcement wants. This is counterproductive. Where regulators can assist 

in the SAR process during their examinations is to identify situations where financial institutions do not file SARs or do not file 

adequate SARs. In my experience, the failure to file SARs or to 

adequately file SARs is the biggest breakdown in an AML program. 

This is where the regulators should be focused regarding SARs. 

Q.15. Would a better feedback loop system exist if financial institutions employed more people with security clearances? If so, what, 

if anything, can the Federal Government do to facilitate this? 

A.15. I have long been an advocate that select financial institution 

AML professionals be granted security clearances. In fact, I was 

interviewed many times by the 9/11 Commission. I strongly recommended to them they recommend that security clearances be 

granted to select financial institution personnel. Unfortunately, the 

9/11 Commission did not concur. Despite that, I firmly believe security clearances would be beneficial and are warranted. 

Security clearances have been given to select AML personnel on 

a limited basis through TFOS at the FBI for terrorist financing collaboration. 

I do not believe that security clearances would improve the feedback issue. However, it would improve the ability of the Government to provide financial institutions with classified information. 

Q.16. Often, financial institutions will derisk by refusing to serve 

customers that could be involved in illegal activity. As financial institutions start to share more information with each other, this 

practice could become more prominent and potential criminals 

could more frequently lose access to the United States’ financial 

system altogether. 

95 

Are there instances in which derisking is actually unhelpful for 

law enforcement purposes, because it drives these criminals underground and makes it more difficult to track them? 

A.16. Law enforcement would prefer that financial institutions do 

not derisk. Exiting relationships is a hindrance to law enforcement. 

It makes it more challenging for law enforcement to follow the 

money and to develop prosecutable cases reliant on financial evidence. There are times when law enforcement learns that financial 

institutions are going to exit an account relationship and law enforcement requests the financial institution maintain the banking 

relationship. In such instances, law enforcement will provide the financial institution with a keep open letter. Financial institutions 

often derisk and/or exit high risk relationships due to concern of 

adverse regulatory actions by their regulators. 

Q.17. At the moment, do the regulators that evaluate and enforce 

financial institutions compliance with our Federal money laundering take this into account? 

A.17. Regulators do not take this into account, which is a problem. 

Either real or perceived, financial institutions derisk because they 

are concerned that the regulators will take an enforcement action 

against the financial institution for the level of high risk they accept. This is where the regulators lack leadership and clarity with 

financial institutions. I’ve heard regulators asked to provide guidance respond that it is up to the financial institution to identify the 

appropriate level of risk they can manage. In many such high risk 

situations financial institutions believe it’s better to exit the customer relationship and not face real or perceived regulatory action. 

Q.18. Are there promising ways to increase cooperation between financial institutions, regulators, and law enforcement officials, so 

that financial institutions can make a more informed decision 

about when and how to derisk? 

A.18. If financial institutions, regulators, and law enforcement 

could establish sustainable communications and take the time to 

understand each other’s perspectives, a better sense of collaboration could be established and a middle ground acceptable to each 

other could be established. If you placed financial institutions, the 

regulators and law enforcement in a triangle and places financial 

institutions at the top and regulators and law enforcement at the 

bottom side points, there would be hard lines from the financial institutions to the regulators and law enforcement. Unfortunately, 

the line between the regulators and law enforcement would be a 

broken line. The hard lines are lines of communication. The broken 

line is a lack of communication. The point is the level of communications between the regulators and law enforcing is not good. 

This leaves financial institutions in direct communications with the 

regulators and law enforcement, which have conflicting interests. 

Q.19. Would financial institutions need to hire more employees 

with a top security clearance and/or a law enforcement background 

for this coordination to be effective? 

A.19. The issue of security clearances is not related to the issue of 

derisking. They are separate issues. I think it would be extremely 

beneficial if financial institutions hire more employees from law enVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00099 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
96 

forcement or the intelligence community who have security clearances. This would enable law enforcement to share classified information with financial institutions they would not have otherwise 

been able to share. Financial institutions derisk in order to avoid 

real or perceived regulatory actions like enforcement actions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM DENNIS M. LORMEL 

Q.1. How can we leverage technology to make the process simultaneously less onerous on banks while enhancing the outcomes of 

catching illegal behavior? Are there regulatory and legislative barriers to getting that down? 

A.1. We should definitely seek to leverage and embrace technology 

to enhance transaction monitoring and to be more innovative. I believe the barriers to this are two pronged. First is cost considerations for financial institutions. The second is real or perceived regulatory expectations. Financial institutions are concerned about adverse regulatory action if they enhance technology. In questions 

from Senator Sasse I received a similar question. The answer I provided Senator Sasse is set forth below: 

As I noted above, I am not an IT expert. I’m not sure if it’s a 

regulatory problem as much as a cost consideration. Regardless of 

cost considerations, the problem is not regulations. Rather it is the 

regulators and the lack of clarity and leadership by regulators concerning regulatory expectations. My sense is financial institutions 

are concerned about potential regulatory consequences they may 

face for enhancing technology. There is concern that if new innovations will result in criticism that the older technology will be criticized for not having picked up the same level of alerts causing 

them to have to look back for potential suspicious activity perceived 

to be missed. At the ACAMS AML Conference held in Hollywood, 

Florida, from April 9–11, 2018, during a regulator panel, one regulator advised that if financial institutions upgraded their transaction monitoring system, they should run the two systems in parallel for a period of time to ensure one if one system generates 

more alerts, the other is assessed to see if it missed alerts. That’s 

a cause for concern for two reasons, cost and perceived regulatory 

action against the financial institution. This is a deterrent and not 

an incentive to enhance technology. 

Q.2. Financial institutions often complain that FinCEN, law enforcement officials, and prudential regulators do not tell them 

whether their BSA filings serve a useful purpose, or how the reports they submit are being used—and that the filings go into a 

black hole. Can you shed some light on the filings that you make 

or have used and what could be done to improve this process? 

A.2. SARs are extremely important and make significant contributions to law enforcement investigations. Lack of feedback is a problem. The perception by financial institutions that SARs fall into a 

black hole is a misperception. SARs do not fall into a black hole. 

Financial institutions have a right to be frustrated about the lack 

of SAR feedback. In terms of developing a consistent feedback 

mechanisms, this is not an issue for the regulators. It is an issue 

97 

for FinCEN and law enforcement, mostly law enforcement. Law enforcement is the end user of SARs and the beneficiary of SAR information. Senator Sasse asked a similar question. Below is the answer I furnished him, which is relevant to your question. 

Feedback from law enforcement to financial institutions regarding the value of SARs is problematic. I have frequently heard the 

same complaint from financial institutions. As noted above, the 

lack of feedback does not mean SARs were not reviewed or that 

SARs did not predicate and/or enhance law enforcement investigations. In response to the frustration on the part of financial institutions about the lack of SAR feedback, I always make it a point 

when I provide training to AML professionals about how important 

SARs are. I also include in my presentations a flow chart I developed regarding the lifecycle of a SAR. As I mentioned in an earlier 

response to one of your questions, I’d be happy to provide the flow 

chart to you. 

When I was the Chief of TFOS in the FBI, I frequently met with 

then FinCEN Director James Sloan. We often spoke about developing a consistent feedback mechanism for financial institutions 

but were unable to develop an adequate mechanism to do so. There 

are a number of inherent impediments to establishing a feedback 

mechanism. Such include the nature of criminal investigations. 

From the point a SAR is filed to the point a case is concluded, it 

could be a period of one or more years. If a case is a Grand Jury 

investigation, information cannot be disclosed by law enforcement. 

Law enforcement lacks the resources to consistently provide feedback. There are always new cases to move forward with and investigators don’t have time to provide feedback. Impediments aside, 

they are no excuse for not providing feedback. I believe a feedback 

mechanism should be developed and implemented through FinCEN 

initiated by law enforcement. I concur with your comment that a 

SAR feedback mechanism would improve the quality of SAR submissions. I also believe that a SAR feedback would improve the morale of AML professionals who are involved in the SAR process. 

They would have a greater sense of accomplishment and satisfaction that their work contributes to law enforcement successes. 

Make no mistake; SARs play a significant role in investigations. 

Q.3. Another compliance challenge often cited by banks is that they 

feel pressured by bank examiners and law enforcement authorities 

to exit certain business lines or cease offering certain services to 

customers viewed as presenting particular money-laundering 

vulnerabilities, i.e., severing corresponding banking relationships 

with foreign institutions in certain geographic areas, and also ending money services businesses (MSBs, i.e., check cashing, money 

transmitters, currency exchange outlets, etc.) 

As banks reevaluate their business relationships with MSBs in 

light of what they may view as a hostile regulatory landscape, 

what can we do to change this type of behavior/is this a prevalent 

problem in the industry? 

A.3. Senator, let me answer the second part of your question first. 

The issue is a significant prevalent issue in the industry. The term 

referred to for exiting high risk relationships by financial institutions is ‘‘derisking’’. The problem here is with the regulators. Either 

98 

real or perceived, financial institutions believe they will face regulatory enforcement actions if they continue to bank high risk customers. This is where I believe regulators lack leadership and clarity. They do not provide guidance to financial institutions about 

banking high risk customers. I have heard regulators at conference 

state it is not their responsibility to provide such guidance but it’s 

the responsibility of the financial institution to determine the level 

of risk they can manage. This lack of guidance leads to financial 

institutions exiting high risk customer relationships. 

Q.4. It is my understanding that there are times when law enforcement and the bank regulators work at cross purposes. That is, law 

enforcement might want a bank to continue banking an individual 

or company that they are following and building a case against but 

the bank regulators, whose incentives are to not be embarrassed by 

their regulated entities, force the banks to ‘‘derisk’’ or close those 

accounts. Is that actually the case? 

A.4. Unfortunately, this is the case. As noted in my response to 

your previous question, either real or perceived, financial institutions derisk out of fear of regulatory enforcement actions. The regulators do not provide financial institutions with leadership or clarity about maintaining high risk relationships. Consequently, financial institutions exit these relationships. Regulators state that they 

do not want derisking but they want inclusion. The problem is they 

do not provide the guidance about banking high risk customers. 

Law enforcement would prefer the account relations not be 

exited, especially in cases of ongoing investigations. Below is the 

response to a similar question that I provided to Senator Sasse. 

Law enforcement would prefer that financial institutions do not 

derisk. Exiting relationships is a hindrance to law enforcement. It 

makes it more challenging for law enforcement to follow the money 

and to develop prosecutable cases reliant on financial evidence. 

There are times when law enforcement learns that financial institutions are going to exit an account relationship and law enforcement requests the financial institution maintain the banking relationship. In such instances, law enforcement will provide the financial institution with a keep open letter. Financial institutions often 

derisk and/or exit high risk relationships due to concern of adverse 

regulatory actions by their regulators. 

Q.5. In terms of AML, we know that the success of AML is centric 

around whether or not the predicate crime of money laundering 

has been reduced, but we only really know how pervasive money 

laundering is on a reactive basis, i.e., when someone/some entity is 

caught. To that end, do you believe the advent/popularity of 

cryptocurrencies could affect the capture of money laundering/could 

it affect AML? Do enforcement authorities have the technological 

capabilities to work with private industry to capture mal-actors? 

A.5. The challenge of identifying money laundering is that it is an 

inherently reactive process. The evolution of cryptocurrency presents new challenges for financial institutions. This is certainly one 

area where public–private sector partnerships could better address 

the emerging challenges of cryptocurrency. I responded to a similar 

question from Senator Sasse. Below is the response I provided him 

with. 

99 

As bitcoin, blockchain, and other cryptocurrency continue to 

emerge and gain popularity and useage, it will grow as a money 

laundering challenge. The initial reaction to bitcoin, blockchain, 

and other cryptocurrency, and its attractiveness to money 

launderers and criminals was its perceived anonymity. Experts 

have demonstrated that is not true and that they can identify people engaging in bitcoin and other cryptocurrency transactions. This 

is a money laundering deterrent. However, the more bitcoin and 

other cryptocurrencies are used, and the more they can be used in 

cash like manners, the more prevalent the money laundering challenge will become. Part of the problem is the extent to which the 

dark net can be used and the level of anonymity that bad guys can 

develop and exploit. 

Q.6. In your opinion, do you think that the overall AML regime has 

been effective? Additionally, what do you see as the best way to ensure future effectiveness? 

A.6. As I stated in my written and oral testimony at the Committee 

hearing on January 9th, the flow of BSA information from financial 

institutions to law enforcement is invaluable. In this regard the 

AML regime is effective. The system is flawed when you overlay 

regulatory requirements. The system could be more effective and 

efficient. I encourage the Committee to assess the perspectives of 

all stakeholders in the process, especially law enforcement and financial institutions who I consider the two primary stakeholders. 

BSA information is intended to assist law enforcement. Financial 

institutions are the repository for financial intelligence and serve 

as the filter for identifying and reporting suspicious activity. I believe there are three primary factors that Congress should consider: 

1. How to incentivize financial institutions to enhance technology and be innovative. In addition to cost factors, this will 

require dealing with the real or perceived regulatory expectations financial institutions are concerned about regarding upgrading technology. Financial institutions are concerned about 

potential adversarial regulatory consequences. 

2. How to make transaction monitoring and the SAR process 

more effective and efficient. The key is to improve the percentage of SARs that are meaningful and are used to predicate 

and/or enhance law enforcement investigations. 

3. How to establish a consistent and meaningful feedback mechanism from law enforcement to financial institutions regarding the value of SARs. This would be one factor that would 

contribute to improving the effectiveness and efficiency of the 

SAR process. 

Q.7. Is it to have Treasury be the lead to: 

1. Define with other stakeholders specific and clear national priorities of the regime; and 

2. Determine, working with other stakeholders, clear and measurable objectives of the regime in light of those priorities. 

Should Treasury or someone else have to report those measurements against the objectives back to Congress? 

100 

A.7. This is a difficult question that requires considerable assessment by numerous stakeholders with varying perspectives. On one 

hand, I concur that from a practical point of view, one department 

or stakeholder should be the lead to establish specific and clear national priorities and set clear and measurable objectives that are 

reported back to Congress. My problem is that Federal departments and agencies within those departments have vastly different 

responsibilities and mandates. Therefore, could one department objectively determine the overall priorities for the intergovernmental 

community? For example, the Treasury Department is primarily 

responsible for sanctions and enforcement. Whereas, the Department of Justice (DOJ) and Homeland Security are responsible for 

law enforcement. From a practical standpoint, it would be prudent 

to designate Treasury to be responsible. However, without equal 

input, my concern would be that DOJ and Homeland Security law 

enforcement perspective and priorities might not be accurately 

stated and/or prioritized. In addition, are their other stakeholders 

who should be included in the reporting process such as the CIA 

and Department of Defense (DOD)? The CIA and DOD are both engaged in threat and/or terrorist financing. Having co-responsibility 

might be an acceptable alternative. However, that would be a challenge for efficiency. Perhaps Treasury, DOJ, Homeland Security, 

and other Government stakeholders should be responsible to submit similar reports to more specifically define their priorities, objectives and measurable. 

Regardless of who is designated with reporting responsibility, I 

believe it would be prudent to have a reporting mechanism to Congress. 

This idea may have come from the Clearinghouse report, dated 

February 2017, titled ‘‘A New Paradigm: Redesigning the U.S. 

AML/CTF Framework to Protect National Security and Aid Law 

Enforcement’’. I was not involved in the Clearing House assessment process. However, my concern is the principal participants 

possessed more of a Treasury perspective (sanctions and enforcement) verses a law enforcement perspective. I understand the 

working group included former law enforcement officials. However, 

in reading the Clearing House report, my concern is law enforcement interests were not adequately considered. As noted in my 

written and oral testimony on January 9th, I contacted then current law enforcement executive in positions like I held in the FBI, 

and none were included in the discussions. I believe the Clearing 

House report sets a good framework for improving BSA reporting. 

However, law enforcement should have greater engagement in the 

assessment process. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM DENNIS M. LORMEL 

Q.1. What are the costs and benefits of having bank examiners assess bank compliance with the Bank Secrecy Act’s (BSA) requirements instead of having anti–money laundering (AML) and combating the financing of terrorism (CFT) experts at the Financial 

Crimes Enforcement Network (FinCEN) examine bank compliance 

programs? 

101 

A.1. I do not believe it is practical to have FinCEN perform the 

bank examinations/program reviews as currently done by the regulatory agencies. First and foremost, FinCEN does not have the capacity to handle such demands. They lack the required resources. 

FinCEN resources do not have the same level of examination training or experience that regulatory agencies possess. I believe it is 

imperative that FinCENs primary responsibility continue to be to 

collect BSA reporting information and to serve as the conduit between financial institutions and law enforcement. FinCEN should 

continue to be involved in regulatory actions on a case specific 

basis and in conjunction with the regulators. FinCEN should continue to provide regulatory guidance to financial institutions. 

FinCEN should also continue to conduct the analytical work they 

perform in support of law enforcement. 

Q.2. Is there a way to maintain a top-shelf effective AML/CFT policy while maintaining a commitment to increase access to financial 

products for the underbanked and immigrants who rely on remittance services? 

A.2. I’m a proponent for inclusion of the underbanked and immigrants who rely on remittance services. I conduct AML, terrorist financing, and fraud training on a regular basis. I also write articles 

published in industry publications, such as ACAMS Today magazine. In these forums, I frequently state that illegal money remitters represent one of the most significant vulnerabilities to the U.S. 

financial system. Part of the problem is that some illegal money remitters and underbanked customers have been derisked. Derisking 

is a significant problem. Much of the problem regarding illegal 

money remittance is that different ethnic communities, especially 

with the underbanked and immigrants prefer to use illegal money 

remitters to transmit funds back to family members in their countries of origin. 

One of the solutions to the issue of derisking is for regulators to 

provide leadership and clarity to financial institutions about regulatory expectations. Another solution for the issue if illegal money 

remittance is for FinCEN, law enforcement, and financial institutions to establish a partnership and working group to address the 

issue of illegal money remittance operations. 

Q.3. I’m interested in the ways in which technology can aid AML 

compliance efforts. What are some of the innovative technologies 

that you’ve seen that hold some promise for either the Government 

or the private sector? 

A.3. I’m not an IT expert. However, I believe that financial institutions should embrace technology. In doing so, they should also demand transparency with new technology driven product offerings. 

Regarding transaction monitoring, financial institutions should be 

considering technology enhancements through artificial intelligence 

and FinTech capabilities. 

Q.4. What are the barriers to either the Government or the private 

sector adopting these technologies? 

A.4. In my opinion, the barriers to Government are primarily cost 

related. The barriers also include Government bureaucracy. The 

barriers to the private sector, specifically to financial institutions, 

102 

are cost and real or perceived regulatory expectations. I was asked 

similar questions by your colleagues Senators Sasse and Tillis. 

Below are my responses to their questions. 

1. We should definitely seek to leverage and embrace technology 

to enhance transaction monitoring and to be more innovative. 

I believe the barrios to this are two pronged. First is cost considerations for financial institutions. The second is real or perceived regulatory expectations. Financial institutions are concerned about adverse regulatory action if they enhance technology. In questions from Senator Sasse I received a similar 

question. The answer I provided Senator Sasse is set forth 

below: 

2. As I noted above, I am not an IT expert. I’m not sure if it’s 

a regulatory problem as much as a cost consideration. Regardless of cost considerations, the problem is not regulations. 

Rather it is the regulators and the lack of clarity and leadership by regulators concerning regulatory expectations. My 

sense is financial institutions are concerned about potential 

regulatory consequences they may face for enhancing technology. There is concern that if new innovations will result in 

criticism that the older technology will be criticized for not 

having picked up the same level of alerts causing them to 

have to look back for potential suspicious activity perceived to 

be missed. At the ACAMS AML Conference held in Hollywood, 

Florida, from April 9–11, 2018, during a regulator panel, one 

regulator advised that if financial institutions upgraded their 

transaction monitoring system, they should run the two systems in parallel for a period of time to ensure one if one system generates more alerts, the other is assessed to see if it 

missed alerts. 

That’s a cause for concern for two reasons, cost and perceived 

regulatory action against the financial institution. This is a deterrent and not an incentive to enhance technology. 

Q.5. What can we be doing as legislators to ensure that we promote 

technological innovation in this sector? 

A.5. Technology innovation is important. If I was a legislator, I 

would consider what I could do to incentivize financial institutions 

to embrace technology. One thing I would assess is how to encourage regulators to take a leadership role and to provide financial institutions with guidance and clarity to change the real or perceived 

concern by financial institutions that there could be adverse regulatory enforcement actions for enhancing technology as addressed 

in the response to the prior question. 

Q.6. The regulatory definition of ‘‘financial institution’’ has been expanded several times over the years, both by FinCEN rulemaking 

and by legislation by Congress. 

Should the definition of financial institutions be expanded to include other sectors? If so, which sectors? 

A.6. The one sector that comes to mind where the definition of ‘‘financial institution’’ might be included is the real estate sector. As 

addressed in Geographic Targeting Orders (GTOs), issued by 

FinCEN to require U.S. title insurance companies to identify the 

103 

natural persons behind shell companies used to pay ‘‘all cash’’ for 

high-end residential real estate in six major metropolitan areas, 

money laundering through real estate is a significant problem. Certainly, where focus was placed on this specific money laundering 

problem, the GTOs were warranted. But the problem of money 

laundering through real estate is much broader. There are a number of real estate schemes to include criminal property flipping that 

have had a detrimental economic impact on many U.S. cities. 

I believe that to answer how broadly the real estate sector should 

be regulated as a financial institution requires considerable assessment. Stakeholders should include FinCEN, real estate professionals and experts, financial institutions, law enforcement, and 

academics who have researched money laundering in the real estate sector. As an example, the Terrorism, Transnational Crime 

and Corruption Center (TraCCC) at George Mason University 

(GMU), held a daylong conference at GMU’s Schar School of Policy 

and Government to learn about money laundering through the real 

estate sector. The forum was held on March 23, 2018. Speakers included experts from the real estate sector, law enforcement banks, 

Government, associations, nongovernment organizations, and academia. I served as a moderator for a panel addressing new approaches to countering money laundering in real estate in the U.S. 

A draft report has been circulated to conference speakers and organizers. The report is in the process of being finalized. If you are interested, I’d be happy to provide a copy of the report after it’s published. 

Q.7. Could these changes be made via FinCEN rulemaking or 

should legislation be passed? 

A.7. I believe both FinCEN rulemaking and legislation are warranted. I believe that the GTO’s issued by FinCEN are an outstanding example of FinCEN rulemaking. However, the long-term 

solution is legislation. Congress should consider establishing a 

working group to assess how best to craft legislation to address the 

broader risks of money laundering through real estate. 

Q.8. In August 2017, FinCEN issued an advisory encouraging real 

estate brokers to share information with them that could be helpful 

in AML efforts, while noting they are not required to do so under 

current law. 

How do we increase information sharing between real estate brokers and FinCEN? 

A.8. Meaningful information sharing between real estate brokers 

and FinCEN is more likely to be accomplished through rulemaking 

and legislative requirements. An alternative that could result in 

voluntary information is to promote awareness through outreach, 

particularly in the real estate sector, about the risk and consequences of money laundering through real estate. 

Q.9. Geographic Targeting Orders (GTOs), which impose additional 

record keeping and reporting requirements on domestic financial 

institutions or nonfinancial trades or businesses in a specific geographic area for transactions involving certain amounts of United 

States currency or monetary instruments, have been deployed since 

2016 to target high-end real estate sectors in major metropolitan 

104 

areas by requiring U.S. title insurance companies to identify the 

natural persons behind shell companies used to pay ‘‘all cash’’ for 

high-end residential real estate. 

Are GTOs an effective tool or would regulation be a preferable 

way to cover the real estate sector? 

A.9. I applaud the GTOs. They are a good step forward in addressing the money laundering issues in real estate. The GTO’s focus on 

one significant money laundering problem. I believe this has had 

the intended impact and that is why the GTOs were extended in 

2017. As noted in the response to the prior question, I believe the 

long-term solution is regulations that are broader than the one 

issue addressed in the GTOs. Regulations need to address a broader range of money laundering risks in the real estate sector. 

Q.10. Cryptocurrency exchanges are money services businesses supervised by State regulators and subject to Federal AML and CFT 

laws. 

Should FinCEN play an enhanced role in assessing the compliance of cryptocurrency exchanges, or are State regulators sufficiently equipped to handle compliance monitoring? 

A.10. I will address this question first at the State level and then 

at the Federal level. Overall, State regulators do a good job at enforcing State regulatory compliance requirements. However, there 

is no uniformity among States about regulatory requirements. Regulatory requirements vary from State to State. My sense is New 

York probably has the most stringent State requirements. At the 

Federal Government level, we need to assess the roles and perspectives Government agency stakeholders have with respect to 

cryptocurrency exchanges. For instance, FinCEN issued guidance 

to cryptocurrency exchanges in 2013. Since cryptocurrency exchanges are MSBs, they would be subject to Federal review by the 

IRS, who examines MSBs from a Federal regulatory perspective. In 

addition, the Securities and Exchange Commission (SEC) and the 

Commodities Futures Trading Commission (CFTC) each have interests. In some situations, the SEC could consider the trade of 

cryptocurrency securities transactions. In some situations, the 

CFTC could consider virtual currency as a commodity. 

The question of should FinCEN play an enhanced role in assessing the compliance of cryptocurrency exchanges should be assessed 

along with the roles of the IRS, SEC, and CFTC. One question is, 

does FinCEN have the capacity, in terms of resources, to take on 

enhanced responsibilities. FinCEN should certainly provide continued guidance and rulemaking. In terms of supervision, IRS should 

continue to have examination responsibility. The problem here is 

the same question as I posed for FinCEN. Does the IRS possess 

adequate resources to address regulatory examination requirements? 

Q.11. What additional tools could we give regulators and law enforcement? 

A.11. The tools that regulators and law enforcement need to address the AML challenges posed by cryptocurrency begin with 

budget enhancements. From the regulators side, enhanced resources are needed in terms of personnel and equipment to perform 

an adequate level of regulatory examinations. Whether it’s the IRS 

105 

or FinCEN, resource enhancements are needed. Law enforcement 

is less pressed for resource enhancements, although the need for 

resource enhancements should be assessed. Regulators and law enforcement could use budget enhancements to address the training 

requirements necessary to gain and maintain the skill sets required to address the evolving challenges posed by 

cryptocurrencies. 

Q.12. How prevalent is money laundering in cryptocurrency markets? 

A.12. I cannot speak definitively about how prevalent money laundering is in cryptocurrency markets. However, like with all types 

of financial institutions, there is a risk for money laundering. Like 

financial institutions, cryptocurrency markets serve as a facilitation tool or a detection mechanism. Our challenge is to make 

cryptocurrency markets more of a detection mechanism. 

The common belief that cryptocurrencies can be anonymous 

makes cryptocurrency more attractive to money laundering. Law 

enforcement has begun to state that cryptocurrencies are not as 

anonymous as thought and that they can trace transactions and 

those transacting in cryptocurrency. The more law enforcement 

proves this fact by making arrests, getting convictions, and seizing 

illicit assets, the greater the deterrent there will be for money 

laundering through cryptocurrency. That said, the more 

cryptocurrency transactions become cash like transactions, the 

greater the likelihood for money laundering. AML transaction monitoring is inherently reactive, which poses a significant challenge 

for those fighting money laundering. Cryptocurrency is an evolving 

space. AML technology must evolve along with cryptocurrency technology. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM DENNIS M. LORMEL 

Q.1. Gaming and tourism are some of Nevada’s top industries. In 

the State of Nevada, our gaming operators employ thousands of 

hard working Nevadans, and the industry as a whole domestically 

supports 1.7 million jobs across 40 States. Qualified casinos, like financial institutions, are also subject to Banking Secrecy Act requirements. Organizations within Nevada have suggested that 

gaming operators would welcome a review of BSA requirements, 

which they find to be burdensome. They look forward to this Committee’s thoughtful, bipartisan, review of BSA requirements that 

takes into account the security imperative for robust anti–money 

laundering efforts, as well as the impact those requirements have 

on all industries. For example, the Suspicious Activity Report 

(SAR) ($5,000) and the Currency Transaction Report (CTR) 

($10,000) levels were set years ago. Some have recommended increasing these to correspond with inflation. Others believe that 

would be too high but do support a higher amount than currently, 

A.1. I would like to comment here that I am not in favor of raising 

the SAR or CTR reporting thresholds. In today’s world, where it 

takes small amounts of funds to commit a terrorist act, we need 

106 

the thresholds where they are. Most financial institutions will tell 

you the reporting thresholds do not cause extra burden to them. 

Q.2. One of the top priorities of the gaming industry is to remove 

the requirement for a detailed factual narrative for structuring in 

the suspicious activity forms. What do you think of this recommendation? 

A.2. I was the direct beneficiary of SARs when I was an FBI agent, 

especially following the terrorist attacks of 9/11. I formed and ran 

the Terrorist Financing Operations Section (TFOS). Following 9/11, 

we began a datamining project and included SAR narratives and 

SAR identifying information like addresses, phone numbers, and 

other collateral information. From a macro or program level, I liked 

the narrative information for all SARs to include structuring. That 

said, SARs are a subjective topic. If you speak to law enforcement 

agents at the field or grass roots level, especially those who physically review SARs, they would likely agree that structuring narratives are cumbersome and not necessary. There is no easy solution to the SAR narrative question. 

Q.3. Do you have specific recommendations regarding how the 

gaming industry can benefit from greater communication with Government agencies and law enforcement? Is there something the 

Federal Government can do to share information with casinos and 

others filing SARs about broad benefits that may occur because of 

some of the 58,000 SAR forms filed by gaming firms. 

A.3. I am a huge proponent for public and private partnerships and 

collaboration. When I ran the Financial Crimes Section at the FBI 

prior to 9/11, I had frequent conversation with the then Director 

of FinCEN, James Sloan about developing a feedback mechanism 

for financial institutions regarding SARs. There were numerous inherent impediments to establishing a feedback mechanism. That 

should not be an excuse. FinCEN and law enforcement should revisit this issue and determine how to more consistently provide 

feedback to financial institutions, including Casinos. 

Q.4. Would the creation of a Qualitative Feedback Mechanism help 

reduce money laundering and terrorist financing? Should the Secretary of the Treasury establish a mechanism to communicate 

anti–money laundering (AML) and countering terrorism financing 

(CTF) priorities to financial institutions, gaming establishments, 

and Federal financial regulators? Could such a mechanism provide 

qualitative feedback on information shared by financial institutions 

with the Department of Treasury, including CTRs and SARs? 

Please describe the pros and cons of such a system. 

A.4. As mentioned in the answer above, I am a firm believer in the 

benefits of a feedback mechanism regarding SARs. I would welcome 

a feedback mechanism. I do believe that would improve the identification of money laundering and terrorist financing. From an intangible standpoint, a consistent feedback mechanism would greatly improve the morale and motivation of the AML professionals involved in the SAR process. There is a constant sense that SARs go 

into a black hole. That is not true. SARs are extremely valuable. 

If AML professionals received consistent feedback, there would be 

more interest in filing better quality SARs that would improve the 

107 

investigative process and lead to more prosecutions and disruptions. 

I do not like the idea of Treasury providing money laundering 

and terrorist financing priorities to financial institutions because 

their issues are with sanctioning and enforcement actions and not 

law enforcement. Non-Treasury law enforcement agencies, such as 

the FBI have primary criminal and intelligence for terrorism and 

many criminal violations. I’m not comfortable with Treasury setting priorities for matters they have limited or no jurisdiction over. 

If Treasury acted as a bridge with law enforcement then perhaps 

it would be workable. 

Q.5. The Office of the Comptroller of the Currency mentioned in its 

2018 Banking Operating Plan that financial institutions should not 

inadvertently impair financial inclusion. But, as of September 

2017, the OCC has not identified any specific issues they plan to 

address. We know that derisking has become an epidemic across 

many communities and industries, such as communities along the 

Southwest border, humanitarian organizations aiding Nations 

wracked with violence, and remittances providers that serve fragile 

Nations like Somalia. 

What type of guidance could the OCC, FinCEN, FDIC, and the 

Federal Reserve provide to help banks meet the banking needs of 

legitimate consumers and businesses that are at risk of losing access—or have already lost access? 

A.5. Inclusion or derisking is a sensitive issue. Although the regulators preach inclusion and the harm of derisking, they do not adequately provide the needed guidance to financial institutions. In 

my view and what I have observed in working groups that discuss 

this issue and in other forums, the regulators do not demonstrate 

any leadership or clarity in providing direction. Regulators will 

state that it is up to banks to determine the level of risk they can 

manage and offer no guidance about regulatory expectations. Consequently, that lack of guidance causes financial institutions to be 

more risk averse and exit relationships for fear that the regulators 

would take a negative view and some action against the institution 

for banking high risk customers. Regulators should take a leadership role and provide clear guidance about regulatory expectations 

beyond stating that financial institutions need to identify and manage their risk. 

Q.6. Last year, the Countering Iran’s Destabilizing Activities Act of 

2017 (P.L. 115-44) was enacted. In Section 271, it required the 

Treasury Department to publish a study by May 1, 2018, on two 

issues: 

Somali Remittances: The law required the U.S. Department of 

Treasury to study if banking regulators should establish a pilot 

program to provide technical assistance to depository institutions 

and credit unions that wish to provide account services to money 

services businesses serving individuals in Somalia. Such a pilot 

program could be a model for improving the ability of U.S. residents to make legitimate funds transfers through easily monitored 

channels while preserving strict compliance with BSA. 

Sharing State Banking Exams: The law also required Treasury 

to report on the efficacy of money services businesses being allowed 

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to share certain State exam information with depository institutions and credit unions to increase their access to the banking system. 

Have you or your organization been involved with these Treasury 

studies? 

A.6. I have not been engaged in the Treasury studies. I am in favor 

of such pilot programs 

Q.7. What advice did you give—or would you give—on the pilot 

studies? 

A.7. Somalia is a high risk country for terrorism. That said, the 

stories of bulk cash being carried to Somalia from the U.S. because 

MSBs are not banked and NGOs are forced to currier money is extremely problematic. To expand on my answer above about regulatory agencies not taking or demonstrating a leadership role, this 

would be a great opportunity for that to change. I would recommend Treasury and the regulators take a leadership role in 

working with financial institutions to bank MSBs in the Somali region and to what extent the depository institutions should have a 

risk tolerance for. Part of the lack of leadership on the part of the 

regulators results in a lack of clarity with banks in terms of the 

level of risk they should take on and the perceived regulatory response to financial institutions considering taking on such risk. 

This is where leadership and clarity would be helpful in formulating more realistic risk tolerance thresholds and would lead to 

less derisking. 

I like the idea of MSBs being able to share certain State exam 

information with depository institutions and credit unions. In most 

instances, it would provide information that should lead to establishing or maintaining a banking relationship. 

Q.8. In 2016, William and Margaret Frederick were moving from 

Ohio to Las Vegas. Unfortunately, it is alleged that the title company they used in Columbus, Ohio, fell for an email scam and 

wired the $216,000 profit from their home sale to a hacker, not to 

the Fredericks. William is 83 and Margaret is 75 and as of October, 

they were still trying to get their money back. While the Fredericks’ tale is now a court case to determine who was responsible 

for the fraudulent information, we know that the Fredericks’ experience is ‘‘very typical’’ of scams that divert an estimated $400 million a year from title companies into bogus accounts. 

Please describe the responsibilities of financial firms to avoid 

these frauds? 

A.8. These situations are devastating to the victims, especially elderly victims like the Fredericks. I wish there was a simple recourse for the Frederick’s but there is not. The financial institutions involved in the transaction do not owe the Fredericks or the 

title company a fiduciary duty. The financial institution has a responsibility to have a reasonably designed AML program. What 

that means is the program is reasonably designed to identify and 

report suspicious activity to FinCEN. Your question does not give 

much context about the banking relationships involved in this case. 

The Frederick’s recourse should be with the title company who fell 

for the phishing/email scam. It’s likely the escrow company did not 

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have adequate controls. There are, unfortunately, to many cases 

like this. They usually wind up in civil law suits. 

Depending on the case specifics, it is not likely the bank would 

be found negligent or responsible. Again, the culpability is likely to 

lie with the escrow company. The bank would not be responsible 

for the escrow company’s falling victim to the scammers. 

Q.9. What penalties should be assessed and by which agencies 

when financial firms enable theft? 

A.9. In the event that the financial institution did not have a reasonably designed AML program to identify suspicious activity, the 

bank failed to file SARs or to adequately file SARs than the bank 

should face an enforcement action by their regulators and/or 

FinCEN. If it was a one off fraud, and the bank had a reasonably 

designed program it is unlikely they would be held culpable. Invariably, many of these cases wind up with civil law suits filed 

against the bank. In at least some such cases, the bank will opt 

to settle the law suit and avoid trial to avert adverse publicity and 

reputational damage. 

Q.10. What is the role for the Consumer Financial Protection Bureau to ensure financial firms protect their customers’ money and 

information? 

A.10. The CFPB is intended to help consumers protect their assets 

from fraud. I’m not sure of the role the CFPB would play in a scenario involving the Fredericks. If the escrow company was negligent and lacked adequate internal controls, they should be held 

culpable for the loss. I’m not a lawyer so I cannot speak to the legal 

ramifications. Again, I’m not sure of what the CFPB could or 

should do. 

Q.11. In 2014, FinCEN issued an advisory with human trafficking 

red flags, to aid financial institutions in detecting and reporting 

suspicious activity that may be facilitating human trafficking or 

human smuggling. 

To what extent do you assess that financial institutions are currently utilizing these red flags, in order to better assess whether 

their banks are being used for to finance human trafficking? If institutions are not widely utilizing the red flags, what actions is 

FinCEN taking to encourage them to do so? 

A.11. Human trafficking is a heinous crime problem. I believe that 

AML professionals are dedicated professionals and are very concerned about human trafficking. I cannot speak definitively as to 

how widely financial institutions use the FinCEN red flags regarding human trafficking or to the extent FinCEN provides guidance 

regarding human trafficking. However, I do believe many financial 

institutions use human trafficking and smuggling red flags from 

multiple sources. There is other red flag guidance that financial institutions use that comes from FATF, Homeland Security Investigations, the FBI and other viable sources. It should be noted that 

the Polaris Project has written a great reference guide about 

human slavery (trafficking), titled ‘‘Typologies of Modern Slavery’’. 

In addition, human trafficking is widely discussed at industry 

training conferences. Training is one of the core pillars of an AML 

110 

program. Human smuggling typologies and warning signs are frequent topics. 

The Association of Certified Anti–Money Laundering Specialists 

(ACAMS) has made human smuggling a long time priority. They 

started a working group in 2010 with a group of major banks and 

Homeland Security Investigations. Bank analysts and Homeland 

Security Investigations analysts developed patterns of activity or 

typologies consistent with human smuggling. JPMorgan Chase had 

a team of special investigators who conducted targeted transaction 

monitoring and identified potential suspicious activity. ACAMS 

gave JPMorgan Chase and Homeland Security a special award in 

recognition of their outstanding collaboration. Another outstanding 

example of public–private sector partnerships occurred in January 

2018, in the run up to the Super Bowl. The ACAMS Minneapolis 

Chapter held a half-day long learning event focused entirely on 

human slavery/trafficking. I was proud to be the first speaker. U.S. 

Bank, Homeland Security Investigations, and the U.S. Attorney’s 

Office in Minneapolis collaborated to develop typologies to identify 

human sex trafficking specifically related to travel for the Super 

Bowl. These types of initiatives have a great impact on crime problems like human trafficking. I must give a cautionary comment 

that this type of initiative is not as easy as it sounds. It can be 

costly; there are regulatory concerns and other impediments that 

must be overcome. The September issue of ACAMS Today magazine had a detailed article about the Minneapolis learning event. 

I would be happy to provide a copy of ACAMS Today if you’d like 

one. 

Q.12. What are the pros and cons of reducing or eliminating the 

standards requiring SARs filing for insider abuse (i.e., employee 

misconduct)? 

A.12. I do not believe there are any pros to reducing or eliminating 

SAR filing for insider abuse. If the insider abuse would be considered suspicious activity, SARs should be filed. Insider abuse can be 

devastating to financial institutions and should be dealt with 

harshly. It’s one thing if insiders embezzle or defraud their employer. It’s another issue when insiders facilitate external fraud 

schemes. That can be more devastating to the financial institution, 

as well as to outsiders exposed to the fraud or other crime problem. 

Q.13. The common expectation is that any financial institution subjected to a cyberattack would be in touch with law enforcement 

about whether or not it’s required to file an SAR. What are the 

pros and cons of eliminating SAR filing requirement for 

cyberattacks against financial institutions? 

A.13. As I mentioned responding to an earlier question, I do not 

see any pros for eliminating SAR filing requirements regarding 

cyberattacks. There are only cons. That is unless the cyberattack 

has no financial lead value. I believe that most if not all 

cyberattacks have a financial component to them. Therefore, it is 

incumbent that SARs be filed to ensure the financial considerations 

receive adequate attention from financial experienced investigators. 

More importantly, FinCEN has a cyberteam that assesses and addresses cyber SARs. I believe that not all cyberthreats, where SARs 

are generated, are reported to law enforcement other than through 

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the SAR filing. Also, when cyberthreats are reported to cyber investigators, I’m not sure that the follow up cyber investigation has a 

financial component as it would if SARs were filed. 

Q.14. Gaming and tourism are some of Nevada’s top industries. In 

the State of Nevada, our gaming operators employ thousands of 

hard working Nevadans, and the industry as a whole domestically 

supports 1.7 million jobs across 40 States. Qualified casinos, like financial institutions, are also subject to Banking Secrecy Act requirements. Organizations within Nevada have suggested that 

gaming operators would welcome a review of BSA requirements, 

which they find to be burdensome. They look forward to this Committee’s thoughtful, bipartisan review of BSA requirements that 

takes into account the security imperative for robust anti–money 

laundering efforts, as well as the impact those requirements have 

on all industries. The Suspicious Activity Report (SAR) ($5,000) 

and the Currency Transaction Report (CTR) ($10,000) levels were 

set years ago. Some have recommended increasing these to correspond with inflation. Others believe that would be too high but 

do support a higher amount than currently, 

From a law enforcement perspective, are there risks to raising 

the amounts? Is it possible that having CTRs at higher levels could 

result in more fraud and terrorist financing? If the amounts were 

raised, to what amount do you recommend? 

A.14. I am a firm believer that the SAR and CTR thresholds should 

not be raised. This would be detrimental to law enforcement, especially considering the threat of homegrown violent extremists. 

Homegrown violent extremists would be more likely to transact in 

amounts below the $5,000 and $10,000 threshold levels. As the 

Chief of the Financial Crimes Section and founder of the Terrorist 

Financing Operations Section (TFOS) at the FBI, I was the direct 

beneficiary of SAR and CTR data. I saw firsthand how information 

below the threshold levels was used in investigations. I believe in 

2004 or 2005, my successor as Chief of TFOS, Michael Morehart, 

testified about not raising the thresholds before a Congressional 

Committee. Subsequent to that, GAO conducted a review of the 

threshold issue and concured that law enforcement benefited from 

SAR and CTR information at the current thresholds. My apology 

for not being more specific about the hearing or report date. At this 

point in time, I do not recall the specifics and in deference to time 

in completing my response to questions, I was unable to conduct 

the necessary research. 

I also believe that most financial institutions would state that 

the current thresholds do not cause them any greater work than 

they would if the thresholds were raised. This topic comes up at 

industry conferences and financial institution representatives have 

stated this regularly. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM HEATHER A. LOWE 

Q.1. Information Sharing Among Banks—While you have generally 

supported increased information sharing between banks and the 

U.S. Government, and among banks, you also have sounded an 

alarm about the importance of appropriate privacy safeguards 

112 

around bank–bank information sharing, particularly where an individual’s access to financial services may be at risk if negative but 

inaccurate information on them gets into the system, as with inaccurate credit reporting. 

Can you describe the types of safeguards you think would be important if we were to consider clarifying or expanding this authority? In particular, should we consider implementing a system of redress or information correction for such individuals, and if so how 

would you configure such new protections, and how would you envision that process actually working? 

A.1. The general rule around information sharing among banks 

should be that data is anonymized before being shared. This is consistent with the Clearing House’s recommendations. Instances 

where an individual’s personal and/or account information can be 

shared among banks should be very clearly circumscribed. A system of redress should be established for individuals to review and 

rectify incorrect information that may be forming the basis of 

banks’ decisions to deny an individual banking services, as is the 

case with credit information. 

When the banks ask for permission to share information, they 

are asking for that permission not just among banks in the U.S., 

but globally. As such, rules circumscribing the sharing of individuals’ personal and account information and processes for redress 

should be crafted in conjunction with other major financial centers. 

FinCEN (the U.S.’s financial intelligence center) could initiate and 

lead this process through its membership in the Egmont Group, the 

umbrella organization for more than 135 financial intelligence centers around the world. 

Q.2. Bank Derisking/Remittances—Your testimony emphasized the 

importance of Know Your Customer procedures for banks. But in 

recent years many financial institutions have opted to shed accounts of customers with personal or commercial links to parts of 

the world where it can be difficult to ascertain the final recipient 

of a financial transaction—an especially important concern to Somali communities in Ohio, for example. Whether we are talking 

about family remittances, or funds transfers for humanitarian purposes, this derisking has presented hurdles to effort to get resources to some of the most at-risk populations on Earth. And customers who lose accounts or are unable to move money through the 

regulated financial system are often forced to use less transparent, 

safe and regulated channels, undermining AML/CFT goals. The Financial Action Task Force (FATF) has recently suggested making 

inappropriate derisking a priority. 

From your perspective, what steps can be taken as part of BSA 

modernization to address the derisking problem and provide relief 

to both banks and their customers? How specifically can we better 

balance KYC obligations with the need to facilitate the flow of remittances, and the legitimate work of charities and humanitarian 

organizations, abroad? 

A.2. My organization focuses on the movement of illicit money out 

of developing countries the effect of that financial flow for development, and not financial flows into developing countries, so we have 

not focused a great deal on the remittances and nonprofit issues. 

113 

Nonprofit organizations like the Charity and Security Network, 

Oxfam, and the Center for Global Development, and intergovernmental organizations such as the World Bank, the IMF, the OECD 

and others have been doing a great deal more research in this area 

and I would recommend speaking with them for more developed 

and far-reaching recommendations. 

Having said that, there are three somewhat different problems in 

the derisking area with root causes that are not all AML-related, 

and I think that is a really important point here. One is that banks 

that are no longer willing to provide banking services to money 

service businesses (MSBs) that are the primary movers of remittances. Second is banks choosing not to do business with correspondent banks in certain very high-risk countries. (The Somali 

remittance problems are a combination of both these first and second categories.) Third, is the problem of banks choosing not to provide banking services for charities/nonprofits. These are related 

issues, but not the same issues. Something to bear in mind as well 

is that the World Bank has found that the cost of transmitting remittances has actually decreased over the past several years, suggesting that some of the problems in the sector may really be location specific, such as with Somalia, as opposed to being as widespread as discussion on this topic might suggest. 

In 2012 and the following 2 years, FATF Recommendations and 

related guidance were published relating to risks posed by nonprofits and risks posed by MSBs. That guidance suggested that 

those entire sectors were particularly vulnerable to money laundering with no nuance, which resulted in banks categorizing them 

all as high risk, regardless of the nature of those businesses, the 

strength of their compliance programs, their clientele, or other risk 

assessment factors. The general refrain from banks was that it was 

too costly to do proper AML vetting on all these ‘‘high risk’’ entities. Banks also said they were pulling out of high risk areas because of an increase in fines and penalties, but very few fines/penalties have been levied related to servicing MSB or nonprofit clients, which begs the question of whether this reaction was simply 

disproportionate or driven by other motives, such as an excuse to 

get out of these relatively low-margin lines of business. 

For example, Barclays in the U.K. caused a bit of a crisis when 

it closed the accounts of the vast majority of the money service 

businesses it serviced. But it held on to MSBs with assets of $10m 

or more. However, the significant MSB money laundering case on 

record actually relates to Western Union, one of the world’s largest 

and well-capitalized MSBs. Barclays’ decision to jettison smaller 

MSB accounts was made not in relation to actual enforcement 

trends, how good their MSB clients’ compliance programs were, or 

other risks relating to the individual MSB’s business or other relevant factors, it was made on whether the bank wanted to keep 

that capitalization or not and bother to continue servicing smaller 

accounts where its margin was smaller and getting smaller because 

of compliance costs. It would be interesting to find out pre-2012 

margins on these business lines versus post-2012 margins so that 

Congress has a frame of reference for what a bank consider an unacceptable margin in these business lines. 

114 

And that raises an important point in all of this that is very 

often missed. There has been huge bank consolidation leading to 

behemoth banks that do not consider providing services to smaller 

account holders to be worth the cost. (In our experience, smaller, 

local banks rarely provide adequate international transfer services 

and did not do so prior to AML regulation.) We see that every day 

as banking fees for people who have little savings climb while those 

who have sizable accounts have no fees at all. Banks are doing everything they can to increase their profit margins with little regard 

to the effect on the average account holder. That’s today’s business 

model, and bank decisions regarding MSB and nonprofit account 

holders are driven in large part by this model. Furthermore, the 

Center for Global Development put out a report on derisking in 

2015. In that report, they noted that some banks have ‘‘derisked’’ 

and then beefed up their own money transmitter services, suggesting a possible move to undermine competition and seize the 

market themselves. 

So there are problems, some of which are not actually AML related, but the following are some measures that can be taken in the 

AML sphere to help in this area: 

• Better nuanced Recommendations and guidance from FATF 

and regulators is needed. 

• In October 2014, FATF spoke out against blanket derisking 

and said that FIs should derisk only on a case by case basis. 

FinCEN, the FDIC, and the OCC followed that up asking 

banks to come to the regulators if they felt pressure to terminate an MSB relationship. Other regulators have followed. 

• Unfortunately it seems that there is no hard data to be able 

to measure what has happened in the market since. 

• After an outcry from the global nonprofit community, FATF 

revised its guidance with respect to the problematic Recommendation 8, but I think it still needs further revision 

and U.S. Treasury could use its influence to make that happen. Please contact Kay Guinane at the Charity and Security 

Network for further information 

(kguinane@charityandsecurity.org). 

• Banks should have access to information from FinCEN about 

whether an MSB has been the subject of formal warnings/cease 

and desists which are not public information, so that they can 

better judge the strength of an MSB’s compliance program and 

its weaknesses. 

• Create a low-cost certification scheme for smaller MSBs. Such 

a scheme would create benchmarks for MSB compliance programs, similar to what has been done in the development of an 

ISO standard for anticorruption compliance. This could perhaps be subsidized by a fund the big banks pay into for the 

smaller MSBs. 

• One element of compliance cost is identifying the true owners 

and controllers of MSBs and charities, as well as the remitters 

themselves. Transparency about who owns and controls companies would be a real help with that. 

115 

• National ID schemes for individuals around the world are also 

important. India leading the way in effectively doing this in 

rural populations living in poverty—the hardest to reach and 

often recipients of remittances. While it may seem to be outside of Congress’ remit, USAID has financially supported these 

initiatives in the past and Congress could prioritize funding to 

USAID to continue and/or increase this work. 

Q.3. Scope of AML Reporting—In recent House testimony, you 

noted that AML compliance and reporting is undertaken by a wide 

range of entities and persons beyond the banking sector. You also 

made clear that there are entities and persons not currently regulated or required to have AML programs in place, that really ought 

to if the system is to be comprehensive. 

Can you give us a sense of the scope of entities and persons you 

think we ought to have in mind, beyond the banking sector, when 

contemplating an update to our current anti–money laundering 

framework and its underlying authorities? 

A.3. FATF has identified several of what it calls Designated NonFinancial Businesses and Professions, or DNFPB’s, as businesses 

and professions that are susceptible for, or can be used to play a 

part in, money laundering. The idea is that these businesses and 

professions should identify who they are doing business with, in 

some cases carry out some customer due diligence, and file suspicious activity reports if they think a transaction is suspicious. 

The U.S. already requires some DNFBPs to have those AML programs, such as casinos and dealers in precious metals and stones. 

Treasury regulations originally also included others, including travel agents, those involved in real estate closings, and car, plane, and 

boat dealers, among others, but then Treasury gave them a ‘‘temporary’’ exemption from the requirements with no sunset for that 

exemption which has now been in place for many years. Still others 

never made it on any list, and those four are lawyers, accountants, 

corporate service providers, and escrow agents. For these four, 

AML programs would really be about knowing with whom you are 

doing business and not permitting practitioners in these businesses 

and professions to be able to have plausible deniability that they 

didn’t have reason to know or suspect that they were providing 

services that might be laundering dirty money. 

While there are clearly several businesses and professions missing from U.S. regulation, I would focus on five of them: lawyers, 

those involved in real estate closings, corporate service providers, 

escrow agents, and accountants. 

Lawyers: Of course criminals need and use legal services. A 60 

Minutes piece that aired last year featured undercover footage from 

an organization called Global Witness, showing just how easy it is 

to walk into a law firm in New York and get a lawyer to easily suggest ways in which structures could be created to spend money that 

is clearly the proceeds of corruption to buy real estate, planes, etc. 

One attorney even suggested running the dirty money through the 

lawyer’s client account to clean it. It was a real eye-opener. In 

2010, the American Bar Association published what I would characterize as sound Voluntary Good Practices Guidance for Lawyers 

to Detect and Combat Money Laundering and Terrorist Financing, 

116 

but I encourage you to ask every lawyer you know if they have implemented it. It is unlikely that they have even heard of it. This 

voluntary guidance is simply not enough. 

Escrow Agents: Senate Permanent Subcommittee on Investigations’ 2010 report Keeping Foreign Corruption Out of the United 

States: Four Case Histories tells the story of how one escrow agent, 

McAfee & Taft, refused to provide escrow services to Teodorin 

Obiang, the corrupt, playboy son of the long time dictator of the impoverished Nation of Equatorial Guinea, because the anti–money 

laundering policy they had voluntarily put in place prescribed that 

they do so. Another escrow agent without an AML program happily 

took that money. 

Corporate Service Providers: The Panama Papers showed just 

how entangled corporate service providers like Mossack Fonseca 

can be in facilitating money laundering, corruption, and tax evasion. The book Global Shell Games details research by a team of 

American and Australian academics into just how easy it is to create an anonymous company to engage in terror finance or corruption in different countries around the world through corporate service providers. They found that the easiest country in which to do 

so was the United States. One email response to the researchers’ 

inquiry from a corporate service provider in Florida was, ‘‘[Y]our 

started purpose could well be a front for funding terrorism, and 

who the f—— would get involved in that? Seriously, if you wanted 

a functioning and useful Florida corporation you’d need someone 

here to put their name on it, set up bank accounts, etc. I wouldn’t 

even consider doing that for less that 5k a month, and I doubt you 

are going to find any suckers that will do it for less, if at all. If 

you are working with less than serious money, don’t waste anybody’s time here. Using a f——— google account also shows you are 

just a f——— poser and loser. If you have a serious proposal, write 

it up and we will consider it. Your previous message and this one 

are meaningless crap. Get a clue. Just how stupid do you think we 

are?’’ 

Those Involved in Real Estate: With respect to real estate, since 

July 2016, FinCEN has had geographic targeting orders in place in 

various counties in New York, Florida, Texas, and California, requiring title insurance companies to collect beneficial ownership information for those entities buying high value real estate with 

cash. They found that about 30 percent of the beneficial owners 

identified by the title companies already had SARs filed on them 

by other financial institutions. That’s nearly one third. Expose ́s like 

The New York Times’ ‘‘Towers of Secrecy’’ show just how easy it is 

for people to hide behind anonymous companies and buy real estate 

with proceeds of crime and corruption. It is central to the 2017 indictment of Paul Manafort and Richard Gates as well. 

Q.4. Cryptocurrencies—As the use of cryptocurrencies continues to 

evolve and to spread, questions have been raised about the abuse 

of such virtual currency for money laundering and other illicit purposes. 

Can you please comment on the current exploitation of virtual 

currency for illicit finance purposes, as well as the potential for 

blockchain technology to short-circuit our current AML regulatory 

117 

and enforcement frameworks? In your opinion, what tools should 

the U.S. Government be developing, now, to head off this threat? 

A.4. I am not sufficiently informed to provide a detailed response 

to this question, but recommend that you contact the following people to develop a greater understanding of the threats and opportunities posed by both cryptocurrencies (referred to as ‘‘virtual currencies’’ in international regulatory parlance) and the blockchain 

technology that underpins them, but also has much wider applications. 

Yaya Fanusie, Director of Analysis, Center on Sanctions and Illicit Finance (yaya@defenddemocracy.org); Tom Robinson, COO and 

Cofounder, Elliptic (tom@elliptic.co); Jamie Smith, Global Chief 

Communications Officer, The Bitfury Group 

(jamie.smith@bitfury.com). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM HEATHER A. LOWE 

Q.1. This hearing discussed the importance of increasing information sharing between financial institutions and with law enforcement officials. 

What—if any—are the privacy risks with facilitating the sharing 

of such information? 

What are the best ways to mitigate such privacy concerns? 

Increased information sharing between financial institutions 

could make it easier for individuals to be completely cut out of the 

United States’ financial system. How should wrongly targeted individuals be able to challenge their designation? 

What should our risk tolerance be for the fact that the U.S. financial system facilitates crimes like human trafficking? Should we 

strive to have zero incidence of money laundering in our financial 

system? 

A.1. There are three types of privacy risks that I would identify 

here—the information security risk, the risk of personal information being sold or otherwise transmitted by financial institutions 

for reasons other than communicating risk of criminal activity, and 

the ‘‘cut out’’ risk. I do not have the right expertise to effectively 

address the information security risk, and recommend that you 

speak with cybersecurity experts focusing on the financial sector 

and to FinCEN/law enforcement regarding their cybersecurity protections (and protections on the BSA database), as those will be the 

two types of entities between which this information would be 

passed and collected. 

Regarding the risk of information being sold or otherwise transmitted for purposes other than detection of criminal activity, the 

laws and regulations around what type of information can be transmitted, to whom, and how and how long it should be retained 

should be very clearly defined in legislation/regulation. 

The risk that someone could be incorrectly identified as a bad 

actor and cut out of the global financial system is certainly a risk 

here. It is a common complaint associated with being added to the 

OFAC’s Specially Designated Nationals and Blocked Persons (SDN) 

list. Another complaint about the SDN list is that sometimes people do not know why they have been placed on the SDN list and 

118 

there is no procedure for challenging the designation. In that case, 

there is one body making those designations. In a world of financial 

institution information sharing, those decisions would be just as 

opaque, could have been made by any financial institution, and 

there is even less redress because a financial institution is never 

under an obligation to open an account for someone. 

Ultimately, we are also talking about information sharing that is 

global and repercussions that are global, so I don’t think the U.S. 

will be able to create a redress system alone. I think a redress system would probably need to involve FinCEN, however, because of 

the confidential nature of the information involved. FinCEN is the 

U.S.’s Financial Intelligence Unit, or FIU. Most other countries 

with any sort of AML monitoring that might end up denying someone access also have an FIU. Those FIUs are, with some exceptions, members of a body called the Egmont group, which has rules 

and methods for information sharing among Egmont FIUs. There 

are over 135 FIU members of Egmont at present. The U.S. could 

spearhead the creation of a redress process in this area that involved the Egmont FIUs, or a review panel housed within that secretariat the was, perhaps, funded by bank contribution. 

In terms of expectations with respect to money laundering, at my 

organization, Global Financial Integrity, we always speak in terms 

of curtailing the problem. We understand that it can never be entirely prevented. However, I caution against using terms like ‘‘tolerance.’’ There is no acceptable level of known money laundering 

that should be tolerated. We need to have reasonable expectations 

with respect to how much money laundering can be detected by financial institutions that have well-crafted and executed AML compliance programs in place, and we need reasonable expectations as 

to what a well-crafted and executed AML program is. Congress is 

currently in the dark with respect to independently verifiable information about the nonpublic citations financial institutions are currently receiving for compliance program failures and whether they 

are reasonable. Congress has only the complaints of industry representatives themselves, many of whom resent AML compliance 

and reporting requirements writ large and have every incentive to 

overstate the problem. The massive fines levied on banks in recent 

years have been the result of knowing, willful, and egregious violations of laws and regulations in the AML area in order to turn a 

blind eye to money laundering their clearly knew about in order to 

increase profits. There should be zero tolerance for that. 

Q.2. I’d like to understand better how technological innovation is 

transforming the fight against money laundering and how Government policy can help or hurt these efforts. 

In the health care context, I hear about how researchers have 

used machine learning and artificial intelligence to identify diseases and predict when they will occur, using data points that humans would have never put together. How have financial institutions or law enforcement officials been able to use of similar techniques to identify money laundering and how much more progress 

can be made in this front? 

Outside of AI and machine learning, how can recent FinTech innovations such as blockchain fight money laundering? 

119 

What regulatory requirement or requirements—if any—most 

hinders the adoption of technological innovations? 

How much does bitcoin, blockchain, and other cryptocurrencies 

facilitate money laundering? How—if at all—should this impact our 

approach to combating money laundering in traditional banks? 

How can law enforcement officials best stop this newer form of 

money laundering? 

A.2. With respect to the first bulleted question, there is a very wide 

world of financial analytics in use to identify money laundering and 

expertise to create the algorithms used in these processes. I am not 

an expert in analytics, unfortunately, but there is an entire industry of people who can provide a helpful response to this question, 

although they may not be able to answer this broad of a question 

in written form. 

With respect to the remaining bullet points, the most significant 

block to adopting new technologies is, I believe, a concern that regulators will not recognize the use of a new technology as a positive 

development in examinations. I therefore support the creation of a 

technological ‘‘sandbox’’, as has been proposed by The Clearing 

House and has been implemented in the U.K. It is important to 

note that the U.K. structure appears to have some specific safeguards to protect consumers which they consider to be an integral 

part of their system. U.K. regulators presented their approach at 

a recent FATF industry consultation meeting I attended. They 

stressed the importance of ensuring that consumers were protected 

at all times as innovative approaches were being tested, and the 

U.S. should do the same. In the House of Representatives, Members are discussing legislative language that does not require any 

of the safeguards present in the U.K. system, potentially giving financial institutions an unlimited safe harbor for the use of any 

new technology with no Government oversight. This is a significant 

danger because if a financial institution spends the money to integrate new technology that, it turns out, isn’t as effective as alternative methods, they would have no incentive to change their approach. They would incur some unwelcome cost for doing so and 

they’d have the security of an unlimited safe harbor, so there would 

be no incentive to act. 

Connecting this in with blockchain technology, there is certainly 

work being done in this area. You may wish to reach out to Tom 

Robinson, COO and Cofounder, Elliptic (tom@elliptic.co). Elliptic is 

a company that finds ways to identify the ‘‘anonymous’’ digital currency traders to help with customer due diligence problems associated with digital currencies. 

Mr. Robinson recently coauthored a paper entitled ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’ 

with the Foundation for Defense of Democracy’s Yaya Fanusie, a 

long-time expert on illicit and terror finance who has been researching the linkages between terror finance and digital currency. 

I would recommend reaching out to Mr. Fanusie to further explore 

this area. Yaya Fanusie, Director of Analysis, Center on Sanctions 

and Illicit Finance (yaya@defenddemocracy.org). 

Q.3. I’d like to discuss Suspicious Activity Reports (SARs). Today, 

around 2 million SARs are filed each year. While every SAR used 

120 

to be read by law enforcement officials, that is no longer the case 

today. Financial institutions often complain that they rarely, if 

ever, receive feedback from law enforcement officials on the utility 

of any particular suspicious activity report that they file. This lack 

of feedback loops increases the burdens on financial institutions, 

who continue to file SARs that are of little utility to law enforcement officials. It also prevents financial institutions from developing better analytical tools to more precisely discern between the 

signal and the noise. 

What percentage of SARs are actually read by someone in law 

enforcement? 

A.3. I am not aware of credible estimates. This question will need 

to be answered by FinCEN. 

Q.4. How often do financial institutions receive feedback from law 

enforcement officials as to the utility of their SAR filing? 

A.4. Such feedback is rare. While law enforcement cannot and 

should not share information about an ongoing investigation, at the 

very least they could be collecting statistics about the number of 

SARs/CTRs from a given financial institution that they followed up 

on in some way. Where a SAR from a financial institution (or many 

SARs from several institutions, which is more likely) helped law 

enforcement bring a strong case, it could be worthwhile to positively identify the banks that helped the case in this way once the 

case is resolved. Positive reinforcement is important. I once highlighted a seminal case regarding tax evasion and money laundering 

at an international AML conference in Florida. A very excited compliance officer from the U.S. Virgin Islands approached me after 

presentation—she had been the person to file the SAR that resulted in the case and she had never known what had happened 

to it. She was thrilled that her actions had made a difference, and 

remembered the SAR because the activity seemed so odd to her at 

the time. I believe that we would have a much more robust AML 

defense system in the U.S. if more bankers and compliance officers 

were given such opportunities to feel like their actions really made 

a difference. Therefore, I am in favor of initiatives like FinCEN Exchange, announced in December, to enhance information sharing 

with Financial Institutions. However FinCEN needs to make this 

a meaningful program in its execution if it is to have any impact. 

Q.5. While some have proposed reducing the number of SARs and 

CRT filings because they are often superfluous and are never read, 

others argue that this poses risks, because investigating minor infractions may still lead to significant law enforcement successes. 

How should policymakers resolve this conflict? 

A.5. The driving force behind this complaint from industry is the 

amount of resources spent on drafting SARs, including preparatory 

investigation time. CTR filings are automatically generated when 

more than $10,000 is deposited, so should be discussed separately 

if there really are valid concerns there. One source of tension in 

this area appears to be that law enforcement wants SARs to include as much information as possible, in as standard a format as 

possible, and that their demands for greater detail and specificity 

have grown over time. This has obviously developed over time as 

law enforcement has identified what information is most useful to 

121 

them and the presentation that is most useful—specificity that the 

financial institutions have actually asked for over time. However, 

financial institution employees may not have the desired level of 

detail that law enforcement would like—that is simply a reality of 

money laundering cases which often involve hidden conduct and individuals. The SAR instructions properly allow filers to indicate on 

the form that the information is ‘‘unknown’’; that option should be 

honored by law enforcement rather than trying to require bank employees to become detectives uncovering illegal conduct. 

Q.6. How could regulators (1) set up better feedback loops between 

financial institutions and law enforcement officials that could help 

financial institutions better identify money laundering; and (2) empower financial institutions to act upon their improved ability to 

distinguish between useful and superfluous reports, including by 

filing fewer unnecessary SARs, without fearing regulatory consequences for doing so? 

A.6. I believe my answer is subsumed in the responses above. 

Q.7. Would a better feedback loop system exist if financial institutions employed more people with security clearances? If so, what, 

if anything, can the Federal Government do to facilitate this? 

A.7. I do not have an opinion on this question. 

Q.8. Often, financial institutions will derisk by refusing to serve 

customers that could be involved in illegal activity. As financial institutions start to share more information with each other, this 

practice could become more prominent and potential criminals 

could more frequently lose access to the United States’ financial 

system altogether. 

Are there instances in which derisking is actually unhelpful for 

law enforcement purposes, because it drives these criminals underground and makes it more difficult to track them? 

At the moment, do the regulators that evaluate and enforce financial institutions compliance with our Federal money laundering 

take this into account? 

Are there promising ways to increase cooperation between financial institutions, regulators, and law enforcement officials, so that 

financial institutions can make a more informed decision about 

when and how to derisk? 

Would financial institutions need to hire more employees with a 

top security clearance and/or a law enforcement background for 

this coordination to be effective? 

A.8. My organization focuses on the movement of illicit money out 

of developing countries the effect of that financial flow for development, and not financial flows into developing countries, so we have 

not focused a great deal on the remittances and nonprofit issues. 

Nonprofit organizations like the Charity and Security Network, 

Oxfam, and the Center for Global Development, and intergovernmental organizations such as the World Bank, the IMF, the OECD 

and others have been doing a great deal more research in this area 

and I would recommend speaking with them for more developed 

and far-reaching recommendations. 

Having said that, there are three somewhat different problems in 

the derisking area with root causes that are not all AML-related, 

122 

and I think that is a really important point here. One is that banks 

that are no longer willing to provide banking services to money 

service businesses (MSBs) that are the primary movers of remittances. Second is banks choosing not to do business with correspondent banks in certain very high-risk countries. (The Somali 

remittance problems are a combination of both these first and second categories.) Third, is the problem of banks choosing not to provide banking services for charities/nonprofits. These are related 

issues, but not the same issues. Something to bear in mind as well 

is that the World Bank has found that the cost of transmitting remittances has actually decreased over the past several years, suggesting that some of the problems in the sector may really be location specific, such as with Somalia, as opposed to being as widespread as discussion on this topic might suggest. 

In 2012 and the following 2 years, FATF Recommendations and 

related guidance were published relating to risks posed by nonprofits and risks posed by MSBs. That guidance suggested that 

those entire sectors were particularly vulnerable to money laundering with no nuance, which resulted in banks categorizing them 

all as high risk, regardless of the nature of those businesses, the 

strength of their compliance programs, their clientele, or other risk 

assessment factors. The general refrain from banks was that it was 

too costly to do proper AML vetting on all these ‘‘high risk’’ entities. Banks also said they were pulling out of high risk areas because of an increase in fines and penalties, but very few fines/penalties have been levied related to servicing MSB or nonprofit clients, which begs the question of whether this reaction was simply 

disproportionate or driven by other motives, such as an excuse to 

get out of these relatively low-margin lines of business. 

For example, Barclays in the U.K. caused a bit of a crisis when 

it closed the accounts of the vast majority of the money service 

businesses it serviced. But it held on to MSBs with assets of $10m 

or more. However, the significant MSB money laundering case on 

record actually relates to Western Union, one of the world’s largest 

and well-capitalized MSBs. Barclays’ decision to jettison smaller 

MSB accounts was made not in relation to actual enforcement 

trends, how good their MSB clients’ compliance programs were, or 

other risks relating to the individual MSB’s business or other relevant factors, it was made on whether the bank wanted to keep 

that capitalization or not and bother to continue servicing smaller 

accounts where its margin was smaller and getting smaller because 

of compliance costs. It would be interesting to find out pre-2012 

margins on these business lines versus post-2012 margins so that 

Congress has a frame of reference for what a bank consider an unacceptable margin in these business lines. 

And that raises an important point in all of this that is very 

often missed. There has been huge bank consolidation leading to 

behemoth banks that do not consider providing services to smaller 

account holders to be worth the cost. (In our experience, smaller, 

local banks rarely provide adequate international transfer services 

and did not do so prior to AML regulation.) We see that every day 

as banking fees for people who have little savings climb while those 

who have sizable accounts have no fees at all. Banks are doing everything they can to increase their profit margins with little regard 

123 

to the effect on the average account holder. That’s today’s business 

model, and bank decisions regarding MSB and nonprofit account 

holders are driven in large part by this model. Furthermore, the 

Center for Global Development put out a report on derisking in 

2015. In that report, they noted that some banks have ‘‘derisked’’ 

and then beefed up their own money transmitter services, suggesting a possible move to undermine competition and seize the 

market themselves. 

So there are problems, some of which are not actually AML related, but the following are some measures that can be taken in the 

AML sphere to help in this area: 

• Better nuanced Recommendations and guidance from FATF 

and regulators is needed. 

• In October 2014, FATF spoke out against blanket derisking 

and said that FIs should derisk only on a case by case basis. 

FinCEN, the FDIC, and the OCC followed that up asking 

banks to come to the regulators if they felt pressure to terminate an MSB relationship. Other regulators have followed. 

• Unfortunately it seems that there is no hard data to be able 

to measure what has happened in the market since. 

• After an outcry from the global nonprofit community, FATF 

revised its guidance with respect to the problematic Recommendation 8, but I think it still needs further revision 

and U.S. Treasury could use its influence to make that happen. Please contact Kay Guinane at the Charity and Security 

Network for further information 

(kguinane@charityandsecurity.org). 

• Banks should have access to information from FinCEN about 

whether an MSB has been the subject of formal warnings/cease 

and desists which are not public information, so that they can 

better judge the strength of an MSB’s compliance program and 

its weaknesses. 

• Create a low-cost certification scheme for smaller MSBs. Such 

a scheme would create benchmarks for MSB compliance programs, similar to what has been done in the development of an 

ISO standard for anticorruption compliance. This could perhaps be subsidized by a fund the big banks pay into for the 

smaller MSBs. 

• One element of compliance cost is identifying the true owners 

and controllers of MSBs and charities, as well as the remitters 

themselves. Transparency about who owns and controls companies would be a real help with that. 

• National ID schemes for individuals around the world are also 

important. India leading the way in effectively doing this in 

rural populations living in poverty—the hardest to reach and 

often recipients of remittances. While it may seem to be outside of Congress’ remit, USAID has financially supported these 

initiatives in the past and Congress could prioritize funding to 

USAID to continue and/or increase this work. 

124 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM HEATHER A. LOWE 

Q.1. How can we leverage technology to make the process simultaneously less onerous on banks while enhancing the outcomes of 

catching illegal behavior? Are there regulatory and legislative barriers to getting that down? 

Financial institutions often complain that FinCEN, law enforcement officials, and prudential regulators do not tell them whether 

their BSA filings serve a useful purpose, or how the reports they 

submit are being used—and that the filings go into a black hole. 

Can you shed some light on the filings that you make or have used 

and what could be done to improve this process? 

A.1. While law enforcement cannot and should not share information about an ongoing investigation, at the very least they could be 

collecting statistics about the number of SARs/CTRs from a given 

financial institution that they followed up on in some way. Where 

a SAR from a financial institution (or many SARs from several institutions, which is more likely) helped law enforcement bring a 

strong case, it could be worthwhile to positively identify the banks 

that helped the case in this way once the case is resolved. Positive 

reinforcement is important. I once highlighted a seminal case regarding tax evasion and money laundering at an international 

AML conference in Florida. A very excited compliance officer from 

the U.S. Virgin Islands approached me after presentation—she had 

been the person to file the SAR that resulted in the case and she 

had never known what had happened to it. She was thrilled that 

her actions had made a difference, and remembered the SAR because the activity seemed so odd to her at the time. I believe that 

we would have a much more robust AML defense system in the 

U.S. if more bankers and compliance officers were given such opportunities to feel like their actions really made a difference. 

Therefore, I am in favor of initiatives like FinCEN Exchange, announced in December, to enhance information sharing with Financial Institutions. However FinCEN needs to make this a meaningful program in its execution if it is to have any impact. 

Q.2. Another compliance challenge often cited by banks is that they 

feel pressured by bank examiners and law enforcement authorities 

to exit certain business lines or cease offering certain services to 

customers viewed as presenting particular money-laundering 

vulnerabilities, i.e., severing corresponding banking relationships 

with foreign institutions in certain geographic areas, and also ending money services businesses (MSBs, i.e., check cashing, money 

transmitters, currency exchange outlets, etc.) 

As banks reevaluate their business relationships with MSBs in 

light of what they may view as a hostile regulatory landscape, 

what can we do to change this type of behavior/is this a prevalent 

problem in the industry? 

A.2. My organization focuses on the movement of illicit money out 

of developing countries the effect of that financial flow for development, and not financial flows into developing countries, so we have 

not focused a great deal on the remittances and nonprofit issues. 

Nonprofit organizations like the Charity and Security Network, 

Oxfam, and the Center for Global Development, and intergovernVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00128 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
125 

mental organizations such as the World Bank, the IMF, the OECD 

and others have been doing a great deal more research in this area 

and I would recommend speaking with them for more developed 

and far-reaching recommendations. 

Having said that, there are three somewhat different problems in 

the derisking area with root causes that are not all AML-related, 

and I think that is a really important point here. One is that banks 

that are no longer willing to provide banking services to money 

service businesses (MSBs) that are the primary movers of remittances. Second is banks choosing not to do business with correspondent banks in certain very high-risk countries. (The Somali 

remittance problems are a combination of both these first and second categories.) Third, is the problem of banks choosing not to provide banking services for charities/nonprofits. These are related 

issues, but not the same issues. Something to bear in mind as well 

is that the World Bank has found that the cost of transmitting remittances has actually decreased over the past several years, suggesting that some of the problems in the sector may really be location specific, such as with Somalia, as opposed to being as widespread as discussion on this topic might suggest. 

In 2012 and the following 2 years, FATF Recommendations and 

related guidance were published relating to risks posed by nonprofits and risks posed by MSBs. That guidance suggested that 

those entire sectors were particularly vulnerable to money laundering with no nuance, which resulted in banks categorizing them 

all as high risk, regardless of the nature of those businesses, the 

strength of their compliance programs, their clientele, or other risk 

assessment factors. The general refrain from banks was that it was 

too costly to do proper AML vetting on all these ‘‘high risk’’ entities. Banks also said they were pulling out of high risk areas because of an increase in fines and penalties, but very few fines/penalties have been levied related to servicing MSB or nonprofit clients, which begs the question of whether this reaction was simply 

disproportionate or driven by other motives, such as an excuse to 

get out of these relatively low-margin lines of business. 

For example, Barclays in the U.K. caused a bit of a crisis when 

it closed the accounts of the vast majority of the money service 

businesses it serviced. But it held on to MSBs with assets of $10m 

or more. However, the significant MSB money laundering case on 

record actually relates to Western Union, one of the world’s largest 

and well-capitalized MSBs. Barclays’ decision to jettison smaller 

MSB accounts was made not in relation to actual enforcement 

trends, how good their MSB clients’ compliance programs were, or 

other risks relating to the individual MSB’s business or other relevant factors, it was made on whether the bank wanted to keep 

that capitalization or not and bother to continue servicing smaller 

accounts where its margin was smaller and getting smaller because 

of compliance costs. It would be interesting to find out pre-2012 

margins on these business lines versus post-2012 margins so that 

Congress has a frame of reference for what a bank consider an unacceptable margin in these business lines. 

And that raises an important point in all of this that is very 

often missed. There has been huge bank consolidation leading to 

behemoth banks that do not consider providing services to smaller 

126 

account holders to be worth the cost. (In our experience, smaller, 

local banks rarely provide adequate international transfer services 

and did not do so prior to AML regulation.) We see that every day 

as banking fees for people who have little savings climb while those 

who have sizable accounts have no fees at all. Banks are doing everything they can to increase their profit margins with little regard 

to the effect on the average account holder. That’s today’s business 

model, and bank decisions regarding MSB and nonprofit account 

holders are driven in large part by this model. Furthermore, the 

Center for Global Development put out a report on derisking in 

2015. In that report, they noted that some banks have ‘‘derisked’’ 

and then beefed up their own money transmitter services, suggesting a possible move to undermine competition and seize the 

market themselves. 

So there are problems, some of which are not actually AML related, but the following are some measures that can be taken in the 

AML sphere to help in this area: 

• Better nuanced Recommendations and guidance from FATF 

and regulators is needed. 

• In October 2014, FATF spoke out against blanket derisking 

and said that FIs should derisk only on a case by case basis. 

FinCEN, the FDIC, and the OCC followed that up asking 

banks to come to the regulators if they felt pressure to terminate an MSB relationship. Other regulators have followed. 

• Unfortunately it seems that there is no hard data to be able 

to measure what has happened in the market since. 

• After an outcry from the global nonprofit community, FATF 

revised its guidance with respect to the problematic Recommendation 8, but I think it still needs further revision 

and U.S. Treasury could use its influence to make that happen. Please contact Kay Guinane at the Charity and Security 

Network for further information 

(kguinane@charityandsecurity.org). 

• Banks should have access to information from FinCEN about 

whether an MSB has been the subject of formal warnings/cease 

and desists which are not public information, so that they can 

better judge the strength of an MSB’s compliance program and 

its weaknesses. 

• Create a low-cost certification scheme for smaller MSBs. Such 

a scheme would create benchmarks for MSB compliance programs, similar to what has been done in the development of an 

ISO standard for anticorruption compliance. This could perhaps be subsidized by a fund the big banks pay into for the 

smaller MSBs. 

• One element of compliance cost is identifying the true owners 

and controllers of MSBs and charities, as well as the remitters 

themselves. Transparency about who owns and controls companies would be a real help with that. 

• National ID schemes for individuals around the world are also 

important. India leading the way in effectively doing this in 

rural populations living in poverty—the hardest to reach and 

often recipients of remittances. While it may seem to be outVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
127 

side of Congress’ remit, USAID has financially supported these 

initiatives in the past and Congress could prioritize funding to 

USAID to continue and/or increase this work. 

Q.3. It is my understanding that there are times when law enforcement and the bank regulators work at cross purposes. That is, law 

enforcement might want a bank to continue banking an individual 

or company that they are following and building a case against but 

the bank regulators, whose incentives are to not be embarrassed by 

their regulated entities, force the banks to ‘‘derisk’’ or close those 

accounts. Is that actually the case? 

A.3. There is no reputational risk associated with continuing to 

bank a customer when instructed to do so by law enforcement. A 

bank will not be sanctioned by examiners for doing so. The information will not be made public. This seems a spurious complaint 

if it is being made by industry. 

Q.4. In terms of AML, we know that the success of AML is centric 

around whether or not the predicate crime of money laundering 

has been reduced, but we only really know how pervasive money 

laundering is on a reactive basis, i.e., when someone/some entity is 

caught. 

To that end, do you believe the advent/popularity of 

cryptocurrencies could affect the capture of money laundering/could 

it affect AML? Do enforcement authorities have the technological 

capabilities to work with private industry to capture mal-actors? 

A.4. NOTE: Your introduction suggests some confusion with respect to money laundering (i.e., reference to ‘‘whether or not the 

predicate crime of money laundering has been reduced’’). It is critical to understand that money laundering is a crime in and of itself 

and is not a predicate offense. The crime is thought by many to be 

the crime of laundering/disguising/accepting the funds of some underlying crime that generated money, otherwise known as a predicate offense or, in U.S. statutory terms, a specified unlawful activity (SUA). That is correct, but it is not complete. A person can be 

convicted of money laundering if they believed they were accepting/ 

disguising the proceeds of an SUA and took steps to do so. That 

means that even if nobody has been convicted of the underlying 

crime that is the SUA, a person can be convicted of laundering the 

related funds. However, in almost every ‘‘money laundering’’ case 

you have heard of, the banks were not charged with actual criminal 

money laundering. They were charged with violations of provisions 

of the Bank Secrecy Act requiring financial institutions to have in 

place measures to detect when someone is trying to use the institution to launder money and preventative measures that detect if 

anyone inside the institution is allowing money to be laundered by 

the institution. 

The advent and popularity of digital currencies are an emerging 

threat in the money laundering field because much of our AML 

policies depend on a financial institution carrying out ‘‘due diligence’’ and ‘‘know your customer’’ checks. That is why accounts 

opened by companies with hidden beneficial ownership are such a 

problem. One of the biggest challenges with digital currencies is 

also the fact that the transactions are essentially conducted anonymously. For more information, I recommend that you contact Tom 

128 

Robinson, COO and Cofounder, Elliptic (tom@elliptic.co). Elliptic is 

a company that finds ways to identify the ‘‘anonymous’’ digital currency traders to help with customer due diligence problems associated with digital currencies. 

Mr. Robinson recently coauthored a paper entitled ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’ 

with the Foundation for Defense of Democracy’s Yaya Fanusie, a 

long-time expert on illicit and terror finance who has been researching the linkages between terror finance and digital currency. 

I would recommend reaching out to Mr. Fanusie to further explore 

this area. Yaya Fanusie, Director of Analysis, Center on Sanctions 

and Illicit Finance (yaya@defenddemocracy.org). 

Q.5. In your opinion, do you think that the overall AML regime has 

been effective? Additionally, what do you see as the best way to ensure future effectiveness? 

Is it to have Treasury be the lead to: 

1. Define with other stakeholders specific and clear national priorities of the regime; and 

2. Determine, working with other stakeholders, clear and measurable objectives of the regime in light of those priorities. Should 

Treasury or someone else have to report those measurements 

against the objectives back to Congress? 

A.5. My organization has estimated that just 11 types of 

transnational crime generate a total proceeds of between $1.6 and 

$2.2 trillion annually. There are many, many more types of crime 

that generate proceeds in this world. Most of that money must be 

laundered in some way. As noted above, there is very little prosecution for large-scale criminal money laundering, even when it seems 

from charging documents that criminal money laundering (which 

includes an intent standard) was taking place. In addition, individuals are not being prosecuted and jailed for their actions in the 

cases that we see, which would be a significant deterrent to money 

laundering. That may be changing, however, as I note in a recent 

piece that I wrote about the Rabobank case. So I would say that 

we are not prosecuting criminal money laundering and that is a 

problem. 

What you are asking, however, is really whether the regulatory 

regime that is in place to detect money laundering and prevent 

banks from engaging in it has been effective. There is no way to 

determine this through data because hard data (not extrapolated 

estimates) of the amount of money laundered in the world do not 

and cannot exist by their very nature. What I can say is that the 

AML compliance violation cases that we have seen over the past 

few years (HSBC, Wachovia, Citigroup, BNP Paribas, Rabobank, 

etc.) tell us that many large international bank were either paying 

lip service to complying with the legal requirements or were actively subverting the measures up until about 2010. I have no reason to believe that these cases are not indicative of an industrywide approach because banks had absolutely no incentive to comply 

with laws which would ultimately require them to turn away clients and money that they had previously banked very willingly. 

The question at this point is whether, now that there has been 

some significant enforcement of AML compliance laws, banks are 

129 

actually complying with those laws and regulations and if they are 

turning away business/closing accounts where there is significant 

indication of money laundering. 

The crescendo of complaints by the industry about the ‘‘rising 

cost’’ of compliance indicates that this is the case. I have ‘‘rising 

cost’’ in quotations because we are talking about the cost of complying with laws that have been in place for many, many years 

now, so this is neither a new cost nor one that could not have been 

anticipated, and should be estimated in terms of costs that should 

have been incurred and spread over that lengthy time period. The 

other indication that the regime is now having an effect is the industry’s disproportionate measures in what has come to be called 

‘‘derisking’’ entire client categories and/or business with certain 

countries. Some of that activity may be due to a serious concern by 

the bank about managing the risks associated with a certain business, but research has indicated that some banks may be jettisoning some types of business in order to freeze out competition for 

those services and then offering those services themselves (such as 

in the money transmission area). 

In some cases, I think certain actions are being taken in order 

to try to force deregulation, such as when Bank of America, a 

major provider of banking services to foreign embassies in the U.S., 

sent a letter to its embassy clients that it was going close their accounts and cease to provide banking services to them only one 

week before closing their accounts. The action seemed clearly designed to create a diplomatic crisis for the U.S. Government, to be 

blamed on U.S. AML regulation. If Bank of America’s concern was 

really AML related, they should have worked with FinCEN and 

law enforcement to identify accounts, individuals and activities of 

concern and, after doing so, closed the accounts in accordance with 

a process that was agreed with the Government. If the decision 

was that they simply did not want to service what they perceived 

as a high-risk client but they hadn’t actually observed money laundering red flags associated with the accounts, they should have 

provided the embassies with adequate notice, giving them time to 

find an alternative service provider and to migrate their accounts. 

Instead, they chose to create an unnecessary and unwarranted diplomatic crisis which should have had the effect of undermining 

their credibility in speaking out with AML regulatory concerns. It 

certainly undermined their credibility with me. 

Giving FinCEN total responsibility for establishing annual AML 

priorities for banks and monitoring every bank’s progress every 3 

months, as was recommended by the Clearing House, is extremely 

ill-advised. A financial institution understands its own business 

and products better than anyone else. It is therefore best-placed to 

determine what its AML risks are and how best to address those 

risks within the systems that it has created. We support the idea 

of a financial institution working with FinCEN/Treasury to discuss 

those risks in the context of national and global trends observed by 

FinCEN, and whether adjustments might be made as a result, 

however. In addition, reviewing each financial institution’s progress 

in AML every 3 months seems like far too short a time frame to 

observe how an FI is progressing in this respect, however, and enVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00133 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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tirely impractical from a Government resource allocation perspective. 

On a related note the suggestion that FinCEN be given access 

to bulk data transfers from financial institutions to enable it to 

analyze AML trends and patterns across institutions is another potentially useful idea. But questions about the effectiveness and cost 

of this proposal include whether FinCEN currently has the technological capability and personnel needed to perform that type of data 

analysis or whether it would need to be built, which could be a significant expense. In addition, charging FinCEN with industrywide 

data collection and analysis should not be seen as a way for banks 

to absolve themselves of their AML obligations. The banks would 

retain their position as the primary gateway into the U.S. financial 

system, so the first level of responsibility to safeguard the system 

against money-laundering abuses must remain with the individual 

banks who open their accounts to individuals and entities around 

the world. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM HEATHER A. LOWE 

Q.1. What are the costs and benefits of having bank examiners assess bank compliance with the Bank Secrecy Act’s (BSA) requirements instead of having anti–money laundering (AML) and combating the financing of terrorism (CFT) experts at the Financial 

Crimes Enforcement Network (FinCEN) examine bank compliance 

programs? 

A.1. I am not sure it will make much of a difference. Currently, you 

have examiners sitting at the Securities and Exchange Commission, the Commodities Futures Trading Commission and other specialized agencies who have specific AML/CFT training. When they 

have AML/CFT enforcement questions, they liaise with FinCEN as 

needed. If you had those people instead within FinCEN, they have 

easy access to FinCEN personnel but would have to reach out to 

the other agencies for sector-specific guidance. Would bringing all 

of the examiners into FinCEN result in a more coherent approach 

to examination? Unlikely, unless specific changes were made to the 

examination procedures and incentives for examiners. However, I 

can also imagine that should there be more coherence in examination procedure across industries, it would give rise to the problem 

that examinations are not nuanced enough and therefore not even 

addressing issues specific to a given industry where AML/CFT 

risks may be significant. I can imagine that industry complaints 

about that would surge. No company will ever be happy with the 

way they are examined, so it is most important to work with industry to identify real problems which result in ineffective or inadequate AML oversight and with law enforcement to identify areas 

where the resources being expended by industry seem disproportionate to the value of information gleaned from their efforts, and 

not just industry complaints. 

Q.2. Is there a way to maintain a top-shelf effective AML/CFT policy while maintaining a commitment to increase access to financial 

products for the underbanked and immigrants who rely on remittance services? 

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I’m interested in the ways in which technology can aid AML compliance efforts. What are some of the innovative technologies that 

you’ve seen that hold some promise for either the Government or 

the private sector? 

What are the barriers to either the Government or the private 

sector adopting these technologies? 

What can we be doing as legislators to ensure that we promote 

technological innovation in this sector? 

A.2. The most significant block to adopting new technologies is, I 

believe, a concern that regulators will not recognize the use of a 

new technology as a positive development in examinations. I therefore support the creation of a technological ‘‘sandbox’’, as has been 

proposed by The Clearing House and has been implemented in the 

U.K. It is important to note that the U.K. structure appears to 

have some specific safeguards to protect consumers which they consider to be an integral part of their system. U.K. regulators presented their approach at a recent FATF industry consultation 

meeting I attended. They stressed the importance of ensuring that 

consumers were protected at all times as innovative approaches 

were being tested, and the U.S. should do the same. In the House 

of Representatives, members are discussing legislative language 

that does not require any of the safeguards present in the U.K. system, potentially giving financial institutions an unlimited safe harbor for the use of any new technology with no Government oversight. This is a significant danger because if a financial institution 

spends the money to integrate new technology that, it turns out, 

isn’t as effective as alternative methods, they would have no incentive to change their approach. They would incur some unwelcome 

cost for doing so and they’d have the security of an unlimited safe 

harbor, so there would be no incentive to act. 

Q.3. The regulatory definition of ‘‘financial institution’’ has been expanded several times over the years, both by FinCEN rulemaking 

and by legislation by Congress. 

Should the definition of financial institutions be expanded to include other sectors? If so, which sectors? 

Could these changes be made via FinCEN rulemaking or should 

legislation be passed? 

A.3. FATF has identified several of what it calls Designated NonFinancial Businesses and Professions, or DNFPB’s, as businesses 

and professions that are susceptible for, or can be used to play a 

part in, money laundering. The idea is that these businesses and 

professions should identify who they are doing business with, in 

some cases carry out some customer due diligence, and file suspicious activity reports if they think a transaction is suspicious. 

The U.S. already requires some DNFBPs to have those AML programs, such as casinos and dealers in precious metals and stones. 

Treasury regulations originally also included others, including travel agents, those involved in real estate closings, and car, plane, and 

boat dealers, among others, but then Treasury gave them a ‘‘temporary’’ exemption from the requirements with no sunset for that 

exemption which has now been in place for many years. Still others 

never made it on any list, and those four are lawyers, accountants, 

corporate service providers, and escrow agents. For these four, 

132 

AML programs would really be about knowing with whom you are 

doing business and not permitting practitioners in these businesses 

and professions to be able to have plausible deniability that they 

didn’t have reason to know or suspect that they were providing 

services that might be laundering dirty money. 

While there are clearly several businesses and professions missing from U.S. regulation, I would focus on five of them: lawyers, 

those involved in real estate closings, corporate service providers, 

escrow agents, and accountants. 

Lawyers: Of course criminals need and use legal services. A 60 

Minutes piece that aired last year featured undercover footage from 

an organization called Global Witness, showing just how easy it is 

to walk into a law firm in New York and get a lawyer to easily suggest ways in which structures could be created to spend money that 

is clearly the proceeds of corruption to buy real estate, planes, etc. 

One attorney even suggested running the dirty money through the 

lawyer’s client account to clean it. It was a real eye-opener. In 

2010, the American Bar Association published what I would characterize as sound Voluntary Good Practices Guidance for Lawyers 

to Detect and Combat Money Laundering and Terrorist Financing, but I encourage you to ask every lawyer you know if they have implemented it. It is unlikely that they have even heard of it. This 

voluntary guidance is simply not enough. 

Escrow Agents: Senate Permanent Subcommittee on Investigations’ 2010 report Keeping Foreign Corruption Out of the United 

States: Four Case Histories tells the story of how one escrow agent, 

McAfee & Taft, refused to provide escrow services to Teodorin 

Obiang, the corrupt, playboy son of the long time dictator of the impoverished Nation of Equatorial Guinea, because the anti–money 

laundering policy they had voluntarily put in place prescribed that 

they do so. Another escrow agent without an AML program happily 

took that money. 

Corporate Service Providers: The Panama Papers showed just 

how entangled corporate service providers like Mossack Fonseca 

can be in facilitating money laundering, corruption, and tax evasion. The book Global Shell Games details research by a team of 

American and Australian academics into just how easy it is to create an anonymous company to engage in terror finance or corruption in different countries around the world through corporate service providers. They found that the easiest country in which to do 

so was the United States. One email response to the researchers’ 

inquiry from a corporate service provider in Florida was, ‘‘[Y]our 

started purpose could well be a front for funding terrorism, and 

who the f—— would get involved in that? Seriously, if you wanted 

a functioning and useful Florida corporation you’d need someone 

here to put their name on it, set up bank accounts, etc. I wouldn’t 

even consider doing that for less that 5k a month, and I doubt you 

are going to find any suckers that will do it for less, if at all. If 

you are working with less than serious money, don’t waste anybody’s time here. Using a f——— google account also shows you are 

just a f——— poser and loser. If you have a serious proposal, write 

it up and we will consider it. Your previous message and this one 

are meaningless crap. Get a clue. Just how stupid do you think we 

are?’’ 

133 

Those Involved in Real Estate: With respect to real estate, since 

July 2016, FinCEN has had geographic targeting orders in place in 

various counties in New York, Florida, Texas, and California, requiring title insurance companies to collect beneficial ownership information for those entities buying high value real estate with 

cash. They found that about 30 percent of the beneficial owners 

identified by the title companies already had SARs filed on them 

by other financial institutions. That’s nearly one third. Expose ́s like 

The New York Times’ ‘‘Towers of Secrecy’’ show just how easy it is 

for people to hide behind anonymous companies and buy real estate 

with proceeds of crime and corruption. It is central to the 2017 indictment of Paul Manafort and Richard Gates as well. 

Q.4. In August 2017, FinCEN issued an advisory encouraging real 

estate brokers to share information with them that could be helpful 

in AML efforts, while noting they are not required to do so under 

current law. 

How do we increase information sharing between real estate brokers and FinCEN? 

A.4. Voluntary measures will not yield the necessary results because it is rare for a business to voluntarily want to lose out on 

a sale or for it to be discovered that if you work with a particular 

agent they may provide information to law enforcement about your 

transcation. Any measure must be industrywide and required to 

maintain a level playing field. It is necessary to bring them into 

the definition of Financial Institution. Please see response to previous question. 

Q.5. Geographic Targeting Orders (GTOs), which impose additional 

record keeping and reporting requirements on domestic financial 

institutions or nonfinancial trades or businesses in a specific geographic area for transactions involving certain amounts of United 

States currency or monetary instruments, have been deployed since 

2016 to target high-end real estate sectors in major metropolitan 

areas by requiring U.S. title insurance companies to identify the 

natural persons behind shell companies used to pay ‘‘all cash’’ for 

high-end residential real estate. 

Are GTOs an effective tool or would regulation be a preferable 

way to cover the real estate sector? 

A.5. GTOs are an effective tool for the purposes they were created—to gather intelligence for specific cases or, as in this case, to 

gather intelligence about the extent of a problem to inform decisions about how to move forward. They should not be used as a 

long-term measure. With respect to the Title Insurer GTOs, 

FinCEN now has the information it needs to move forward with a 

rulemaking—there is clearly a problem in the real estate industry. 

However, I would note that I would not focus regulation in the 

real estate sector on title insurers, but rather on real estate agents, 

who have the longest and most personal relationship with the 

buyer and are in a much better position to identify red flags. Furthermore, it is very easy for a cash buyer of real estate to avoid 

title insurers entirely (which launderers have apparently not realized yet). If I’m trying to launder money through real estate and 

I’m making an all-cash purchase, I don’t need a mortgage and so 

title insurance isn’t actually required. If I’m going to flip the propVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00137 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
134 

erty to launder the funds, then I’m not too worried about a challenge to title down the line (my buyer will get their own title insurance and my lack of it doesn’t affect that). If I am concerned that 

the title is not clean and it will therefore be difficult to sell the 

property, I can have an attorney carry out a title search or I can 

even do it myself—the search itself is not difficult (I would probably need legal assistance to fix any problems I found however, if 

I didn’t simply abandon that particular purchase). So if I were a 

money launderer I would simply avoid the title insurers and avoid 

the disclosures entirely. 

Q.6. Cryptocurrency exchanges are money services businesses supervised by State regulators and subject to Federal AML and CFT 

laws. 

Should FinCEN play an enhanced role in assessing the compliance of cryptocurrency exchanges, or are State regulators sufficiently equipped to handle compliance monitoring? 

What additional tools could we give regulators and law enforcement? 

How prevalent is money laundering in cryptocurrency markets? 

A.6. There is certainly work do be done in the area of digital currency/blockchain technology. I am far from an expert in this area, 

so I will make some recommendations for people to contact. Before 

I do, however, I would note that I was concerned by the Treasury 

representative’s statement that they felt they had adequately regulated in the digital currency space by regulating the exchangers. 

Technology has moved on, and the advent of ‘‘mixers’’, which are 

now used to make it incredibly difficult for the exchangers to identify where the currency they are exchanging is coming from, makes 

that regulation now insufficient. 

You may wish to reach out to Tom Robinson, COO and Cofounder, Elliptic (tom@elliptic.co). Elliptic is a company that finds 

ways to identify the ‘‘anonymous’’ digital currency traders to help 

with customer due diligence problems associated with digital currencies. 

Mr. Robinson recently coauthored a paper entitled ‘‘Bitcoin Laundering: An Analysis of Illicit Flows Into Digital Currency Services’’ 

with the Foundation for Defense of Democracy’s Yaya Fanusie, a 

long-time expert on illicit and terror finance who has been researching the linkages between terror finance and digital currency. 

I would recommend reaching out to Mr. Fanusie to further explore 

this area. Yaya Fanusie, Director of Analysis, Center on Sanctions 

and Illicit Finance (yaya@defenddemocracy.org). 

Finally, Ms. Jamie Smith, Global Chief Communications Officer, 

The Bitfury Group (jamie.smith@bitfury.com), is an excellent resource as well. 

Both Ms. Smith and Mr. Fanusie have extensive prior experience 

working within U.S. Government agencies and understand political 

context well. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM HEATHER A. LOWE 

Q.1. What is the most effective action a consumer can take to protect against identity theft if the consumer’s information has been 

135 

compromised? Please include a detailed description of the differences between credit freezes, credit locks, and fraud alerts, including how long each takes to activate and deactivate and the relative benefits and drawbacks of each. 

A.1. Unfortunately, I am not an expert on U.S. consumer banking 

laws and cannot provide an informed response to your question. 

Q.2. Many States have laws requiring credit bureaus to provide 

credit freezes. Can you describe what these laws generally require 

and discuss whether it is appropriate for Congress to create a Federal standard? 

A.2. Unfortunately, I am not an expert on U.S. consumer banking 

laws and cannot provide an informed response to your question. 

Q.3. Gaming and tourism are some of Nevada’s top industries. In 

the State of Nevada, our gaming operators employ thousands of 

hard working Nevadans, and the industry as a whole domestically 

supports 1.7 million jobs across 40 States. Qualified casinos, like financial institutions, are also subject to Banking Secrecy Act requirements. Organizations within Nevada have suggested that 

gaming operators would welcome a review of BSA requirements, 

which they find to be burdensome. They look forward to this Committee’s thoughtful, bipartisan, review of BSA requirements that 

takes into account the security imperative for robust anti–money 

laundering efforts, as well as the impact those requirements have 

on all industries. For example, the Suspicious Activity Report 

(SAR) ($5,000) and the Currency Transaction Report (CTR) 

($10,000) levels were set years ago. Some have recommended increasing these to correspond with inflation. Others believe that 

would be too high but do support a higher amount than currently. 

One of the top priorities of the gaming industry is to remove the 

requirement for a detailed factual narrative for structuring in the 

suspicious activity forms. What do you think of this recommendation? 

Do you have specific recommendations regarding how the gaming 

industry can benefit from greater communication with Government 

agencies and law enforcement? Is there something the Federal Government can do to share information with casinos and others filing 

SARs about broad benefits that may occur because of some of the 

58,000 SAR forms filed by gaming firms. 

Would the creation of a Qualitative Feedback Mechanism help 

reduce money laundering and terrorist financing? Should the Secretary of the Treasury establish a mechanism to communicate 

anti–money laundering (AML) and countering terrorism financing 

(CTF) priorities to financial institutions, gaming establishments, 

and Federal financial regulators? Could such a mechanism provide 

qualitative feedback on information shared by financial institutions 

with the Department of Treasury, including CTRs and SARs? 

Please describe the pros and cons of such a system. 

A.3. Financial Institutions file SARs because they believe that activity is suspicious, and descriptions of what they saw that seemed 

suspicious is important information for law enforcement. SARs are 

subject to automated data analysis and human review, and the 

narratives provide information that may seem unimportant alone, 

but takes on greater significance when reviewed in light of other 

136 

SARs. I would not remove the narrative requirement unless law 

enforcement takes the position that it is of limited value. 

Lack of feedback from the Government on what happens to SARs 

and CTRs has long been a complaint of Financial Institutions. I 

once highlighted a seminal case regarding tax evasion and money 

laundering at an international AML seminar in Florida. A very excited compliance officer from the U.S. Virgin Islands approached 

me after presentation—she had been the person to file the SAR 

that resulted in the case and she had never known what had happened to it. She was thrilled that her actions had made a difference. I believe that we would have a much more robust AML defense system in the U.S. if more bankers and compliance officers 

were given such opportunities to feel like their actions really made 

a difference. Therefore, I am in favor of initiatives like FinCEN Exchange, announced in December, to enhance information sharing 

with Financial Institutions. I would strongly recommend that the 

gaming industry engage with FinCEN quickly to ensure that this 

initiative is set up for the gaming industry in a way that results 

in practical and meaningful exchange of information with the Government as opposed to something less useful. 

I am wary when it comes to the Government setting AML priorities for the industry. It already happens to some extent, but I 

would strongly caution against actually transferring responsibility 

for setting AML priorities for individual Financial Institutions from 

those institutions to FinCEN. Financial Institutions are best placed 

to understand their business and their systems and the money 

laundering risks inherent therein, and create the systems that 

work best in their business models to combat money laundering. 

FinCEN and/or other regulators should review those assessments 

but cannot be responsible for carrying them out. 

Q.4. The Office of the Comptroller of the Currency mentioned in its 

2018 Banking Operating Plan that financial institutions should not 

inadvertently impair financial inclusion. But, as of September 

2017, the OCC has not identified any specific issues they plan to 

address. We know that derisking has become an epidemic across 

many communities and industries, such as communities along the 

Southwest border, humanitarian organizations aiding Nations 

wracked with violence, and remittances providers that serve fragile 

Nations like Somalia. 

What type of guidance could the OCC, FinCEN, FDIC, and the 

Federal Reserve provide to help banks meet the banking needs of 

legitimate consumers and businesses that are at risk of losing access—or have already lost access? 

A.4. My organization focuses on the movement of illicit money out 

of developing countries the effect of that financial flow for development, and not financial flows into developing countries, so we have 

not focused a great deal on the remittances and nonprofit issues. 

Nonprofit organizations like the Charity and Security Network, 

Oxfam, and the Center for Global Development, and intergovernmental organizations such as the World Bank, the IMF, the OECD 

and others have been doing a great deal more research in this area 

and I would recommend speaking with them for more developed 

and far-reaching recommendations. 

137 

Having said that, there are three somewhat different problems in 

the derisking area with root causes that are not all AML-related, 

and I think that is a really important point here. One is that banks 

that are no longer willing to provide banking services to money 

service businesses (MSBs) that are the primary movers of remittances. Second is banks choosing not to do business with correspondent banks in certain very high-risk countries. (The Somali 

remittance problems are a combination of both these first and second categories.) Third, is the problem of banks choosing not to provide banking services for charities/nonprofits. These are related 

issues, but not the same issues. Something to bear in mind as well 

is that the World Bank has found that the cost of transmitting remittances has actually decreased over the past several years, suggesting that some of the problems in the sector may really be location specific, such as with Somalia, as opposed to being as widespread as discussion on this topic might suggest. 

In 2012 and the following 2 years, FATF Recommendations and 

related guidance were published relating to risks posed by nonprofits and risks posed by MSBs. That guidance suggested that 

those entire sectors were particularly vulnerable to money laundering with no nuance, which resulted in banks categorizing them 

all as high risk, regardless of the nature of those businesses, the 

strength of their compliance programs, their clientele, or other risk 

assessment factors. The general refrain from banks was that it was 

too costly to do proper AML vetting on all these ‘‘high risk’’ entities. Banks also said they were pulling out of high risk areas because of an increase in fines and penalties, but very few fines/penalties have been levied related to servicing MSB or nonprofit clients, which begs the question of whether this reaction was simply 

disproportionate or driven by other motives, such as an excuse to 

get out of these relatively low-margin lines of business. 

For example, Barclays in the U.K. caused a bit of a crisis when 

it closed the accounts of the vast majority of the money service 

businesses it serviced. But it held on to MSBs with assets of $10m 

or more. However, the significant MSB money laundering case on 

record actually relates to Western Union, one of the world’s largest 

and well-capitalized MSBs. Barclays’ decision to jettison smaller 

MSB accounts was made not in relation to actual enforcement 

trends, how good their MSB clients’ compliance programs were, or 

other risks relating to the individual MSB’s business or other relevant factors, it was made on whether the bank wanted to keep 

that capitalization or not and bother to continue servicing smaller 

accounts where its margin was smaller and getting smaller because 

of compliance costs. It would be interesting to find out pre-2012 

margins on these business lines versus post-2012 margins so that 

Congress has a frame of reference for what a bank consider an unacceptable margin in these business lines. 

And that raises an important point in all of this that is very 

often missed. There has been huge bank consolidation leading to 

behemoth banks that do not consider providing services to smaller 

account holders to be worth the cost. (In our experience, smaller, 

local banks rarely provide adequate international transfer services 

and did not do so prior to AML regulation.) We see that every day 

as banking fees for people who have little savings climb while those 

138 

who have sizable accounts have no fees at all. Banks are doing everything they can to increase their profit margins with little regard 

to the effect on the average account holder. That’s today’s business 

model, and bank decisions regarding MSB and nonprofit account 

holders are driven in large part by this model. Furthermore, the 

Center for Global Development put out a report on derisking in 

2015. In that report, they noted that some banks have ‘‘derisked’’ 

and then beefed up their own money transmitter services, suggesting a possible move to undermine competition and seize the 

market themselves. 

So there are problems, some of which are not actually AML related, but the following are some measures that can be taken in the 

AML sphere to help in this area: 

• Better nuanced Recommendations and guidance from FATF 

and regulators is needed. 

• In October 2014, FATF spoke out against blanket derisking 

and said that FIs should derisk only on a case by case basis. 

FinCEN, the FDIC, and the OCC followed that up asking 

banks to come to the regulators if they felt pressure to terminate an MSB relationship. Other regulators have followed. 

• Unfortunately it seems that there is no hard data to be able 

to measure what has happened in the market since. 

• After an outcry from the global nonprofit community, FATF 

revised its guidance with respect to the problematic Recommendation 8, but I think it still needs further revision 

and U.S. Treasury could use its influence to make that happen. Please contact Kay Guinane at the Charity and Security 

Network for further information 

(kguinane@charityandsecurity.org). 

• Banks should have access to information from FinCEN about 

whether an MSB has been the subject of formal warnings/cease 

and desists which are not public information, so that they can 

better judge the strength of an MSB’s compliance program and 

its weaknesses. 

• Create a low-cost certification scheme for smaller MSBs. Such 

a scheme would create benchmarks for MSB compliance programs, similar to what has been done in the development of an 

ISO standard for anticorruption compliance. This could perhaps be subsidized by a fund the big banks pay into for the 

smaller MSBs. 

• One element of compliance cost is identifying the true owners 

and controllers of MSBs and charities, as well as the remitters 

themselves. Transparency about who owns and controls companies would be a real help with that. 

• National ID schemes for individuals around the world are also 

important. India leading the way in effectively doing this in 

rural populations living in poverty—the hardest to reach and 

often recipients of remittances. While it may seem to be outside of Congress’ remit, USAID has financially supported these 

initiatives in the past and Congress could prioritize funding to 

USAID to continue and/or increase this work. 

139 

Q.5. Last year, the Countering Iran’s Destabilizing Activities Act of 

2017 (P.L. 115-44) was enacted. In Section 271, it required the 

Treasury Department to publish a study by May 1, 2018, on two 

issues: 

Somali Remittances: The law required the U.S. Department of 

Treasury to study if banking regulators should establish a pilot 

program to provide technical assistance to depository institutions 

and credit unions that wish to provide account services to money 

services businesses serving individuals in Somalia. Such a pilot 

program could be a model for improving the ability of U.S. residents to make legitimate funds transfers through easily monitored 

channels while preserving strict compliance with BSA. 

Sharing State Banking Exams: The law also required Treasury 

to report on the efficacy of money services businesses being allowed 

to share certain State exam information with depository institutions and credit unions to increase their access to the banking system. 

Have you or your organization been involved with these Treasury 

studies? 

What advice did you give—or would you give—on the pilot studies? 

A.5. I have not been involved with either of these Treasury studies 

because other organizations have been leading research and advocacy on remittance issues. They may have been involved in and/or 

consulted on these issues. Please contact: Kay Guinane, Director of 

the Charity and Security Network 

(kguinane@charityandsecurity.org); Vijaya Ramachandran, Senior 

Fellow at the Center for Global Development 

(vramachandran@cgdev.org). 

Q.6. In 2016, William and Margaret Frederick were moving from 

Ohio to Las Vegas. Unfortunately, it is alleged that the title company they used in Columbus, Ohio, fell for an email scam and 

wired the $216,000 profit from their home sale to a hacker, not to 

the Fredericks. William is 83 and Margaret is 75 and as of October, 

they were still trying to get their money back. While the Fredericks’ tale is now a court case to determine who was responsible 

for the fraudulent information, we know that the Fredericks’ experience is ‘‘very typical’’ of scams that divert an estimated $400 million a year from title companies into bogus accounts. 

Please describe the responsibilities of financial firms to avoid 

these frauds? 

What penalties should be assessed and by which agencies when 

financial firms enable theft? 

What is the role for the Consumer Financial Protection Bureau 

to ensure financial firms protect their customers’ money and information? 

A.6. As noted above, I am not an expert on U.S. consumer banking 

laws and cannot provide an informed response to your question 

with respect to CFPB. Your question regarding the title insurance 

company’s culpability is a fact-specific question of criminal or 

tortious liability that I am unable to answer in this format, and 

does not relate to money laundering. 

140 

Q.7. In 2014, FinCEN issued an advisory with human trafficking 

red flags, to aid financial institutions in detecting and reporting 

suspicious activity that may be facilitating human trafficking or 

human smuggling. 

To what extent do you assess that financial institutions are currently utilizing these red flags, in order to better assess whether 

their banks are being used for to finance human trafficking? If institutions are not widely utilizing the red flags, what actions is 

FinCEN taking to encourage them to do so? 

A.7. I have not seen any data pertaining to the number of SARs 

filed in relation to human trafficking or smuggling in the United 

States, so I do not have enough information to provide an accurate 

assessment. FinCEN has an online tool that can be used to look at 

the number of SARs filed with respect to specific activities, but unfortunately human trafficking is not one of the categories. However, anecdotally I can say that human trafficking and human 

smuggling are issues where I have seen a relatively large number 

of training programs offered to compliance personnel in recent 

years. It is therefore on the radar of compliance personnel in the 

U.S. at least. I would recommend that you reach out to FinCEN for 

an answer to this question and, if they are not currently collecting 

statistics to be able to answer this question, ask or legislate for 

them to do so. You might also reach out to Polaris for further discussions on the intersection between money laundering and human 

trafficking. 

Q.8. What are the pros and cons of reducing or eliminating the 

standards requiring SARs filing for insider abuse (i.e., employee 

misconduct)? 

A.8. I do not have a strong opinion about this issue. Logically, however, I think it is helpful for FinCEN to know the identifying information of people who have been found by financial institutions to 

be engaging in fraudulent activity or other malfeasance, and for 

the CFPB to be aware of the same if it involved harm to consumers, but I do not necessarily think a SAR is likely to be the 

most effective way to communicate that. 

Q.9. The common expectation is that any financial institution subjected to a cyberattack would be in touch with law enforcement 

about whether or not it’s required to file an SAR. What are the 

pros and cons of eliminating SAR filing requirement for 

cyberattacks against financial institutions? 

A.9. Cyberattacks are an ever-growing threat to the financial services sector and, therefore, to the business and individual consumers 

with accounts at financial institutions. A great deal of personal information is collected and held by financial institutions, so they are 

a particular target for that reason as well. I think FinCEN does a 

good job of explaining why they want cyberattacks to be reported 

in SAR form, how they have used such information in the past, and 

what information is most useful for them in a SAR relating to 

cyberattacks in an October 2016 Advisory. In December 2017, news 

broke in the U.K. that the U.K.’s Financial Conduct Authority had 

found that U.K. banks were significantly under-reporting the full 

extent of cyberattacks. As history has shown in a number of AMLrelated areas, it is unlikely that U.S. banks are reporting more rigVerDate Nov 24 2008 08:37 Jun 04, 2018 Jkt 046629 PO 00000 Frm 00144 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\01-09ZDISTILL\10918.TXT JASON
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orously. This puts not only account holders at risk, but the entire 

fabric of our financial system. 

Q.10. As you know, under current regulations, FinCEN currently 

exempts a range of institutions from the requirement to maintain 

an anti–money laundering program. The list of exempted institutions includes ‘‘pawnbrokers,’’ ‘‘private bankers,’’ ‘‘seller of vehicles, 

including automobiles, airplanes and boats,’’ as well persons ‘‘involved in real estate closings and settlements’’ among others. 

In your view, what are some of the most glaring exemptions on 

this list? 

Are there any additional categories of institution, such as persons involved in the art market or lawyers that should be required 

to establish minimum anti–money laundering program requirements? 

A.10. FATF has identified several of what it calls Designated NonFinancial Businesses and Professions, or DNFPB’s, as businesses 

and professions that are susceptible for, or can be used to play a 

part in, money laundering. The idea is that these businesses and 

professions should identify who they are doing business with, in 

some cases carry out some customer due diligence, and file suspicious activity reports if they think a transaction is suspicious. 

The U.S. already requires some DNFBPs to have those AML programs, such as casinos and dealers in precious metals and stones. 

Treasury regulations originally also included others, including travel agents, those involved in real estate closings, and car, plane, and 

boat dealers, among others, but then Treasury gave them a ‘‘temporary’’ exemption from the requirements with no sunset for that 

exemption which has now been in place for many years. Still others 

never made it on any list, and those four are lawyers, accountants, 

corporate service providers, and escrow agents. For these four, 

AML programs would really be about knowing with whom you are 

doing business and not permitting practitioners in these businesses 

and professions to be able to have plausible deniability that they 

didn’t have reason to know or suspect that they were providing 

services that might be laundering dirty money. 

While there are clearly several businesses and professions missing from U.S. regulation, I would focus on five of them: lawyers, 

those involved in real estate closings, corporate service providers, 

escrow agents, and accountants. 

Lawyers: Of course criminals need and use legal services. A 60 

Minutes piece that aired last year featured undercover footage from 

an organization called Global Witness, showing just how easy it is 

to walk into a law firm in New York and get a lawyer to easily suggest ways in which structures could be created to spend money that 

is clearly the proceeds of corruption to buy real estate, planes, etc. 

One attorney even suggested running the dirty money through the 

lawyer’s client account to clean it. It was a real eye-opener. In 

2010, the American Bar Association published what I would characterize as sound Voluntary Good Practices Guidance for Lawyers 

to Detect and Combat Money Laundering and Terrorist Financing, but I encourage you to ask every lawyer you know if they have implemented it. It is unlikely that they have even heard of it. This 

voluntary guidance is simply not enough. 

142 

Escrow Agents: Senate Permanent Subcommittee on Investigations’ 2010 report Keeping Foreign Corruption Out of the United 

States: Four Case Histories tells the story of how one escrow agent, 

McAfee & Taft, refused to provide escrow services to Teodorin 

Obiang, the corrupt, playboy son of the long time dictator of the impoverished Nation of Equatorial Guinea, because the anti–money 

laundering policy they had voluntarily put in place prescribed that 

they do so. Another escrow agent without an AML program happily 

took that money. 

Corporate Service Providers: The Panama Papers showed just 

how entangled corporate service providers like Mossack Fonseca 

can be in facilitating money laundering, corruption, and tax evasion. The book Global Shell Games details research by a team of 

American and Australian academics into just how easy it is to create an anonymous company to engage in terror finance or corruption in different countries around the world through corporate service providers. They found that the easiest country in which to do 

so was the United States. One email response to the researchers’ 

inquiry from a corporate service provider in Florida was, ‘‘[Y]our 

started purpose could well be a front for funding terrorism, and 

who the f—— would get involved in that? Seriously, if you wanted 

a functioning and useful Florida corporation you’d need someone 

here to put their name on it, set up bank accounts, etc. I wouldn’t 

even consider doing that for less that 5k a month, and I doubt you 

are going to find any suckers that will do it for less, if at all. If 

you are working with less than serious money, don’t waste anybody’s time here. Using a f——— google account also shows you are 

just a f——— poser and loser. If you have a serious proposal, write 

it up and we will consider it. Your previous message and this one 

are meaningless crap. Get a clue. Just how stupid do you think we 

are?’’ 

Those Involved in Real Estate: With respect to real estate, since 

July 2016, FinCEN has had geographic targeting orders in place in 

various counties in New York, Florida, Texas, and California, requiring title insurance companies to collect beneficial ownership information for those entities buying high value real estate with 

cash. They found that about 30 percent of the beneficial owners 

identified by the title companies already had SARs filed on them 

by other financial institutions. That’s nearly one third. Expose ́s like 

The New York Times’ ‘‘Towers of Secrecy’’ show just how easy it is 

for people to hide behind anonymous companies and buy real estate 

with proceeds of crime and corruption. It is central to the 2017 indictment of Paul Manafort and Richard Gates as well. 

Q.11. In recent years we’ve witnessed a seemingly endless string 

of money laundering violations by some of the largest global banks, 

with Deutsche Bank being the most recent megabank to disregard 

the anti–money laundering requirements contained in the Bank Secrecy Act. 

Given that large megabanks continued to disregard their obligations under the law, what in your view should this Committee do 

to ensure compliance, particularly by the largest global banks? 

A.11. Unfortunately for the banking community, many of the high 

profile, incredibly egregious cases that involve the biggest banks in 

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the world have eroded public trust that banks will indeed act in a 

manner that is law-abiding and actively try to turn away proceeds 

of crime. Even many bankers lack faith in their institutions. You 

may find a 2015 study by the University of Notre Dame and the 

law firm of Labaton Sucharow, entitled ‘‘The Street, the Bull, and 

the Crisis’’, to be of interest. The researchers surveyed more than 

1,200 U.S. and U.K.-based financial services professionals to examine views on workplace ethics, the nexus between principles and 

profits, the state of industry leadership and confidence in financial 

regulators. As the report states, ‘‘The answers are not pretty. Despite the headline-making consequences of corporate misconduct, 

our survey reveals that attitudes toward corruption within the industry have not changed for the better.’’ 

There are forms of enforcement that we have not been pursuing 

that I believe would be highly dissuasive. The first is prosecuting 

the individuals that are behind the decisions that are resulting in 

these money laundering violations. When a banker sees his or her 

colleague being prosecuted for decisions that bring the proceeds of 

crime into the bank, he or she will be careful not to do the same. 

Second, prosecution of financial institutions has historically been 

for regulatory violations of the BSA as opposed to the criminal act 

of money laundering, even when the hallmarks of a clear money 

laundering case are present. We need to begin to criminally prosecute these entities as well. Finally, when a financial institution is 

convicted of or pleads guilty to felonious behavior, it must trigger 

any cross-debarments that we have built into our legal system. For 

example, Credit Suisse should have lost its status as a Qualified 

Professional Asset Manager (QPAM) in 2014 by virtue of its conviction for facilitating large-scale tax evasion by Americans. However, 

as with several similar cases which preceded it, the Department of 

Labor waived Credit Suisse’s disqualification and allowed the bank 

to continue to enjoy this ‘‘privileged’’ status under U.S. law that 

meant that the bank had to meet fewer regulatory requirements in 

its handling of U.S. pension funds—something we tend to try to 

keep felons away from for public policy reasons. 

Q.12. Despite record fines, rarely have the individuals who run the 

largest global banks been held accountable for their firms’ willful 

disregard of anti–money laundering and counterterrorism financing 

rules included in the Bank Secrecy Act. 

Can you discuss why we’ve seen such low levels of individual accountability for such violations? To what degree does the lack of 

clear chains of responsibility within large firms contribute to the 

lack of accountability among senior leaders? 

A.12. The Department of Justice is the most appropriate body to 

answer this question because it is the body that has taken these 

decisions based on the evidence before it, prosecution guidelines, 

and cost/benefit analysis. However, there have certainly been a few 

cases where information made publicly available the Statement of 

Facts attached to relevant Deferred Prosecution Agreements, such 

as excerpts from emails between executives, strongly suggested 

that there was sufficient evidence to bring individuals to trial in 

certain cases, and yet we did not see that happen. When I have 

asked the DOJ about this, they have responded that they did not 

144 

feel that they had sufficient evidence to move forward with prosecution. 

After receiving a fair amount of criticism about this, in September 2015 the DOJ released a memo outlining its intention to 

more frequently prosecute individuals. It would be worthwhile to 

ask for the DOJ for statistics around prosecutions of individuals before and after the publication of the memo. It is possible that we 

are seeing the first significant example of this approach being applied to a large bank money laundering case in the case of 

Rabobank, as I explain more fully in a recent blog post that was 

heavily quoted in the press. It will be important to keep an eye on 

whether individual executives are prosecuted in that case for the 

reasons outlined in the blog. 

Q.13. Just as the success of the BSA is reliant on good behavior 

by individual employees of financial institutions, the efficacy of the 

BSA also depends on regulatory and supervisory accountability. 

U.S. anti–money laundering efforts in recent years at times failed 

to recognize the cumulative effect of the violations they cited, leading them to permit massive problems to occur before any serious 

enforcement actions were taken. 

What in your view should be done to address this problem and 

ensure that regulators are holding repeat violators of the Bank Secrecy Act accountable? 

To your knowledge, to what extent are Bank Secrecy Act deficiencies currently factored into the management aspect of firms’ 

CAMELS rating? 

A.13. It seems clear that any policies in place regarding number 

and nature of infractions leading to escalation in enforcement actions are either insufficient or not adhered to. Either way, this is 

an area that could certainly benefit from Congressional review. 

Policies on elevation/escalation need to be clear, proportionate, and 

enforced in a way that results in meaningful adjustments/reforms 

being carried out by banks when they have been the subject of violation notices. 

While I think the revolving door issue is a tricky one (we want 

experienced people in Government and in financial institutions and 

they should have the ability to progress their careers), I am concerned that there may not be sufficient safeguards preventing regulators from moving directly to work for the banks that they have 

been regulating. In the recent Rabobank case, Rabobank’s OCC examiner put Rabobank under a Formal Agreement (requiring reform 

of their AML compliance program), and then while that Formal 

Agreement was still in place, she was hired by Rabobank as a senior executive overseeing compliance at the bank. According to 

Rabobank’s Plea Agreement and accompanying Information, the 

OCC released Rabobank form that Formal Agreement within the 

year, although bank employees reported that nothing substantial 

having changed within the bank’s compliance program in that time. 

Whether or not the executive used her close ties to the OCC to get 

the Formal Agreement dismissed, measures should be put in place 

to ensure that the revolving door does not allow this type of situation to arise. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

COUNTERING INTERNATIONAL MONEY LAUNDERING 


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LETTER SUBMITTED BY THE FACT COALITION 


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STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA 


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LETTER SUBMITTED BY THE CREDIT UNION NATIONAL ASSOCIATION 


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