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29–429 PDF 2006

S. HRG. 109–517

AN UPDATE ON MONEY SERVICES

BUSINESSES UNDER BANK SECRECY

AND USA PATRIOT REGULATION

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

MONEY SERVICES BUSINESSES UNDER BANK SECRECY ACT AND USA

PATRIOT ACT REGULATIONS, FOCUSING ON FEDERAL AND STATE EFFORTS IN THE ANTI-MONEY LAUNDERING AREA

APRIL 26, 2005

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

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

MEL MARTINEZ, Florida

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

SKIP FISCHER, Senior Staff Professional

JOHN O’HARA, Counsel

STEPHEN R. KROLL, Democratic Special Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, APRIL 26, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Johnson ............................................................................................... 2

Senator Stabenow ............................................................................................. 4

Prepared statement ................................................................................... 44

Senator Allard ................................................................................................... 14

Prepared statement ................................................................................... 44

Senator Sarbanes .............................................................................................. 23

Senator Carper ................................................................................................. 27

WITNESSES

Julie L. Williams, Acting Comptroller of the Currency ........................................ 4

Prepared statement .......................................................................................... 45

Kevin Brown, Commissioner, Small Business/Self-Employed Division, Internal

Revenue Service ................................................................................................... 6

Prepared statement .......................................................................................... 49

Response to a written question of Senator Shelby ........................................ 84

William J. Fox, Director, Financial Crimes Enforcement Network, U.S. Department of the Treasury .................................................................................... 8

Prepared statement .......................................................................................... 54

Diana L. Taylor, New York State Superintendent of Banks ............................... 10

Prepared statement .......................................................................................... 58

John J. Byrne, Director, Center for Regulatory Compliance, American Bankers Association ...................................................................................................... 30

Prepared statement .......................................................................................... 64

Gerald Goldman, General Counsel, Financial Service Centers of America,

Inc. ......................................................................................................................... 31

Prepared statement .......................................................................................... 68

Dan O’Malley, Vice President of the Americas, MoneyGram International,

Inc. ......................................................................................................................... 33

Prepared statement .......................................................................................... 72

David Landsman, Executive Director, the National Money Transmitters Association, Inc. ........................................................................................................... 34

Prepared statement .......................................................................................... 77

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Guidance and Advisory Issued on Banking Services for Money Services Businesses Operating in the United States, dated April 26, 2005 .......................... 85

(III)

(1)

AN UPDATE ON MONEY SERVICES

BUSINESSES UNDER BANK SECRECY

AND USA PATRIOT REGULATION

TUESDAY, APRIL 26, 2005

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD SHELBY

Chairman SHELBY. This hearing will come to order.

This morning, the Committee will hear testimony from representatives of the banking and money services industries, as well

as from the Government agencies that regulate them, on the rapidly growing problem of what for lack of a better term we will call

‘‘the unbanking of MSB’s.’’

Money services businesses, MSB’s as we call them, include wire

transmitters, check cashers, sellers and redeemers of money orders,

and currency exchangers. MSB’s are a large and vital part of the

global economy. It is estimated that the international market for

remittances by itself is as much as $80 billion per year. That is

money generally earned in developed countries by foreign nationals

that is wired home to family members in less developed countries.

It is a large and important component of those countries’ economies

and has helped hundreds of thousands if not millions of otherwise

desperately poor families to earn vitally needed currency.

Even more than within the formal banking system, however,

MSB’s are vulnerable to abuse by criminals and terrorist organizations. It is now well-known of course that much of the money that

supported the terrorists that carried out the horrible attacks of

September 11, 2001 was wired to them from the Persian Gulf, especially the Emirate of Dubai. It is not only al Qaeda though that

moves cash around by way of money transmitters. The Times of

London reported on April 3 of this year that Hezbollah has continually provided funding to Palestinian terrorist organizations by

way of money transmitters. The Times quotes a captured member

of the Palestinian Islamic Jihad as stating with respect to

Hezbollah’s support for Palestinian terrorist groups, ‘‘They would

send Islamic Jihad money in amounts of something like $4,000,’’

said the 27-year-old leader of that organization. ‘‘It is easy. They

just use Western Union.’’

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It is not just terrorists. Drug traffickers too routinely exploit the

vast MSB world to move the proceeds of their criminal activity. Exactly one year ago a DEA-led organized crime drug enforcement

task force in Texas concluded a major investigation, Operation

Candy Box. It involved the use of wire transfer services to launder

and move money. Concurrently, an FBI-led investigation also in

Texas and dubbed Operation Foreign Exchange resulted in the filing of 6 criminal complaints charging 7 individuals with money

laundering and violations of the Bank Secrecy Act.

Enhanced scrutiny and oversight of MSB’s was then, and remains, fully warranted. Unfortunately, the very nature of many

MSB’s, in effect their global reach, ease, and reliability, has increased perceptions of them as high risk by the banks with whom

they have to maintain accounts in order to do business. Banks in

turn have been dumping or unbanking their MSB accounts, and

they are doing this in a major way. MSB’s, a vital component of

the global financial system, are at risk of being driven out of business, or more ominously, underground.

That brings us to the subject of today’s hearing, the latest in the

Banking Committee’s ongoing examination of money laundering

and terror financing. How do we regulate MSB’s sufficient to ensure that they are not abused by criminals and terrorists? How do

the MSB’s police themselves in conformity with antimoney laundering and Bank Secrecy Act statutes and regulations? How do

banks regain the level of confidence in the first two questions to

feel comfortable banking MSB’s? It is the Committee’s hope that

the witnesses testifying here this morning will help us to understand the scale of the problem and what to do about it.

Our first panel is composed of representatives of U.S. Government agencies responsible for regulating money services businesses

and for enforcing the Bank Secrecy Act. They include: William Fox,

Director of the Financial Crimes Enforcement Network, who has

details of the newly released interagency guidance on providing

banking services to MSB’s; Kevin Brown, Commissioner of Small

Business and Self-Employment Division, Internal Revenue Service;

Julie Williams, Acting Comptroller of the Currency; and a representative of State banking supervisors, Diane Taylor, Superintendent of Banks, New York State Banking Department. Ms.

Taylor’s testimony is particularly important both for the role the

States play in licensing MSB’s and for the vast number of MSB’s

that operate in her State.

Our second panel will include: John Byrne, Director, Center for

Regulatory Compliance, American Bankers Association; Gerald

Goldman, General Counsel, Financial Service Centers of America;

Daniel Landsman, Executive Director, National Money Transmitters Association; and Dan O’Malley, Vice President for the Americas MoneyGram International.

We welcome all of you today and we look forward to your testimony.

Senator Johnson, do you have an opening statement?

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Yes, I do. Thank you, Chairman Shelby for

holding this important hearing today. I am pleased that the BankVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
3

ing Committee is exercising its important oversight function to determine whether the Bank Secrecy Act and the USA PATRIOT Act

are working properly to deter and detect money laundering and

terrorist financing activity.

Following the attacks of September 11 we recognized that the

war on terrorism needs to be fought on many fronts. While extreme

ideology fuels terrorist activity, terrorists would be unable to implement their plans without financial resources. I can think of few

Committee responsibilities more important than helping to ensure

our financial services infrastructure is not used in this manner.

Today’s hearing focuses on whether antimoney laundering legislation is having unintended negative consequences on money services businesses, and by extension, on low-income communities that

have come to rely on nonbank financial services sector. The lessons

that we learn from today’s hearing will, I hope, inform future legislative and regulatory action as we work to balance important national security priorities with the capacities of industry and regulators to implement the law.

As Ranking Member Sarbanes pointed out in a hearing last

June, one of the biggest problems we have seen with the Bank Secrecy Act is that no one seems to be directly accountable for its enforcement. My colleague from Maryland noted that those with BSA

enforcement responsibility range from Treasury to FinCEN to the

Federal banking regulators, to the FBI, to the Bureau of Immigration and Customs Enforcement, to the Drug Enforcement Administration, and to the IRS.

I am hopeful that the witnesses today will have some good news

to share about progress in BSA enforcement coordination. However,

I remain concerned that the BSA and other laws that we have

crafted are not being implemented in a fashion that maximizes

their effectiveness. For example, Mr. Fox has noted in his testimony that we have seen a dramatic rise in defensive filing of suspicious activity reports, which clearly undermines the usefulness of

SAR’s as a tool for law enforcement. As a matter of fact, in the

American Banker just today, an article indicates that the debate

over why banks are filing more suspicious activity reports than

ever has turned into a war of letters among bankers, regulators,

and even Members of Congress. Bankers are complaining that the

Agency’s zero tolerance policy for violations has given banks no

choice but to flood the agencies with so-called ‘‘defensive filings.’’

Regulators have responded that hefty fines handed down by the

Justice Department have led to a surge in filings, and the article

goes on about the concern we have here in this respect.

In addition, I share the concern of my colleagues that so many

depository institutions have discontinued essential banking services for money remitters and other money services businesses. We

need to look carefully at what regulatory resources have been dedicated to helping regulated entities understand how to continue

serving this important sector.

Clearly, we are making progress on the war on terror, and I

would like to express my profound appreciation to those of you here

today who have committed yourselves to the safety and the integrity of our Nation’s financial sector. We will not be successful in

4

protecting our system without a strong partnership between and

among the regulators and the regulated entities.

I look forward to hearing from enforcement officials as to what

steps they have taken to ensure that policy decisions made in

Washington are actually being communicated to regional and local

examiners. I cannot tell you how many times I have heard concerns

about the time it takes for guidance to trickle down to the field,

and similar concerns about the consistency in training levels for

field agents and examiner.

Likewise, I would like to hear from the financial service witnesses, what steps they have taken to implement the law and

where they would benefit from more guidance.

Mr. Chairman, I am confident that we will continue to improve

our antimoney laundering enforcement efforts, but we clearly have

a long road ahead of us to work out some of the unintended consequences that have been reported in recent months.

Mr. Chairman, I regret that I will not be able to stay for the entire length of this hearing because of conflicting obligations that I

have, but I look forward to the testimony. My staff is here, and we

look forward to working with you on ways to address this issue.

Thank you.

Chairman SHELBY. Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman, and I would first

ask that my opening statement be put in the record.

Chairman SHELBY. Without objection it will be so ordered.

Senator STABENOW. And I would just welcome our witnesses here

today. I was very pleased to work on the provisions of money laundering when we passed the USA PATRIOT Act and to sponsor a

couple of the provisions that in fact have become law. I am anxious

to hear from you about how it is going and any unintended consequences that we need to be addressing right now. We do know

that these provisions have had some positive, intended effect, but

we certainly want to make sure that we are looking with a critical

eye at whatever we need to do to strengthen or to change provisions in order to make sure that they are more effective.

So thank you, Mr. Chairman.

Chairman SHELBY. Thank you, Senator.

Ms. Williams, we will start with you. All of your written testimony will be made part of the record in its entirety, so you proceed

as you wish.

STATEMENT OF JULIE L. WILLIAMS

ACTING COMPTROLLER OF THE CURRENCY

Ms. WILLIAMS. Chairman Shelby, Senator Johnson, and Senator

Stabenow, I appreciate the opportunity to appear before you today

to discuss implementation of the Bank Secrecy Act in the context

of money services businesses. We very much appreciate your leadership, your interest, and that of the Committee as a whole in this

vital area.

‘‘Money services businesses,’’ or MSB’s, is an umbrella term that

encompasses many different types of financial services providers.

Estimates of the numbers of MSB’s run into the hundreds of thouVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
5

sands, ranging from Fortune 500 companies with numerous outlets

worldwide to independent convenience stores that offer check-cashing services. Reportedly, millions of Americans depend on MSB’s to

satisfy most of their financial services needs.

But because they may handle large volumes of cash, MSB’s can

pose significant risks. While most MSB’s have never been tainted

by money laundering, some have been conduits for illicit activity.

We have even seen cases in which money launders established

MSB’s to disburse and effectively launder their excess cash to

unsuspecting customers.

Today, MSB’s are governed by an uneven system of licensure and

regulation. Some States do not require any MSB’s to obtain licenses; some only license certain segments of the MSB industry.

Others, as Superintendent Taylor can tell you, have comprehensive

licensing standards and oversight. And, as of last year, apparently

a substantial percentage of MSB’s had not registered with FinCEN

as Federal law requires.

Thus, banks that maintain relationships with MSB’s face multiple challenges. In general, at a minimum, they must apply their

customer identification program requirements, confirm FinCEN

registration, confirm compliance with State or local licensing requirements, confirm agent status if applicable, and conduct a basic

risk assessment to determine the level of risk associated with the

account, and thus the level of diligence that is going to be required

for the relationship. Depending upon the nature of a bank’s business with MSB’s, fulfilling these responsibilities can involve significant bank resources.

Compounding the challenge, we recognize that guidance on key

issues provided by Federal regulators has been in need of clarification in important respects. This was especially true in the case of

unregistered MSB’s where clarity was needed as to whether banks

are expected to file SAR’s, close accounts, or take some other action

upon discovery that an MSB customer has not complied with applicable registration and licensing requirements.

Finally, in addition to these costs, risks, and uncertainties, it is

a reality that banks feel that they are subject to substantial compliance and reputation risk, including from sources beyond banking

regulators, if they are perceived to misstep on BSA issues. It is not

surprising, given these factors, that some banks have determined

that the risks were not worth it, and chose to terminate their accounts with MSB’s.

In closing, I would like to stress several points. First, the OCC

does not expect banks to be de facto supervisors of their MSB customers. A bank’s role and responsibility are to development of systems and controls that effectively identify suspicious transactions,

and to implement those systems in a risk-based manner. Banks

should not be expected to be policemen of their MSB customers.

Second, except in unusual cases, and those generally involve an

enforcement matter, the OCC does not require national banks to

close the accounts of an MSB customer or any other customer.

Third, the OCC expects banks that service MSB’s to apply the requirements of the BSA on a risk-assessed basis, just as they do

with other accountholders. Not all MSB’s represent the same level

6

of risk, and banks should treat MSB’s according to each MSB’s risk

profile.

I also want to emphasize that the OCC is constantly striving to

improve the quality of our BSA examinations and the quality and

clarity of the guidance that we provide to national banks. Our

track record of BSA enforcement actions reflects judicious use of

our enforcement authority. We absolutely do not have a ‘‘zero tolerance’’ approach where any and every BSA deficiency warrants a

formal enforcement action, but we will absolutely take action where

action is warranted.

With respect to improving BSA guidance, the OCC, together with

FinCEN and the other banking agencies, recently issued an Interagency Policy Statement touching on several key issues. FinCEN

and the agencies today are issuing Interagency Interpretive Guidance on Providing Banking Services to MSB’s, which should clarify

several key issues where uncertainties have existed. I will defer to

Director Fox to describe that guidance in detail. I would also like

to take this opportunity to applaud him for all of his efforts to foster coordination and collaboration between FinCEN and the Federal banking agencies.

Last, in concert with FinCEN and the other Federal banking

agencies, we will soon be producing a revised uniform interagency

BSA examination handbook.

Mr. Chairman and Members of the Committee, thank you again

for your leadership in this area. We strongly share the Committee’s

goal of preventing and detecting criminal acts that involve misuse

of our Nation’s financial institutions. We also share the concern

that it is important that MSB’s have access to financial services,

but those relationships also must be consistent with the antimoney

laundering and antiterrorism financing laws of this country.

We stand ready to work with Congress, FinCEN, and the other

Federal banking agencies, and the banking industry, to achieve

these goals.

Thank you.

Chairman SHELBY. We will next hear from Mr. Brown, Internal

Revenue Service.

STATEMENT OF KEVIN BROWN, COMMISSIONER,

SMALL BUSINESS/SELF-EMPLOYED DIVISION,

INTERNAL REVENUE SERVICE

Mr. BROWN. Good morning, Mr. Chairman and distinguished

Members of the Committee. I appreciate the opportunity to be here

today to discuss the Internal Revenue Service’s efforts involving

the Bank Secrecy Act and to update you on the progress we have

made since last September.

The IRS addresses both the civil and criminal aspects of money

laundering. On the civil side, the Department of the Treasury has

delegated to the IRS responsibility for ensuring compliance with

the BSA for nonbanking financial institutions such as money service businesses, casinos, and certain credit unions.

The IRS’s Criminal Investigation Division is responsible for the

criminal enforcement of BSA violations and money laundering statutes related to tax crimes. In October 2004, the IRS’s Small Business/Self-Employed Division officially established the Office of

7

Fraud BSA which reports directly to the Commissioner of the

Small Business/Self-Employed Division. The Director, an IRS executive, has end-to-end accountability for compliance with BSA including policy formation, operations, BSA data management, and

all field activities.

The Office of Fraud BSA is staffed by approximately 300 field examiners located nationwide. These examiners are overseen by 31

group managers and supported by 8 analysts throughout the country. Our hiring plans call for us to have some 325 field examiners

on board by the end of fiscal year 2005. We also plan to hire an

additional 60 BSA examiners in fiscal year 2006 for a 2-year combined increase of 28 percent.

In contrast to years past, all of our BSA examiners and their

managers devote 100 percent of their time to examinations of BSA

related cases. In carrying out our responsibilities under the Bank

Secrecy Act, the IRS works in close partnership with FinCEN, law

enforcement agencies, and the States. Together, we are identifying

MSB’s, raising awareness of BSA obligations, and improving oversight and enforcement by targeting examination resources toward

high risk elements of the industry.

Most recently we finalized, as of yesterday in fact, a Memorandum of Understanding with FinCEN that provides for the routine exchange of BSA compliance information. Moreover, the IRS

and FinCEN recently reached agreement with the Conference of

State Bank Supervisors on our model Federal/State Memorandum

of Understanding. And I am pleased to report that just last week

Superintendent Diana Taylor signed the agreement on behalf of

New York State, the first State to do so.

In the near future, we expect that additional States will sign the

MOU which provides the IRS and the States the opportunity to leverage resources for examinations, outreach, and training.

When I appeared before this Committee in September 2004, I

outlined several areas where we could enhance our BSA examination program. I am pleased to have this opportunity to update the

Committee on our progress. This fiscal year, we are examining

more than 3,500 individual MSB’s. We also are conducting examinations of several larger MSB’s at the entities’ corporate headquarters level. These centralized examinations give us the potential

to impact the compliance behavior of a much larger number of

MSB’s. For example, there are about 29,000 MSB’s related to the

5 corporate entities currently under examination.

The IRS is also employing for the first time an examination technique known as a saturation audit. Specifically, we are conducting

simultaneous examinations of all MSB’s located within particular

zip codes in two cities which were identified as high risk areas in

coordination with other law enforcement agencies. This saturation

approach allows our BSA examiners to identify individuals with

unusual patterns of financial activity which fall below the reporting

threshold. In addition, we are exploring two new methods for identifying BSA workload.

The first approach, which is being tested by our classifiers, uses

a risk-based scoring system to pinpoint which cases in the potential

universe are most in need of examination. In the second related effort, we are researching the feasibility of using currency banking

8

and retrieval system data to create an automated national workload identification and selection system to designate the universe

of potential Title 31 cases.

In conclusion, the fight against money laundering and terrorist

financing are top priorities for the Internal Revenue Service. We

are increasing our commitment to the BSA program and we will

continue to coordinate our efforts closely with FinCEN.

Mr. Chairman, I thank you for this opportunity to appear before

this distinguished Committee and I will be happy to answer any

questions you and the other Members of the Committee may have.

Chairman SHELBY. Thank you.

Mr. Fox.

STATEMENT OF WILLIAM J. FOX

DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK,

U.S. DEPARTMENT OF THE TREASURY

Mr. FOX. Thank you, Mr. Chairman and distinguished Members

of this Committee, I very much appreciate the opportunity to appear before you again to discuss the money services business sector. We very much appreciate the leadership, support, and guidance you have offered us on these and other issues relating to the

administration and implementation of the Bank Secrecy Act. Your

commitment to understand and publicly discuss the issues facing

the money services business sector is critical not only to the safety

of our financial system, but also indeed to our Nation’s security.

I prepared a longer written statement that I ask be we are submitted for the record, and I will keep these remarks short.

Mr. Chairman, if you would not mind I would like to take a second to acknowledge the colleagues who are with me on the panel

today. I am honored to be here today with Julie Williams, Kevin

Brown, and Diana Taylor, and I am pleased to tell you, sir, that

these leaders and their agencies have been incredibly diligent and

cooperative on these issues. The importance of our good working relationship and our working relationship with the other regulators

who have a stake in the Bank Secrecy Act cannot be overstated.

In fact, if we are to be successful in achieving the goals of the Bank

Secrecy Act, we must speak with one voice on these issues. The

confusion resulting from different or disparate messages has obvious and serious ramifications.

Mr. Chairman, I believe it is fair to say that the Bank Secrecy

Act regulatory climate has changed significantly since the last time

I appeared before you. Industry compliance remains a contradiction. We continue to see significant compliance failures of the most

basic type, while at the same time most financial institutions are

demonstrating an extraordinary commitment of resources and effort to comply.

I have, in my written statement, outlined why we believe this

change has resulted in, among other things, the widespread termination of banking services for money services businesses, which is

a significant reason we are all here today.

I would like to take a moment to explain what we are doing to

address the problem. Earlier this year, when we recognized that account termination for money services businesses was becoming a

significant problem, we held a public fact-finding meeting to elicit

9

information from money services businesses and banks as to why

these account relationships were being terminated. The meeting

confirmed that money services businesses of all types and sizes are

losing their bank accounts at an alarming rate, even when those

money services businesses appear to be complying with the Bank

Secrecy Act and State-based regulatory requirements.

We also heard a lot of confusion from banking organizations

about what is required under the regulatory regime. In essence, we

heard quite clearly that we needed to act quickly to clarify the

Bank Secrecy Act requirements.

On March 30, 2005, along with the Federal banking agencies, we

took the first step toward addressing these issues by issuing a joint

statement on providing banking services to money services businesses. This statement calmed the waters and asserted clearly that

we do not intend to make banking organizations the de facto regulators of the money services businesses industry.

Today, I am very pleased to announce that we have taken the

next important step and are issuing, jointly with the Federal banking agencies, interpretative guidance that clarifies the requirements of the Bank Secrecy Act for banking organizations that bank

money services businesses. The guidance confirms that banking organizations have the flexibility to provide banking services to a

wide range of money services businesses and still maintain compliance with the Bank Secrecy Act. The guidance also makes clear

that not all money services businesses pose the same level of risk,

and banks should tailor their due diligence accordingly. This guidance outlines the due diligence needed in fairly specific detail to

better assist banks in assessing and minimizing that risk.

But the banks are only part of the equation. Today we are also

issuing guidance to the money services businesses industry that

outlines the information and documentation that money services

businesses should be prepared to provide to banks when opening

or maintaining an account. Significantly, this guidance stresses

that the failure to take such basic steps as registering with us or

complying with State licensing requirements may result not only in

some form of Government action, but the loss of access to a bank

account as well.

We remain committed to ensuring that those money services

businesses that comply with the law have appropriate access to

banking services and look forward to continuing to work with industry leaders to make compliance a very top priority.

Mr. Chairman, the guidance we issue today is only a beginning.

We are not so naı ̈ve as to believe that this guidance will solve all

issues or that it will repair all relationships between the money

services businesses and banking organizations. We are, however,

committed to continue to work with the Federal banking agencies,

our State counterparts, and the IRS to do everything we can as responsible and responsive regulators. We still have a long way to go,

sir, and we have a lot of work to do, but this is a significant step.

There are two other important developments I would like to mention. We have recently executed an information sharing agreement

with the IRS, as Kevin has told you just a moment ago. Today, we

also have just signed an information sharing agreement with the

State of New York Banking Department. These agreements mark

10

important steps in our efforts at FinCEN to secure information

sharing agreements with those regulators that examine for Bank

Secrecy Act compliance. These agreements are modeled on our

agreements with the Federal banking agencies. Not only do we

benefit by learning more about what their examinations are finding, but we also have a better mechanism for providing support to

their examination effort.

I wanted to make special mention of Ms. Taylor and her staff,

as well as John Ryan of the Conference of State Bank Supervisors,

who were instrumental in helping us and the IRS develop model

agreements for sharing information with the States. Our goal is to

have an information-sharing agreement with all States that examine financial institutions for Bank Secrecy Act compliance.

We understand that we must move with all the possible speed

we can muster and that when we move, we have to get it right.

September 11 has taught us that the information is now central to

the security of the Nation, and the simple fact is that information

is what the Bank Secrecy Act is all about. Information sharing and

cooperation among regulators is key, but without a real partnership with the financial industry in which the Government shares

real information, we will not succeed.

The Bank Secrecy Act regulatory regime should be directed at

safeguarding the financial industry from the threats posed by

money laundering and illicit finance, and it should be directed at

providing the Government with the right information; relevant, robust, and actionable information that would be highly useful to law

enforcement and others.

The best, if not, only way to achieve these goals is to work in a

closer, more collaborative way with the financial industry. I am

convinced that the vast majority of our financial industry members

are committed to this partnership. Our goal is to do all we can to

ensure that the Government lives up to our side of the bargain.

Mr. Chairman, Members of the Committee, the importance of

your personal and direct support of these efforts cannot be overstated. Your oversight will ensure that we meet the challenges that

we are facing. I know how critical it is that we do so, and we hope

you know how committed we are to meeting those challenges.

Thank you very much.

Chairman SHELBY. Thank you, Mr. Fox.

Ms. Taylor.

STATEMENT OF DIANA L. TAYLOR

NEW YORK STATE SUPERINTENDENT OF BANKS

Ms. TAYLOR. Thank you, Mr. Chairman and Members of the

Committee, for inviting me back to continue this very important

dialogue, and I particularly want to thank you for recognizing that

State regulators are an important part of a solution to the issues

we are confronting today.

You are doing all of us a great service by holding these hearings,

especially at a time when MSB’s are having difficulty finding banks

through which they can transact their businesses.

We all know what the problems are. One of the goals of regulators of legal and compliance systems is to reduce the risk factors

and vulnerabilities of our regulated industries as much as possible,

11

while at the same time allowing legitimate businesses to be conducted. I want to spend these few minutes talking about the incredible progress we have made toward resolving some of these

problems and to point out some of the challenges that still remain.

At your hearing last September, we talked about the IRS and

FinCEN working together with the States as bank and MSB regulators to coordinate examination and enforcement efforts and share

BSA information and training resources. I am so pleased that, as

you have heard, as a direct result of that hearing, that as of this

morning, I have signed on behalf of New York memoranda of understanding with both FinCEN and the IRS, covering both bank

and MSB examination information.

The CSBS, its member States, FinCEN, the IRS, and the Federal

banking regulatory agencies deserve great praise for doing an immense amount of work in a very short time, turning this idea of

coordinated information sharing and action into an unprecedented

reality. This is truly ground-breaking cooperation that will make a

difference, particularly with regard to training and education.

In my written testimony, I talk about needing resources to raise

the standard. This is exactly what I meant. I am proud to have

been part of it and I pledge to do my best to help convince all 50

States to sign onto the MOU’s as well.

Another huge step was announced today by FinCEN regarding

their anxiously anticipated guidance about how banks should look

at MSB’s, who is responsible for doing what, delineating as clearly

as possible the banks’ role with regard to working with MSB’s. We

will do everything we can to make sure that all of our regulated

entities understand this guidance as fully as possible. It may not

be the U.S. Constitution or the Bill of Rights, but in some sectors

of this economy it carries as much weight, as I am sure you will

hear in the next panel.

Of course there is still work to be done, but we have set ourselves on a very positive course. We should all be very proud.

But I have two continuing concerns, which given our track record

to date, I think we should be able to tackle. The first has to do with

what many perceive as overzealous prosecution, which has been a

major reason banks are rapidly distancing themselves from MSB’s.

It is clear that an understanding must be reached between U.S.

prosecutors and financial services regulators as to where the jurisdictional line is drawn between them. It is my hope that the Department of Justice, with input from the regulators, can provide direction and consistency to the U.S. Attorneys in this regard.

The second issue that I hope to see clarified in the near future

has to do with the OCC’s preemption of State licensing requirements, which triggers supervision and examination. Under the current OCC rules, operating subsidiaries of nationally chartered

banks, including MSB’s, may ignore any State licensing or other

regulatory requirements.

I think it is important under these circumstances that a means

be crafted to establish national standards regarding these entities,

along with a very clear understanding of who is responsible for

what in this area.

In closing, we have made a great start toward reaching our goal

of a rational and comprehensive approach to difficulties and comVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
12

plexities surrounding the relationship between banks and MSB’s

and the regulatory and legal structure that necessarily frames the

issue.

The MOU’s will help keep us on the same track. The guidance

should serve to give comfort to the banks. Now if we can just crack

the issue of setting national standards, we will not have so much

further to go.

Thank you again, Mr. Chairman, for allowing me to share the

New York view of where we are, what the challenges are, and what

we need to do about them. In holding this hearing you have performed a valuable service for us all.

Thank you.

Chairman SHELBY. Thank you, Ms. Taylor.

Mr. Brown, I will direct the first question to you. Today’s Washington Post reports that half of Maryland’s 120 money transmitters

used by immigrants to physically carry cash across the border and

operating without license was shut down by State regulators. Is the

manner in which half of this State’s particular MSB sector operating without a license reflective of the limited resources of the IRS

to identify these entities?

Mr. BROWN. I think it certainly highlights the need for increased

coordination between both the States, FinCEN and the Internal

Revenue Service. The Memorandum of Understanding that was entered into this morning——

Chairman SHELBY. That help?

Mr. BROWN. —will have a dramatic impact. I mean we cannot

touch them all by ourselves. Superintendent Taylor cannot touch

them all by herself in New York State. Between us, we can avoid

duplication of efforts, and really leverage our resources. And also,

the other thing the Memorandum of Understanding allows us to do

effectively is to emulate best practices. There are techniques that

New York State is employing that we think would be of great benefit to us, that we are going to imitate and perform.

Chairman SHELBY. Mr. Brown, I understand that the IRS Small

Business/Self-Employed Division, which you are in charge of, has

an 80 percent no-finding rate when examining money services businesses and non-MSB, nonbank financial institutions like casinos.

Could you explain for the Committee this morning the significance

of that statistic. Does it mean, for example, that 20 percent of the

examined businesses are failing to comply with antimoney laundering and Bank Secrecy Act requirements? Is 80 percent too high

a number, indicating a potentially flawed examination process, or

what is it?

Mr. BROWN. Well, it could be a mixture of many things. The first

thing is that you would have to determine whether or not we are

examining the right entities. You would like to hope that they are

all compliant, but I do not think that our agents would tell you

that is the case, that they are all 100 percent compliant.

I think there is a gradation here.

Chairman SHELBY. But there are a lot of them, are there not?

Mr. BROWN. There are an awful lot of them. We estimate there

are 200,000. Bill might be able to give you a more precise number,

roughly 200,000 MSB’s in this country. It is a tremendous number.

It is a tremendous number to cover. We have to make sure we are

13

making the examinations count, that we are examining the right

groups, this will help. The coordination with the States is just extremely important here so we do not duplicate efforts.

Chairman SHELBY. Ms. Williams, embassy account, perhaps an

analogy here. Do you think that the current spate of MSB account

closures is analogous to the situation where embassy customers,

whose accounts on average were not a huge profit maker, as we

know, or a compliance risk, had no place to go immediately following the shock of the Riggs and the termination of its embassy

business. But subsequently events quieted down and embassy business found a home somewhere. Or is the MSB problem a much

deeper-rooted problem?

Ms. WILLIAMS. Mr. Chairman, I think that the MSB problem is

a complex problem that has certain parallels to the embassy banking situation.

As I described in my opening statement, there are several factors

that intersect. One is just the effort required of the bank in maintaining a certain type of account. Second is the existence of areas

that may warrant clarification from regulators about the regulators’ expectations of diligence and oversight and certain actions

on the part of the bank. Those two intersect because if there is uncertainty about what the regulators’ expectations are, the banks

may perceive their burden or what they may think they need to do

as being more than what the regulators’ view is. The bank’s assessment of what they need to do and the drain on their resources will

be factored into their decision about whether they maintain the account.

The third issue is, of course, whether there are reputation and

compliance risks that are extraneous to what bank regulators do

that can impact the banks if they maintain this type of account.

Chairman SHELBY. Ms. Taylor, it is my understanding that the

Conference of State Bank Supervisors, along with FinCEN and

IRS, we have just talked about, have completed the Memorandum

of Understanding that Mr. Brown referenced, which you challenged

the IRS to complete at last September’s hearing. This MOU will facilitate, as Mr. Brown has said, the sharing of BSA related information among the States, Federal regulators, and enforcement

agencies.

Would you like to comment on the process by which the MOU

was negotiated? Does the MOU represent a compromise that reflects agreement at the levels you envisioned, or does it come up

short in any area? For example, is there a plan to coordinate exams

of MSB’s with the IRS for BSA compliance?

Ms. TAYLOR. Yes. Thank you, Mr. Chairman. I am very happy

with the process.

Chairman SHELBY. He raised that here, you will recall.

Ms. TAYLOR. I do recall that, and thank you very much, and I

think that it was in large part due to your comments in that area,

that the impetus was given to all involved to be very cooperative

in this. And I must say that I am extremely happy with the outcome and the process that has gone through. We were very much

involved.

The first thing that had to happen was for the Federal agencies

to come to an agreement among themselves, which was no easy

14

task. And then we were involved after that. The structure that we

have come up with I think is a very good one. There is a basic

agreement and then each State will craft its own side letter, which

goes with the agreement, which they will be able to sign because

obviously every State’s requirements are different. Because every

State has its own set of laws, what we are hoping to do over the

next couple of months is to help those States craft agreements that

will allow them to participate in this effort. But I am extremely

happy with how it has come out, and we will see how it works.

Chairman SHELBY. Thank you.

Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman. I have a statement

I would like to ask unanimous consent to get in the record.

Chairman SHELBY. Without objection, it will be made part of the

record.

Senator ALLARD. And the first question is for Ms. Williams. In

your testimony, you explained that the cost of opening and maintaining the money services businesses accounts are further compounded with a huge number of unregistered and unlicensed

MSB’s. Could you please elaborate on those difficulties that exist

within the apparently uneven regulatory framework between the

State and Federal laws requiring registration and licensing, and

how do you think this might be alleviated?

Ms. WILLIAMS. I think the challenge that banks face is the complex set of issues presented by their relationships with money services businesses. One aspect of the question of what is expected of

banks when they enter into, open, and maintain an account relationship with a money services business is the registered or unregistered status of the money services business.

One of the issues that the interagency guidance that is being

issued today helps to clarify is the agencies’ expectations as to

what banks should do if they determine that they have a money

services business customer that is not registered, and that is file

a SAR.

Senator ALLARD. SAR stands for what?

Ms. WILLIAMS. Suspicious activity report, sir.

Second, there is no automatic or absolute requirement to close

that MSB account simply because the bank is filing a SAR because

the MSB is unregistered.

These are areas where I think there may have been lack of uniform, clear guidance coming from all of the banking agencies and

FinCEN, and they are a very important part of the clarifications

in the interagency guidance that we have put out today.

Senator ALLARD. Would other members on the panel care to comment on that question and her response? Mr. Fox.

Mr. FOX. Senator, if may—thank you. I think it is very important

because, again, from our perspective, we have to stabilize this situation and ensure that money services businesses, as a very important financial sector in this country, have banking services. From

my perspective, I think it is even more important because if money

services businesses lose their banking relationships, in many respects, we lose a lot of transparency in that entire sector. If those

15

industries go underground, if you will, or go to a point where we

cannot see them, they pose significant danger in my view.

And therefore, I think it is in all of our interest, not only economic interest but also certainly from our perspective of financial

crime and terrorist financing interests, to ensure that money services businesses: Comply with the law, and particularly at its most

basic level; and are afforded banking services and are brought into

the transparent financial system, if you will, so that we can ensure

appropriate transparency for this sector. The sector provides incredible services to a part of our country that desperately need

those services, and I think it is very important that they are

brought into that transparent, rationalized part of the sector.

Senator ALLARD. While you have been speaking, you know,

‘‘money services business’’ is really a broad term.

Mr. FOX. It is.

Senator ALLARD. Could you give us a number of examples of the

type of businesses those might be?

Mr. FOX. Sure. It can be currency dealers, people who exchange

currencies, exchangers——

Senator ALLARD. Such as?

Mr. FOX. Thomas Cook. You see Thomas Cook at the airports.

People who exchange currency or deal with currency, check cashiers, it can be everything from an actual large check casher in

Manhattan to the local grocery store if the grocery store meets that

particular threshold; issuers of travelers checks, money orders, or

stored value products.

Senator ALLARD. So let me get something straight here on grocery stores. If a business comes in and writes a check for over

$10,000, does that inadvertently throw them into any kind of reporting posture?

Mr. FOX. No, sir. I hope I get this right, it is essentially if you

have individuals who come in with their payroll checks, for example, and cash them at a grocery store. So there is a $1,000 a day

threshold per person that throws them into that milieu.

Senator ALLARD. I just wanted to make sure that was clear.

Mr. FOX. Yes, sir.

Senator ALLARD. Give me some more examples.

Mr. FOX. Sure. Sellers and redeemers of traveler’s checks, money

orders, or stored value products, the products that, you see like the

American Express cards that you can now store value and then

take it abroad and use almost like a credit card. But it is not a

credit line, it is actually a stored value product. And then certainly

one of the largest parts of the sector are money transmitters or remitters, people who wire monies from point to point, MoneyGram,

whom you will hear from later today.

Senator ALLARD. Can I get back to the credit card again?

Mr. FOX. Certainly.

Senator ALLARD. If this amount that is set aside is at the

$10,000 threshold or more, how is that treated for reporting purposes? I mean you could go over and cash a number of—maybe it

is $30,000, they cash two $15,000—or let us put maybe 6 or 7

charges of $5,000 or less, but they would be under the $10,000

threshold. Does that trigger anything?

16

Mr. FOX. Yes. It is not credit card companies, per se, sir. Senator,

it is a product that actually looks like a credit card, maybe acts like

a credit card, but contains value stored. In other words, I would

come into American Express, hand them money, and they would

store that money on the credit card.

Senator ALLARD. I understand. It is a cash deal.

Mr. FOX. It is like having cash but with the safety of——

Senator ALLARD. Like a debit.

Mr. FOX. Exactly, yes, sir, except you are not accessing an account. The value is in the card.

Senator ALLARD. But you could take a debit card overseas.

Mr. FOX. Yes, certainly you can.

Senator ALLARD. And is it counted as a cash transaction over

there, or would they have a debit number?

Mr. FOX. Yes, it all depends——

Senator ALLARD. And a PIN number and all that or not?

Mr. FOX. It all depends on the regime——

Senator ALLARD. What is available.

Mr. FOX. Right. It all depends on the regime overseas.

Senator ALLARD. My question being: Can you have a series of

transactions that would occur independently and equal a transfer

of $10,000, but it is not reported that way because they are smaller

transactions?

Mr. FOX. We call that structuring, sir.

Senator ALLARD. And that does happen? Is that a problem?

Mr. FOX. It is. It is an indication I think, not necessarily proof,

but an indication that there may be structuring and we look at

that very carefully. There is a currency transaction reporting requirement.

Senator ALLARD. I see. That is my question.

Mr. FOX. The threshold is $10,000 under the Bank Secrecy Act.

Clearly, we have very strong rules about structuring transactions

to avoid that reporting requirement. That is a Federal crime, and

we believe it is an indicator of illicit activity, or can be.

Senator ALLARD. So all of those smaller transactions get lumped

together and it does raise a flag as far as you are concerned.

Mr. FOX. Yes, sir.

Senator ALLARD. Very good, continue.

Mr. FOX. These are essentially the groups of people who are regulated as money services businesses under our regime, under the

Bank Secrecy Act.

So just to recap, you have currency dealers and exchangers,

check cashers, issuers of traveler checks, money orders, or these

stored value cards, sellers or redeemers of those products, and then

money transmitters. And money transmitters and check cashers

are the two largest.

Senator ALLARD. Any other comments as far as my original question to Ms. Williams; the rest of the panel want to comment?

Mr. Chairman, my time has expired.

Chairman SHELBY. Thank you.

Are you saying that most of these nontraditional bank services

serve a legitimate need; is that correct?

Mr. FOX. Yes, sir.

17

Chairman SHELBY. And if they are driven underground they go

for other forms of money and it generally costs more, and it would

be hard to regulate; is that correct?

Mr. FOX. That is my view, Mr. Chairman, yes.

Chairman SHELBY. Ms. Williams, could you at the Comptroller’s

Office, for example, as a regulator of national banks, let the banks

know that you want them in business like this, you want them to

be able to make legitimate loans to these operating companies,

rather than let it dry up?

Ms. WILLIAMS. Mr. Chairman, what we have reiterated in a variety of contexts, represented most recently by the interagency guidance that was issued today, is the importance of money services

businesses in the economy, and what we expect banks to do, and

what MSB’s are expected to do in order to foster an environment

where banks can have relationships with these types of businesses.

MSB’s are very important overall in the financial economy of this

country.

For completely separate and distinct reasons, we have also been

trying to educate the banks that we supervise about opportunities

to enhance the type of financial services that they provide to the

underbanked and unbanked, to provide this type of service to a

broader array of customers. It is a very important aspect of our financial system.

Chairman SHELBY. This system, nontraditional banking service,

it will not go away. It is just a question of will it go underground,

will the cost of the money go up if it is illegitimate money.

Ms. WILLIAMS. Mr. Chairman, we agree with you completely. It

is not going to go away.

Chairman SHELBY. And if it is underground money, illegitimate

money, it is going to cost more generally, is it not?

Ms. WILLIAMS. That tends to be the case.

Chairman SHELBY. That will be passed on to the people who can

least afford it, the ones that use a nontraditional banking system;

is that right, Mr. Brown?

Mr. BROWN. It is, and those organizations tend not to be insured

or bonded, so you are placing the money at risk for the very people

who cannot afford to have the money at risk.

Chairman SHELBY. How real is the threat here? Is it that real

to drive them underground? If they cut off the banking legitimate

money, that will drive them underground, will it not?

Ms. WILLIAMS. I think the threat is real.

Chairman SHELBY. Mr. Fox.

Mr. FOX. Absolutely, Mr. Chairman, absolutely.

Chairman SHELBY. You think you are going to be able to handle

it?

Mr. FOX. Well, sir, we sure are trying. I will tell you, I think that

it is in many ways like turning an oil tanker in some respects, because financial institutions, banking organizations in particular,

are not irrationally concerned about their reputation risk, the risk

to their reputation and their regulatory risk. And I think there has

been a lot of misperception about what risk is posed by this sector.

There are clearly parts of the money services sector that are risky

and that bear watching and that bear careful scrutiny by a banking

institution and certainly by regulators.

18

But I think the thing that we have to do and we have begun,

there are really four things, Mr. Chairman. I think the first is

guidance. We have to color in the gray, if you will, where there is

some misperceptions, there are some misunderstandings about

what is required.

Chairman SHELBY. Would the memorandum coming out today,

will that deal with account openings, maintenance, and guidance?

Mr. FOX. Yes, sir. I think the good part about this guidance, the

thing that we are proud of—and again, my compliments to all

around—is that it is specific and it does talk about a number of indicators, so it should give banking organizations some comfort.

Chairman SHELBY. Ms. Williams, a cursory review of the guidance reveals a type of ‘‘hold harmless’’ clause for banks that manage risks associated with all accounts. It is my understanding that

it instructs that banking organizations will not be held responsible

for their customers’ compliance with the Bank Secrecy Act and

other applicable Federal and State laws and regulations.

At what point, if any, does a bank become responsible for the

acts of the customers’ compliance with the Bank Secrecy Act if it

does at all?

Ms. WILLIAMS. Mr. Chairman, I think this is one of the fundamental points here.

Chairman SHELBY. Central to all of this, is it not?

Ms. WILLIAMS. It is very fundamental. It is fundamental to some

of the concerns that the banking organizations have, and that is

that banks are not designed to be the policemen of the conduct of

their customers.

Chairman SHELBY. If you put that burden on them, you are putting a heck of a burden on the banking system period, are you not?

Ms. WILLIAMS. That is an enormous burden; it is an enormous

risk; and it is a substantial deterrent. If there is any uncertainty

as to our expectations there, it is a substantial deterrent to banking institutions’ willingness to take on these relationships.

Chairman SHELBY. Mr. Fox, when you last testified before us,

you told the Banking Committee that FinCEN was recommissioning the Coopers & Lybrand study to get a better sense of the

size, composition, and nature of the industry, as well as the potential for growth in the industry’s component segments. As far as we

know the study is still in progress. Is FinCEN still in the learning

curve there?

Mr. FOX. We are, Mr. Chairman. But I think we have to do some

other things beyond studying.

Chairman SHELBY. You have to do something.

Mr. FOX. Yes. The Coopers & Lybrand study will help. It is commissioned and it is in progress, and it will be helpful when it is

finished.

Chairman SHELBY. You cannot study it forever though, can you?

Mr. FOX. No, you cannot, sir. We do have registration information that we receive, and we should be reviewing that—I mean that

registration information is given to us for a reason and it can provide us with information so that we can begin to assess what this

industry is really all about. We can assess the risks associated with

that industry, and then working with Kevin and his people over at

the IRS, and actually pinpoint where we should be directing our efVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
19

forts on both compliance and law enforcement. I mean we should

be helping our law enforcement colleagues with this effort as well.

So we are embarking on, trying to find out how we can look at

the registration requirement, make sure we are getting what we

need there, and if we are not, we will engage in rulemaking and

get it. We are going to take that information and actually get busy

with it, that and other information and start to make a difference

here I think.

Chairman SHELBY. The percentage would be what I will just be

using here. If 99 percent, 99 point something percent of all the

transactions in the nonbank system, if they were, ‘‘legitimate’’—I

do not know if that is right, that figure might be too high, I do not

know. It might not. Let us say it is 99 percent, because there are

billions and billions of dollars moving. You do not want to kill the

industry off because the industry would be deemed legitimate for

a good purpose for people who generally do not have bank accounts.

Is that correct, Mr. Brown?

Mr. BROWN. Yes, it is. That is exactly correct.

Chairman SHELBY. Will the Memorandum of Understanding, the

guidance that you are putting up, will that make anyone feel more

confident about keeping accounts open and so forth?

Mr. BROWN. We certainly hope so, Mr. Chairman, and if it does

not, we will get busy and do what we need to get it done. We certainly hope that will be the case.

Chairman SHELBY. Ms. Taylor, in your testimony you say that

you strongly believe that if MSB’s are in compliance with BSA and

AML, as interpreted by FinCEN, that this should be sufficient compliance standard for the banks, the regulators, and criminal law

enforcement authorities. How do we avoid the Riggs problem where

a financial institution fails to report and the regulator fails to detect or take sufficient examination and enforcement action upon

first discovering compliance problems?

Ms. TAYLOR. I am very glad you brought that up, Mr. Chairman.

One of the things that I wanted to say in addition to the discussion

which has taken place here about the banks is that——

Chairman SHELBY. In other words, what oversight is there of

your department examiners in New York?

Ms. TAYLOR. The other side of this equation is the MSB’s themselves, and what kind of oversight we have of them, which is why

it is so important that not only they be registered to do business

with FinCEN and OFAC, but also licensed by the States. And we

are making our examination and supervision procedures even more

rigorous.

For instance, when a potential licensee comes to us to ask for a

license to do business in the State, we require several things of

them. First, we require that they have policies and procedures in

place, and internal controls designed to ensure compliance with

BSA and AML requirements. Second, they actually have a compliance officer who is competent in this area to ensure the day-to-day

compliance. Third, we require education and/or training programs

of the appropriate personnel. And we also, as time goes on, require

an independent review to monitor and maintain an adequate program. And that is for licensing.

20

After they are licensed, this triggers our examination procedures,

and we have an acronym that we use which is FILMS, and we go

through various components of that, and we look at them every

year or so, each one, to make sure that they are complying with

all of their requirements. We are hoping that with those requirements and with our examination we will be able to catch any failures or systemic failures within that institution, and punish the

perpetrators accordingly.

Chairman SHELBY. Ms. Williams, do you have a comment?

Ms. WILLIAMS. I was going to jump in if you had not asked me

to.

One thing I noted in my opening statement is that we are absolutely committed to doing a good job with BSA examination and,

where necessary, enforcement, and to improving what we do where

it needs to be improved. We have put in place a number of new

measures, and there are new systems within the OCC that are

coming on stream that will help us to monitor emerging issues in

this area throughout the national banking system and to monitor

our follow-up on those issues to make sure that it is timely. They

will also help us to risk assess the factors associated with different

institutions to make sure that we are able to focus our resources

quickly on those areas and those institutions that present the highest risk so that we can follow up appropriately and promptly.

Chairman SHELBY. Mr. Brown, your division of Internal Revenue

Service is responsible for enforcing BSA compliance with respect to

the estimated 160,000 money services businesses in the United

States. That is a lot of people and a lot of firms. Despite this responsibility, it is my understanding that the IRS, Internal Revenue

Service, has only about 325 people assigned to this mission with

another 60 or so scheduled to be added. Even with these additional

examiners, it is highly questionable whether IRS will have the resources—and that is important that you have the resources—to do

your job, to ensure that the MSB compliance—you know, there is

compliance there. Nobody expects you to say anything here today

in contravention of OMB dictates. I know this. I am also an appropriator, as you know.

[Laughter.]

But it would be very helpful for the Committee here today, and

perhaps to the Appropriations Committee, to have some sense of

the gap between your requirements, which are vast, your responsibilities, and your resources. Do you feel comfortable to talk about

that a little bit?

Mr. BROWN. Sure. I certainly feel a little more comfortable about

our reach, given the Memorandum of Understanding we have entered into with the States. I mean that certainly leverages the resources that are available nationwide.

Chairman SHELBY. The first thing we can do is put the mandate

on you, responsibility, and provide no resources.

Mr. BROWN. No, it is true. I do not think there is anyone in

Washington who would tell you they would not like more resources,

but I have been around long enough to know that bodies are not

the answer to everything. There are a number of things we can do

internally. We need to select our work in a better organized fashion

to make sure that the examinations count. We have some new

21

audit techniques, one that was selected, one that was recommended

to us by FinCEN about doing centralized examinations that we

think is going to prove very beneficial. The sharing of the information, as I mentioned, with the States should help quite a bit.

There is one area of concern. I mean we are talking—and Bill

can address this further—but insurance companies and dealers in

precious metals will soon fall under this rubric, and there are

roughly 1,500 insurance companies and 40,000 jewelers who will

fall under the auspices of the Bank Secrecy Act reporting requirements soon, and it is an area of concern for me and for those at

the IRS.

Chairman SHELBY. It is also of cost, is it not, of cost of compliance for the banks, with all these businesses that we need to weigh

as we go through this, do we not?

Mr. BROWN. There are costs on both sides. There are costs in the

industry and there are costs in the Government.

Chairman SHELBY. It is.

Mr. Fox, I have a couple of questions for you. As you are very

aware, this Committee has been extremely concerned about preservation of appropriate levels of privacy with respect to personal information. The ChoicePoint case, in fact, was the subject of a recent

Committee hearing. It is because of this concern that I feel compelled to raise this issue of the recent GAO report describing the

vulnerability of the Bank Secrecy Act data and personal tax information, Mr. Brown, with IRS, to unwarranted intrusion by thousands of employees without a legitimate need to know. The information susceptible to abuse includes Social Security and driver’s license numbers.

Could you address, Mr. Fox, this concern, including in your comments the status of the BSA Direct Program which I understand

should help alleviate the problem hopefully?

Mr. Brown, this is also an IRS problem and I would like for you

to comment on it after Mr. Fox.

Mr. FOX. I will tell you, Mr. Chairman, we too are concerned, as

I know the IRS is concerned about—and Mr. Brown will address

that—the GAO’s findings. I will tell you that we are working very

closely with——

Chairman SHELBY. People are concerned.

Mr. FOX. No, no, no. Yes, sir. And we are working very closely

with the IRS to ensure that this data is kept safely and securely.

We are pleased that the BSA Direct Project is on track for delivery this fall and that it will alleviate the problem eventually. I

think that it is a very important project for this Agency. As you

know, sir, you have personally supported that project, and we

would not be where we are today if not for your personal support

both in this Committee and in the Appropriations Committee.

I will tell you that I have seen the first iteration of this system,

and I am impressed with it. It is going to get a lot better between

now and this fall, and eventually the responsibility for collecting,

housing, and disseminating Bank Secrecy Act data will lie with the

Financial Crimes Enforcement Network, sir. I think that is where

it belongs because then you and the American people can hold us

accountable for it in a way that we should be held accountable for

it. It is very sensitive information, it is very important, and we are

22

working very closely with the IRS on this transition from Detroit

to BSA Direct. So it is going pretty well right now, and I think it

will resolve the issue at least as far as BSA information goes.

Chairman SHELBY. Mr. Fox, Section 6302 of the Intelligence Reform and Terrorism Prevention Act of 2004 directs the establishment of a system for collecting data on cross-border transfers.

Some of us, while certainly sympathetic with Treasury’s requirement for information on such transactions remains skeptical of the

plan’s feasibility, the determination of which is a prerequisite for

the plan’s implementation.

There are already complaints out there that you cannot process

what you have. How will you ensure that you are not the recipient

of a volume of information of dubious value, while the feasibility

study is only in its initial stages, could you provide the Committee

some sense what you have learned to date and where you are

going?

Mr. FOX. Thank you, Mr. Chairman. First of all, if you do not

mind, I would take issue with those that say that we cannot process what we do have. I think we are doing that pretty well and——

Chairman SHELBY. You should answer that. This is a proper

forum.

Mr. FOX. I think we do that pretty well, and I think we are going

to get much better at that with BSA Direct, so I think that is an

exciting part about being at the Financial Crimes Enforcement

Network now.

Sir, I too share your skepticism about the feasibility of the crossborder wire transfer issue, and that is exactly why we have formed

a group at FinCEN to study the feasibility of actually doing this.

We will soon involve—in fact, we have already reached out to the

Federal Reserve Board, which has a very big stake in these issues,

to bring them into that working group, and we will bring other

members of the Government in as well. We are going to brief the

industry on where we are, on May 18 at the Bank Secrecy Act Advisory Group, and we will eventually include, or it is our intent to

include, in that working group people with other interests such as

privacy interests because I think we owe that in our feasibility report to the Secretary.

It is more than just can we build the box? We can build the box,

sir, but it is really about, is this a feasible way to do it?

Chairman SHELBY. It has to be a good box though, does it not?

Mr. FOX. It does, sir, it does, but it can be built. I am certain

of that.

If I could leave you with two things. First of all, we know this

data is incredibly valuable. My Agency just finished, some might

call it a tome, on fund transfers for law enforcement, to train them

in how to exploit and use this data to their benefit and mutual end.

I think your staffs may have it. It is not a public document.

We understand acutely how valuable this information is, particularly on issues relating to illicit finance and terrorist financing. The

September 11 Commission found that, I believe, and certainly our

counterparts in Canada and Australia, who received this information already, will verify that. Frankly, the wire information is every

bit as valuable as suspicious activity reporting.

23

That being said, we recognize that there are huge logistical

issues. The United States, when you compare the United States

banking system with Canada or with Australia, it is not even a

comparison. You are talking about apples and oranges really. So we

understand that there are huge logistical issues with this.

We also are acutely aware of the privacy concerns and the policy

issues that revolve around reporting of this data, because this

would be the reporting of data that is not necessarily suspicious.

It is actually more akin to our currency transaction reporting that

currently exists. You are reporting data if it meets a certain criteria, assuming we get to that point where we would require it.

What I want to leave you with, sir, is that we are taking this feasibility study very seriously and intend to issue a first class report

to the Secretary, and I am absolutely certain the Secretary will be

working with this Committee, as will we. We are very pleased to

work with this Committee and other Members of Congress to deal

with these issues. I think they are incredibly difficult issues, but

I also think it is very important because the information that is in

those wires, those cross-border wires in particular, sir, can really

make a difference, and that is why I think it is important to do this

and do it well.

My deadline—not anyone else’s—to our group, is to try to have

this thing wrapped up by the end of the year. I think if we are

going to meet the requirements of the statute, that is what we need

to do. Then the Secretary can assess hopefully from that report the

feasibility, and we can report back to the Congress. I am absolutely

certain we will be working with your staffs and with you, sir, on

these issues. They are incredibly big issues and I think important

ones to fully vet.

Chairman SHELBY. Thank you, Mr. Fox.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman.

I want to welcome the panel and I apologize. I was not able to

be here at the outset, but there are two other hearings I have had

to pay attention to this morning.

I want to ask first a somewhat related matter, but it does not

go directly to what you deal with. We held a hearing here on remittances. Dr. Manuel Orozco, a leading researcher on remittances at

the Inter-American dialogue, told the Committee that remittances

from the United States to Latin America had grown substantially,

at that point to an estimated $20 billion. That is in 2001. The estimates now are $30 billion or in excess of $30 billion. Back when

the figure was $20 billion he estimated between 15 to 20 percent,

$3 to $4 billion of the $20 billion was being lost in exchange rate

fees and other transaction costs which are often hidden from the

sender of the remittances, which would lead one to suspect at least

that the abusive practices are taking place in the remittance market. We know that many of the people sending remittances tend to

be relatively low-wage earners with modest formal education, or little experience in dealing with complex financial matters. And of

course, the remittances are not covered by Federal consumer protection laws, including the disclosure of fees.

24

In the course of addressing this issue—this is not directly your

jurisdiction—but have you encountered this situation? I would like

to hear from each of you if you have a take on this situation.

Mr. FOX. Senator, I can only tell you that I know anecdotally

that remittance systems do, or at least on occasion, have been—it

has been alleged that remittance systems have charged on occasion

exorbitant fees on the back-end depending on clients and that

thing. I am really not an expert in it. I can only tell you that

anecdotally we have heard that from time to time.

Ms. TAYLOR. I would like to address that, Mr. Senator, thank

you. One of the things that we do in New York State is time and

time again impress upon people or try to impress upon people the

importance of using a licensed money transmitter as opposed to an

unlicensed money transmitter. From licensed transmitters we require various disclosures. We require them to post the exchange

rates for the countries they are transmitting money to, and we require them to disclose the fees that they are charging. I think a lot

of these abuses happen in the unlicensed sector, but in the licensed

sector we require these disclosures and we examine the companies

to make sure that the disclosures are being followed. And then it

is a competitive market. People can go from transmitter to transmitter if they are so inclined, to shop around and find the best

rate. But anecdotally, we have also heard those stories.

Ms. WILLIAMS. Senator, I do not claim to be an expert on remittances, but at the OCC we have looked at this area. We have a

study on remittances that we did just a few months ago. One of the

things that the study did surface is that the entry of banks into

the remittance business seems to be viewed as a factor which is

bringing down the costs overall, reducing the fees in connection

with remittances. There are other regulatory issues from the bank

perspective that are present in connection with banks being involved in remittance businesses. We highlight some of the issues

in connection with having customers involved in that line of business in the study that we did.

We also note that in connection with banks’ obligations under the

Community Reinvestment Act, where a bank itself may be providing low-cost services including remittance services in a community, that is something that would be favorably considered for CRA

purposes. So there are a number of issues that the remittance business presents for banks either engaged in it directly or servicing

those businesses that we do touch on in the study that we did recently.

Senator SARBANES. Well, the Chairman and I have requested the

GAO to study this very issue, and we expect the report to come in

sometime in the next few months, but I think it is a very important

issue, and there is a considerable concern that people are really

being skimmed off pretty heavily in terms of these remittances.

And I think it is an issue we need to address. That is not today’s

issue.

Today’s Washington Post describes unlicensed money remitters in

Maryland, and the steps taken by State regulators to try to address

them. FinCEN constantly tell us that it has this large collection or

multi-use database. Do you try to project, to identify unlicensed remitters? I mean if the States have a licensing requirement, why

25

would it not behoove us to try to move out of the business unlicensed remitters at least as an important beginning step? That is

not to suggest that licensed remitters are not engaged in some bad

practices, but first of all, the unlicensed remitters are not meeting

the standards that the States have set, which are often designed

to provide important protections to their customers, and protections

that may also bear on money laundering questions.

Mr. Fox.

Mr. FOX. Yes, Senator, I could not agree more. And we will embark on that. We have today entered into a Memorandum of Understanding with the New York Banking Superintendent and the

New York Banking Agency.

Senator SARBANES. Yes, we are very pleased to hear that. In fact,

had you not done so, I would have expected that to be a major

focus.

[Laughter.]

That is always the benefit of hearings.

[Laughter.]

Mr. FOX. It is amazing how that works.

I will tell you, sir, it is our intent to do that with every State

that will sign on with us. We think that this will have a very good

effect—I could not agree with you more. I think it is not just the

State licensing requirement, Senator, it is the Federal registration

requirement as well. We have to make sure that money services

businesses are meeting their very most basic requirements under

the law. That is to register with the Federal Government if they

are required to do so, and then to be licensed under a State regime

if they are required to do so.

It seems to me that we need to study that and we need to work

with our counterparts in the States collaboratively to ensure that

at least those sectors are meeting that very basic requirement.

I would love to tell you, sir, that we have already done that. We

have not. But I can tell you that it is the plan. I mean it is part

of what we are trying to do with the States in leveraging their

abilities to get a handle on this industry.

Senator SARBANES. Ms. Taylor.

Ms. TAYLOR. Thank Mr. Senator. First you have to find the unlicensed money transmitters and check cashers, for that matter, and

in New York, as a high-intensity financial crimes area designation,

we have formed a very close partnership with law enforcement,

local law enforcement including the NYPD and the DA and the

FBI, Secret Service, a lot of other law enforcement agencies. One

of the big things that we are concentrating on is tracking down unlicensed money transmitters. As a matter of fact, I think it was 3

weeks ago at this point, we closed one down. It was called Vietnam

Service, Inc. It was transferring millions of dollars a year from the

New York City area to Vietnam. And we found them, and we closed

them down. So that was an example of how we can work together

with law enforcement.

But you have to find them first.

Senator SARBANES. The New York State Banking Department I

know has been very active in this area. What would you suggest

to the Committee are other important steps that could be taken

that have not yet been taken to get at this problem? I know if I

26

had asked that question 24, 48 hours ago, there would have been

this Memorandum of Understanding, but at least the memorandum

is behind. We will see how it is carried out and implemented. But

what other measures?

Ms. TAYLOR. I think that keeping the pressure on all of us to continue the good work that we have been doing with these memoranda, and carrying them through to fruition is something that is

very valuable.

Also in my oral remarks I mentioned two areas. One, which is

the perceived over-zealousness in some cases, in the law enforcement area with U.S. Attorneys and putting pressure on the Justice

Department to create some uniform way of dealing with that across

the country would be one thing I think we need to reach an understanding between the U.S. prosecutors and the financial services

regulators as to where the lines of jurisdiction are what is considered to be criminal behavior and what should be dealt with in a

regulatory way.

The second issue I brought up is that I hope, in light of the

OCC’s preemption of State licensing requirements for operating

subsidiaries of national banks, that there is some uniform national

level of regulation for these industries.

Ms. WILLIAMS. Senator, could I just say something? That is the

second mention of the OCC preemption position in this context this

morning. That is not an issue here. It has not been an issue. It will

not be an issue.

Ms. TAYLOR. Anecdotally, I know of several money transmitters

who are proactively trying to become operating subsidiaries of nationally chartered banks, and the reason given is that they will not

need a State license under those circumstances.

Ms. WILLIAMS. They should not look to the national banking system as a safe haven.

Senator SARBANES. Well, we are pleased to hear that, although

the OCC has created a lot of problems on the preemption issue. We

just had a decision in Maryland in the Federal Court with respect

to prepayment penalties, and of course the OCC has taken a position that those are preempted. I am in very sharp disagreement

with you on that. I think it is a departure. The ruling you made

is in departure from past practice, and it cripples the States from

providing consumer protections in an area which does not substantially impede the operations of the national bank. But the OCC is—

at least you are not extending it into this area, but you have created a lot of problems in other areas, and significantly diminished

the consumer protections.

Mr. Chairman, I see the red light is on. I have just one other

question I want to put to Mr. Fox if I may?

Chairman SHELBY. You go right ahead.

Senator SARBANES. It has been 31⁄2 years since we enacted the

USA PATRIOT Act with a title dealing with the money laundering

issue. Section 312, which dealt with correspondent accounts, was a

major part of Title 3. The full implementing regulations have not

yet been issued, as I understand it.

Mr. FOX. That is correct, Senator.

Senator SARBANES. And you are the administrator of the Bank

Security Act. When will these regulations be issued?

27

Three-and-a-half years seems like a long time.

Mr. FOX. It is a long time.

Senator SARBANES. Yes, it is. It is almost two-thirds of a Senate

term.

[Laughter.]

Just to use a benchmark.

Chairman SHELBY. It is.

Mr. FOX. It is a long time. The matter is under significant policy

discussion at the Department of the Treasury. I can tell you it is

my view that we are close, and it is our hope that those regulations

will be issued very soon. I think they need to be issued. We need

to implement that statute fully, and we are working hard to make

sure that we get it done. But there is no excuse, Senator, it has

been a long time, I agree.

Senator SARBANES. Does the Chairman need to schedule another

hearing? I mean scheduling the hearing seems to have gotten action on the Memorandum of Understanding.

Chairman SHELBY. We will talk about it, Senator.

[Laughter.]

Senator SARBANES. Do we need to do that?

Chairman SHELBY. We will, absolutely, the Members.

Senator SARBANES. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you, Mr. Chairman.

To our witnesses, thanks very much for joining us today. I have

a couple of questions I would like to ask, and it may have been

asked but I am just going to ask it again. Forgive me if it is repetitive. Do you feel that you need any additional authority to regulate the money services businesses to ensure that it is used for its

correct purposes? I do not care who starts off with this, but I would

like to hear from all of you.

Ms. WILLIAMS. Senator, speaking about regulation of the banking

industry, I think that we have sufficient statutory and regulatory

tools.

Senator CARPER. Okay. Ms. Taylor.

Ms. TAYLOR. In New York State, I think we also have sufficient

statutory and regulatory tools at our disposal.

Senator CARPER. How about Mr. Fox?

Mr. FOX. Senator, thank you. I agree. I think that the tools are

there. You have given us the tools. We need to implement them

fully and make sure they are the right ones, but I think they are

there.

Senator CARPER. I cannot see your last name. What is your last

name? Mr. Brown.

Mr. BROWN. I agree as well, Senator.

Senator CARPER. All right, thank you.

A follow up question. Do you feel that you need additional resources from Congress or from some other source in order to carry

out your mission?

Ms. WILLIAMS. I think that we have sufficient resources to do the

job that we need to do.

28

Ms. TAYLOR. We always feel that we need additional resources.

That is a State issue.

[Laughter.]

Senator CARPER. But there is not much we can do about that, is

there?

Ms. TAYLOR. I think that from the Federal level, one of the

things that has happened which is extremely helpful, is that we

have been given access to examination and training materials by

our sister agencies at the Federal level, for which we thank you

very much.

Senator CARPER. Are there other things we can be doing? That

is a good example.

Ms. TAYLOR. I think that is a very good example, and that is I

think how we can be helped the most. It is the most useful help

that we could get.

Senator CARPER. Mr Fox.

Mr. FOX. Senator, thank you again. Yes, you can always use

more resources. What we are really focused on though is frankly

sometimes—I think Commissioner Brown said it best earlier—you

may not have been here—is that often times bodies are not the answer. I think the important thing is really figuring out what we

can do with the bodies that we have in making sure that we have

those bodies working on the real issues of the day. So that is what

we are very much focused on, but thank you for the question.

Senator CARPER. Mr. Brown, did you really say that?

[Laughter.]

Mr. BROWN. I did say that. To be fair, we are adding 28 percent

in terms of examiners over the course of the next year. We are

going to augment——

Senator CARPER. I am sorry. Say that again.

Mr. BROWN. We are going to augment our front line examining

workforce——

Senator CARPER. I heard 28 percent I thought. Say your whole

sentence over.

Mr. BROWN. Yes. We are going to add 28 percent more examiners

over the course of the next year, so I am concerned about the resource commitment here, but I echo Bill’s remarks in that we also

have an obligation to the taxpaying public and to the Congress to

make sure we are using those resources wisely, to make sure we

are examining the right institutions, to make sure that we are

looking for the right things, to try different techniques, to make

sure we are not duplicating efforts with the States. If Superintendent Taylor has touched someone in New York State, that

should suffice. We do not need to have redundancy there. I think

there are a lot of things we can do short of just adding bodies to

this program to enhance it.

Senator CARPER. Let me come back to you, Mr. Fox, if I could.

I understand that FinCEN held a public hearing. My guess is you

have a lot of them. But one to discuss the money services business.

And if you have already shared some insights from that, I apologize. I just missed that. But if you could just share with us some

of the concerns that might have been raised at that meeting, and

any ideas that you all may have in response to the concerns that

were raised.

29

Mr. FOX. Certainly, Senator. Actually, we do not hold that many

public hearings, and I think this one was such a success we might

change that orientation. I think public hearings are important. It

is amazing what one learns in those fora.

I will tell you that from the perspective of money services businesses what we heard was very clear, that they were losing banking account relationships at an alarming rate, and that causes us

great concerns, not only because that sector being unbanked causes

pinches, if you will. The money services sector is a very important

sector for a large portion of our population, often the people who

are unbanked, who do not have banking accounts. From our perspective at FinCEN, it is incredibly important that those money

services businesses maintain accounts because we want them to be

in the transparent financial system. The worst thing that can happen, I think, is to see those businesses lose that transparency and

go underground.

So we heard that clearly from the money services businesses.

From the banking organizations, we heard a frustration and a

concern about their reputation risk and regulatory risk for banking

this sector. I think that concern is based in large measure on some

misperceptions about the sector, which we recognize. If we took one

thing from that hearing, the thing that we knew, we had to do it

very quickly, is to go out with joint guidance to both sectors and

color in the gray, if you will, to make sure that people understand

better what actually is required.

We believe that if banking organizations and the money services

sector better understand what is required under the Bank Secrecy

Act, that this will calm the water.

And we have announced that guidance today, both with our colleagues in the Federal banking agencies, and then we, FinCEN, are

issuing it to the money services sector. So we hope that this effort

will calm the waters and resolve at least the majority of this problem. If it does not, sir, we will get busy and we will work until it

does.

Senator CARPER. All right. Anybody else have anything else you

want to add before I kick it back to the Chairman?

Mr. Chairman, thanks so much. And thanks to all of you.

Chairman SHELBY. Thank you.

I thank all of you on the first panel. I know it has been long, but

we appreciate your participation. Thank you very much.

Our second panel, Mr. John Byrne, Director, Center for Regulatory Compliance, American Bankers Association; Mr. Gerald

Goldman, General Counsel, Financial Service Centers of America,

Inc.; Mr. Dan O’Malley, a Vice President for the Americas,

MoneyGram International; and Mr. David Landsman, Executive

Director of the National Money Transmitters Association.

Mr. Byrne, we will start with you, but all of your written testimony will be made part of the record. We are going to have a vote

on the floor in a few minutes, but we can finish the panel and then

have a break and come back for questions. Your written testimony

will be made part of the record in its entirety, all of you, so sum

up quickly what you want to say.

30

STATEMENT OF JOHN J. BYRNE

DIRECTOR, CENTER FOR REGULATORY COMPLIANCE

AMERICAN BANKERS ASSOCIATION

Mr. BYRNE. Thank you, Mr. Chairman and Members of the Committee. ABA appreciates this opportunity to discuss how the financial industry is addressing compliance with the USA PATRIOT Act,

as well as all the laws covering antimoney laundering.

At this Committee’s request we will focus specifically on how

these challenges have impacted the banking industry’s relationships with money services businesses. We offer the following three

observations and recommendations.

One, banks have been existing relationships with MSB’s due to

the severe lack of guidance as to what constitutes an acceptable

due diligence program. Immediate direction is essential. Today’s

announcement by FinCEN and the Federal banking agencies will

greatly assists banks in making determination on obtaining and

maintaining business relationships. I would also say, Mr. Chairman, we should avoid the urge to be skeptical and really commend

the agencies for working so quickly after the March 8 meeting to

come up with this guidance, an interagency guidance, which again,

we believe will be vastly helpful in determining what we need to

do with MSB’s to continue those relationships.

Two, the lack of direction in the MSB area is emblematic of the

overall problem with Bank Secrecy Act oversight, the labeling of an

entity as ‘‘high risk’’ without accompanying guidance on how to

mitigate that risk, and more importantly, second-guessing by examiners.

And three, until the financial sector receives assistance in the

form of, one, guidance, two, clear examples of what constitutes suspicious activity, and three, ensuring that appropriate deference is

given to bankers that decline to file suspicious reports, the volume

of SAR’s will continue to skyrocket.

As indicated in the letter for invitation for today’s hearing, in

dealing with MSB’s there is a need to have, ‘‘a consistent and equal

policy.’’ Again, today’s interpretive guidance is a welcome response

to that charge. The industry certainly understands and appreciates

the need to analyze the levels of risk involved with maintaining

MSB relationships. The problem, however, is how much analysis is

sufficient? At times banks will appropriately exit relationships due

to the risks inherent with a particular MSB. At other times, banks

want to continue these valued relationships. We know the importance of providing all segments of society with banking services.

For some, remittances are an essential financial product and MSB’s

frequently provide that service.

If the environment does not change these important services will

continue to be severely hampered by regulatory excess. Again, we

wrote this statement last week. We really appreciate today’s statement because I think today’s interagency guidance will really go a

long way toward helping.

I just want to make two quick points. The one reason to remedy

this problem I think can be summed up—which is in my written

statement—with a community banker, who on March 8 said the following: ‘‘One of the common types of small businesses in our community is the small grocery store or convenience store. These are

31

the businesses that often serve the immigrant and less advantaged

community. These businesses are the connecting point for many in

our society to the economic system. They are legitimate businesses

serving a genuine need. Under the current regulatory scheme, we

can no longer serve them.’’

Mr. Chairman, in the interest of time, let me make one final

point. The agencies will also be issuing at the end of June interagency procedures on examining banks for Bank Secrecy Act compliance. We believe that will go, again, a tremendous long way toward giving us some direction, some road map as to what is considered adequate compliance.

Today, we do not have that. Today, we have problems in the field

where examiners unfortunately are not getting the correct interpretations from Washington, not because Washington has not been

giving them, by the way, because for some reason they feel a need

to find minor problems. They feel a need to tell bankers to eliminate accounts. They tell bankers that they are going to cite them

for failure to file suspicious reports. This June document will be

like this MSB guidance, it will be tremendously helpful.

What we would ask the Committee though is to make sure that

the document gets rolled out around the country, that there are regional meetings with the examiners and the bankers so that we

can ask the appropriate questions as to what is between the lines

of the document. If we do that, I think you will get less and less

complaints from the industry about exam problems.

Finally, Mr. Chairman, we commend the Treasury Department,

the banking agencies, and FinCEN for their recent efforts to ensure

a workable and efficient process. ABA will continue our support for

these efforts.

Thank you. We would be happy to answer any questions.

Chairman SHELBY. Mr. Goldman.

STATEMENT OF GERALD GOLDMAN, GENERAL COUNSEL,

FINANCIAL SERVICE CENTERS OF AMERICA, INC.

Mr. GOLDMAN. Thank you, Mr. Chairman. FiSCA represents

more than 5,000 neighborhood financial service providers

serving——

Chairman SHELBY. Did you say 5,000?

Mr. GOLDMAN. Yes, 5,000.

Chairman SHELBY. Okay.

Mr. GOLDMAN. Serving hundreds of thousands of customers, both

banked and unbanked.

The recent statement by Treasury Secretary Snow, Acting Comptroller Williams, and FinCEN Director Fox, acknowledge that

check cashers play a vital role in the national economy and are a

key component of a healthy financial sector, and it is important

that they have access to banking services.

This is music to our ears. We have waited to hear this shift in

focus for a long time. We commend FinCEN and the Federal banking agencies for their issuance today of MSB guidelines. It is a first

step and we look forward to commenting after further study.

However, I must tell you that we are skeptical. We are not certain that guidelines will be enough to undo the damage done to our

banking relationships. The key to finding a solution to bank disVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
32

continuance will require a real direct action between the regulators, the banks, and the MSB’s. They cannot just be talking to

themselves.

According to American Banker, 50 percent of banks that have

been serving our industry, check cashing industry, have recently

stopped. This is a staggering number. It took us 50 years to nurture these relationships and in one fell swoop they were ended or

damaged. The example of JP Morgan Chase, which served our industry for 50 years, during that time they said they had one loss

in 50 years in this industry. Yet recently our 50-year-old friend notified all 500 of its licensed check cashers that it was terminating

their accounts. Chase, including Bank One, Am South, Citibank,

Fleet, Sovereign, Sun National, Bank of America, and others, have

indiscriminately terminated the accounts of thousands of check

cashing locations.

What if the banks announced that they would no longer provide

services to Members of Congress? Could they do it? Yes. Banks

could cut Members of Congress as a group out of the banking system, and essentially that is what they are doing to our industry.

The irony is that banks do not make serving our customers the priority that we do, yet they have the power to stop us from serving

them. It makes no sense. It is not fair.

The question is, why is this happening? Our industry is sound.

It is stable. It is responsible and profitable. We do not operate underground. We are licensed and regulated in 38 States and are regulated by the BSA and USA PATRIOT Act.

According to FinCEN itself, check cashers—and this is for past

4 years—check cashers, ‘‘have set the standard for financial services industry in the fight against money laundering, financial

crimes, and terrorism.’’ That is an irony. While we were setting the

standard, our banking relationships were being terminated.

Among the reasons cited are: One, OCC designation of check

cashers is high risk for money laundering. I do not think that has

changed.

The high cost and administrative burden of compliance and pressure from regulators. No industry should be subject to the awesome

power of blanket termination at will. Until this very issue of blanket termination at will is addressed, the overreaction and the indiscriminate use of power by some will continue to prevail. We would

like to see this Committee really tackle not only the injustice that

has occurred, but also to define the responsibilities of banks in

serving MSB’s based upon the merits of the individual MSB so that

access to the banking system will be available to all, particularly

the unbanked.

We need to stop the bleeding.

We have five items that we would like to suggest.

One, set definite standards, develop definite standards before

agencies can assign the label ‘‘high risk’’ on an industry, and only

after appropriate due process; two, Congress should consider passing a ‘‘Banking Services Continuation Act’’ that would permit

banks to discontinue the accounts of MSB’s only after the customer

has failed to meet its compliance standards; three, a group should

be created—and possibly through legislation—by the Secretary of

the Treasury, made up of regulators, banks, check cashers and

33

money transmitters, with the sole purpose of ensuring access to

banking services; four, give CRA credit to banks that serve MSB’s

in neighborhoods that serve low and moderate income consumers;

and five, there should be more transparency in the bank examination process to ensure that regulatory directives do not punish the

law abiding, as we are, but only the law breakers.

Thank you, Mr. Chairman.

Chairman SHELBY. Go ahead.

STATEMENT OF DAN O’MALLEY

VICE PRESIDENT OF THE AMERICAS,

MONEYGRAM INTERNATIONAL, INC.

Mr. O’MALLEY. Mr. Chairman, Senator Allard, MoneyGram

International is a payment services company conducting businesses

in 170 countries through more than 79,000 locations. I am pleased

to testify about our compliance program and the problems MSB’s

are having with bank accounts.

MoneyGram was founded in 1940 under the name Traveler’s Express, a money order company. Over the years it has grown to be

a leading international payment services company that offers services through a network of agent locations that include banks, supermarkets, and many small, independently owned mom-and-pop

convenience stores, which along with many check cashers are the

MoneyGram agents experiencing the majority of the banking problems.

MoneyGram offers consumers three primary services, the

MoneyGram money transfer service, Traveler’s Express money orders, and check processing for financial institutions. These services

are closely regulated and licensed by the various State banking departments.

MoneyGram also has a comprehensive compliance program that

is fully compliant with that Bank Secrecy Act and the USA PATRIOT Act. The compliance program is built around three main

components: Training employees and agents, monitoring transactions, and reporting suspicious activity. My written testimony describes in detail MoneyGram’s compliance program which exceeds

or at minimum meets the current regulation in many ways and

many areas.

Now, I would like to address the problems that many MSB’s and

their agents are experiencing with bank accounts. For MoneyGram

agents it appears that the small mom-and-pop shops and check

cashers are the ones who are being targeted for account closings.

These businesses are being told by banks, which they have had relationships with for years, that they now must choose to either

close their account or cease conducting any kind of MSB activity.

When they ask their bankers why, they are frequently told that

the bank’s regulators have informed them that MSB’s are high risk

and the bank is advised to avoid doing business with such entities.

In order to help our agents MoneyGram has been negotiating

with banks around the country to offer special accounts. In some

situations we have negotiated a master MoneyGram account with

subaccounts for our agents. While this may sound like the ideal solution, it is not. It is far more costly for MoneyGram and it is far

less convenient for our agents. In order to retain some agents,

34

MoneyGram is now paying for armored car services to collect the

agent’s funds, which adds even more costs to conducting business,

and is even more inconvenient.

MoneyGram would like to offer two suggestions on how the bank

accounts issue might be addressed, and how compliance with the

USA PATRIOT Act might be improved. The two are somewhat tied

together since improving USA PATRIOT Act compliance will help

banks and their regulators gain confidence in MSB’s.

With regard to the bank account issue MoneyGram believes part

of the problem stems from the fact that banks and their regulators

do not understand the existing State licensing regime that applies

to MSB’s. That is why MoneyGram recommends the Committee

consider legislation that would establish a dual-chartering system

for MSB’s, analogous to what banks and credit unions enjoy.

The establishment of a primary Federal regulator may significantly reduce the concerns and misperceptions about the oversight

of the industry, as Mr. Goldman referenced. Too often MoneyGram

has heard from banks, regulators, and law enforcement officials, as

well as in the press, that MSB’s are largely unregulated. This is

not true, but it is a perception that simply will not go away. A primary Federal regulator would instill greater confidence by banks,

their regulators, and the public in MSB’s.

MoneyGram would also like to offer a recommendation that

would add clarity to the USA PATRIOT Act requirements. One requirement is that MSB’s conduct a periodic review of their compliance program. For banks and licensed MSB’s such a requirement

is appropriate, but for thousands of mom-and-pop convenience

stores that sell money orders or money transfers only as an agent,

this requirement is largely unintelligible. These businesses need

greater direction from FinCEN as to what constitutes an adequate

review and who can conduct the review.

For example, a simple one-page form could be developed that the

owner of the business would be required to complete on an annual

basis confirming compliance with the USA PATRIOT Act. It will

also help those businesses better demonstrate to their bankers that

they are aware of their compliance obligations.

In conclusion, I want to thank you, Mr. Chairman and Senator

Allard, for the honor of presenting testimony on behalf of

MoneyGram International. We at MoneyGram are proud of our

company’s strong efforts in our vigilance in antimoney laundering

and the prevention of terrorist financing, and we remain dedicated,

and again, vigilant to working with regulators and law enforcement

officials to defeat the attempts by criminals to use any of our services for illegal actions.

Thank you.

Chairman SHELBY. Mr. Landsman.

STATEMENT OF DAVID LANDSMAN, EXECUTIVE DIRECTOR

THE NATIONAL MONEY TRANSMITTERS ASSOCIATION, INC.

Mr. LANDSMAN. Mr. Chairman, we appreciate the opportunity

the Committee has given us today to have our grievances on this

subject heard.

We are also grateful to New York Superintendent of Banking,

Diana Taylor, for meeting with us last month on this issue.

35

FinCEN has worked hard with the Federal bank regulators to

publish guidelines. For this we are also grateful and we applaud

the stance they have taken. They are doing what they can to fix

the problem and correct this injustice, an injustice that has ominous implications for other industries untouched by this problem as

yet.

Yet relief will not come soon enough for many of us. If nothing

is done, and done quickly, many licensed remittance companies will

lose their last bank account in 3 days, and probably breathe their

last.

In the March 30 joint statement, FinCEN publicly acknowledged

for the first time that there may have been a misperception of the

requirements of the Bank Secrecy Act and the erroneous view that

money service businesses present a uniform and highly unacceptable risk of money laundering or other illicit activity. This is an understatement.

Clarification of best practices will help, but most of these guidelines have already been in the public domain for years, available

to us and the banks.

Now regulators are properly alarmed at the idea that two entire

licensed industries, money transmitters and check cashers, can be

so red-flagged as to make it impossible for even the best of them

to get an account anywhere.

That the acceleration of these closings has coincided with the accelerating rate of bank prosecutions, fines, enforcement actions,

and scandals is no accident. The more heat that is brought on the

regulators by Congress, the more they will crack down on the banking industry. The more heat that is brought on the banking industry, the less it can afford to appear to be associated with those who

look even slightly suspicious to some eyes.

In most cases, these closings have occurred not because of any

actual problem in our history or deficiency in our compliance programs, but simply because we are in a business designated ‘‘high

risk’’ by Federal banking regulators. Banks no longer feel they can

do enough due diligence on us no matter how much time and

money is spent. They do not feel secure, nor do they feel they can

ever satisfy the probing questions of their examiners in this regard.

We seek a national money transmitters act that will require a

national money transmitters license, not to deal with safety and

soundness, but with antimoney laundering requirements. The purpose of this new license would not be to add more regulatory burdens, but to ensure uniform and universal application of our

antimoney laundering laws, eliminate duplicative exams, and provide a certification that banks may rely on. We seek a broad, clear

national definition of money transfer and when a money transfer

license is required, even application of the licensing requirement,

respect for the license itself, and meaningful punishment for those

who willfully refuse to get a license.

The banks are not wrong to be fearful of our accounts, but the

greatest risk they face with our accounts is getting into serious

trouble with their regulators.

We are not looking for leniency. To the contrary, we licensed

MSB’s welcome stringent regulation and we demand vigorous enforcement. At no time have we thought that the problem was due

36

to regulations that were too stringent. To the contrary, closing accounts is a total abdication of responsibility. All we are asking for

is a level playing field and a fair chance.

What may have started out as legitimate money laundering concern on the part of Government and banks has turned into nothing

less than a denial of civil rights, not only to the community-based

businesses we represent, but also to the broader public they serve.

Money is the lifeblood of our business and banks control the pipeline. Access to a bank account is the access to life. It is a public

accommodation working under public charter, and should not be

unreasonably denied to any class of people.

The challenge of a free society in the war on drugs and money

laundering and the war on terror is to separate and stop the tainted money while letting the good money through, and especially to

separate the flows of migrant worker remittances from the flows of

nefarious schemes. The only way to do that is to encourage a vital,

transparent, nonbank sector.

Thank you.

Chairman SHELBY. I thank all of you. We have a vote on the

floor. We are going to come back, and I have a number of questions. We will be in recess until we can come back. I would say 10

to 12 minutes. Thank you.

[Recess.]

Chairman SHELBY. The hearing will come to order.

Mr. O’Malley, in your testimony you explained that MoneyGram

believes that part of the account termination problem stems from

the fact that banks and their regulators do not understand the existing State licensing regime that applies to MSB’s. Thus, you propose that Congress should consider legislation to establish a dual

chartering system for MSB’s similar to what banks and credit

unions already enjoy. Under this plan an MSB that operates in

only one or a couple of States could choose to be State-chartered

while others could seek a Federal charter, have an option if they

wanted. You conclude that the establishment of a primary Federal

regulator would instill greater confidence by banks and their regulators while significantly reducing the misperceptions about the

oversight of the industry.

Do you think that such new legislation to provide for State or

Federal MSB charters, optional charter, and a primary Federal regulator would benefit only the three or four largest MSB’s by eliminating so much of the State regulation currently imposed on the

category of MSB and not have much impact on the rest of the industry? Other than the new Federal regulator what else can be

done to ease the jitters in the banking community, in your opinion?

Mr. O’MALLEY. To answer the first part of your question, the

dual chartering, I think the critical part there is making sure that

we do not end up with additional regulatory bodies on top so that

we do not layer that.

Chairman SHELBY. That costs money, doesn’t it?

Mr. O’MALLEY. That costs money and it also may add to the

problem by creating further misperceptions or lack of focus on what

we should be working with.

The critical piece there is, will it benefit a couple of the major

players? Certainly it will. But it would also benefit all of the cusVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
37

tomers that are associated with those major players. For example,

a larger retailer that works across State lines has to comply with

those State regulatory bodies as well, and we have a difficult time

trying to explain and provide consistency across State levels because of all the reasons and issues you have heard on both panels

today.

The second part of the question on the following up for other

things that could also add value there, I think was the furthering

of your question. I think the misperception that is created today is

because what ends up being translated out of the OCC or out of

the banking regulatory bodies, it ends up being pushed out and the

banks specifically are unaware of exactly what that means. I think

the guidance that was presented today, Memorandum of Understanding, goes a long way, but to some degree we are sitting looking for what does that guidance and what will it actually provide?

So it potentially helps assist with the problem, but again, until it

gets translated to the furthest extent of the banking channels

many people still have issues with, how do I comply with that? It

is much easier just to say, do not bank MSB’s.

Chairman SHELBY. Mr. Goldman, in your testimony you proposed

to have Congress enact a banking service continuation act that

would permit banks to discontinue MSB accounts only after it

could be shown that the customer has failed to meet its statutory

and regulatory antimoney laundering obligations, or for legitimate

business reasons unrelated to the cost of compliance. What other

industry has such protections that you know of?

Mr. GOLDMAN. I cannot think of any.

Mr. LANDSMAN. What other industry needs it?

Chairman SHELBY. That might be a good question.

Mr. GOLDMAN. I think here you have a very unusual relationship

between the banks and the industry that we represent. We rely

solely on them for our business, so we have to find a way to ameliorate what is happening so that we can continue to provide services.

Chairman SHELBY. They also could be a competitor of yours,

could they not?

Mr. GOLDMAN. That is absolutely true. In fact, some of them are.

Some of them do own check cashing businesses, believe it or not.

Chairman SHELBY. Mr. Landsman, in your testimony you proposed that Congress should enact a national money transmitters

act that would give money transmitters a license based on

antimoney laundering requirements. How exactly would this help

and should it be MSB industrywide? Do you want to elaborate on

that a little?

Mr. LANDSMAN. Yes, I do believe it should be industrywide. I do

not believe the States are ever going to give up their right to regulate, and therefore my concept is not quite a dual regulatory

scheme in the sense that you meant it where an MSB could choose

which one he wanted.

Chairman SHELBY. Is it like an optional charter?

Mr. LANDSMAN. Yes. It would not be like that. Everybody would

have to have this. The States have traditionally left the antimoney

laundering problems to the Federal Government. The States are

not experts. The States do not write the laws on antimoney laundering. They have enough on their hands to enforce the safety and

38

soundness aspects of their license. In a like manner, the Federal

Government is having enough trouble enforcing the antimoney

laundering parts of their charge, of their mandate, so it would

make sense to divide the duties and get the Federal Government

more involved.

Right now, what we have, as a FinCEN registration, is basically

a two-page form. I am not sure, beyond identifying who is an MSB,

what good that does anybody. I know that we have a very small

cadre of examiners and trainers. We need to train the whole country and examine the whole country. We do not need to examine

every 200,000 of those MSB’s, but we do need to examine the larger ones, and everybody needs to know what the rules are. That is

why I think it should be Federal.

Chairman SHELBY. MoneyGram’s global profile. According to

your prepared remarks, MoneyGram offers money transfer services

at 79,000 locations in 170 countries in addition to its 60,000 U.S.

locations. You note with only 1,800 employees and over 100,000 locations it is easy to see why MoneyGram relies on your agents to

sell its services. So that is 79,000 foreign locations and 1,800 employees worldwide. It is my understanding, of the 1,800 employees

only 36 are responsible for ensuring compliance industrywide with

U.S. antimoney laundering and Bank Secrecy Act laws and regulations.

Is that a sufficient number of compliance officers to ensure compliance throughout the MoneyGram empire, and can you provide

some description of how those 36 people function on a daily basis?

In other words, give us some idea of how you work.

Mr. O’MALLEY. First let me clarify. The 79,000 locations is in

total for our wire transfer services, so there is some mix for some

of our money order products. But if you are looking on global

basis——

Chairman SHELBY. It means you are doing well. That is not a

bad——

Mr. O’MALLEY. It means we are doing well. I wish it were larger

and that would be a good thing. But I just want to make sure we

get the numbers correct.

So if you are focusing back on how do we manage compliance and

the number of people, the 36 people, not unlike what we heard

from the first panel, as far as resources, we would all be looking

for and trying to manage toward more resources. But in the end

I agree with the previous statement, that people do not always

solve that problem.

We have a stringent compliance and regulatory program across

our business, from the training of our employees up front, from the

CEO down to the person that handles the last call from our customers. So we are supporting across a vast of individuals from our

sales people to our compliance people that are in the street, specifically for compliance, but we manage compliance throughout our organization and across all 1,800 employees. It is one of the critical

measures and activity that is a requirement of our employment for

our organization is a training program on compliance.

Having said that, managing across the other expectations of our

product base we also have a monitoring program that our systems

are constantly monitoring for compliance, antimoney laundering,

39

structuring, go across the gamut of activities from a compliance

perspective and from an antimoney laundering perspective. So we

have very large resources dedicated from a dollar and a computer

perspective, managing and pushing that information out to our

strict compliance people. But we are vigilant across our agent base

to do the exact same thing.

Chairman SHELBY. The question of risk is at the center of issue

of whether banks should open and maintain accounts for MSB’s. In

your prepared remarks, Mr. Landsman, you address the specter of

racism and civil rights violations should MSB’s be denied access to

banks without a certain level of due process. The implication being

that MSB’s associated with certain ethnic groups are targeted for

discriminatory treatment. A rational assessment of risk has to entail a degree of geographic targeting. Wire transfer companies

sending a large percentage of transactions to the Middle East or

South Asia, for example, could be expected I think to draw more

scrutiny than is the case with other regions. I think that is just

commonsense.

Could each of you provide an assessment of how you assess risk?

Is there an ethnic or geographic dimension? What makes one line

of business riskier than other?

Mr. Byrne, we will start with you.

Mr. BYRNE. The cornerstones of the problem, Senator, has been

the fact that——

Chairman SHELBY. Let’s talk about it banks.

Mr. BYRNE. The agencies are pushing risk assessment and riskbased focus regarding antimoney laundering. So we have to make

up that goal by putting in place programs to assess risk. What are

the risks——

Chairman SHELBY. You are doing that is, assessing risk, in dealing with MSB’s.

Mr. BYRNE. Right. You do look at geography, you do look at the

products. Are they more complicated than basic products? The wire

transfer business or transmission business, if they are sent to certain parts of the world where historically there have been risks, we

have to increase our due diligence.

I should say, today’s document by the Agency though spells out

what is considered low risk and high risk, and when you hit high

risk then it would be that time to ask the MSB for more information. We think that is the way to go. Before today it was not clear

that the risk we did was enough and the second guessing continue.

So from our perspective, you look at geography, you look at products, and you certainly look at jurisdictions where the funds go.

Chairman SHELBY. Are there geographic regions that are assumed or scientifically determined to be higher risk than others?

Mr. Byrne? Geographic outside of the United States?

Chairman SHELBY. Yes.

Mr. BYRNE. Just based on previous statements by our Government and others, the noncooperative country list that we have seen

from FATIF, certainly again the Middle East has been an area

where we have to spend more time and energy.

Chairman SHELBY. It is where a lot of terrorists have come from.

40

Mr. BYRNE. Exactly. So from that perspective we have to—it does

not mean we do not do business. It simply means our due diligence

has to be increased.

Chairman SHELBY. Do licensed MSB’s catering predominantly to

higher risk regions automatically disqualify them for consideration?

Mr. BYRNE. No.

Chairman SHELBY. In other words, they could be totally legitimate and doing a service for people in the Middle East, could they

not, and be clean as they could be?

Mr. BYRNE. Absolutely. Before today, some banks certainly would

opt to say, there is too much risk there. We are not sure how to

mitigate the risk. I think after today’s announcement they know

that they should continue those relationships as they feel that they

have done enough to ask the MSB, are you licensed, are you registered? What are your antimoney laundering programs? If we do

those things that should be no reason to close down the account

simply because they transfer money to the Middle East.

Chairman SHELBY. Mr. Goldman.

Mr. GOLDMAN. I think there are two items I would like to mention with respect to assessing risk for at least the industry that I

represent. Number one, I think it is fair to look at the record and

the record will indicate that in the last 5 years the number of indiscretions and violations in our industry is nominal.

Chairman SHELBY. Very small, is it not, considering everything?

Mr. GOLDMAN. Nominal. Therefore, the designation of high risk

makes no sense. It is just somebody in some department decided

that we were high risk and put us on a list. When I addressed that

question 4 years ago to the then-Director of FinCEN his response

to me was that your industry is no greater risk than any other

business for money laundering violations. So here we are 5 years

later, tabbed as high risk, with nominal violations and the Director

of FinCEN having said that we should not even be designated as

high risk. The result of that was the jitteriness of banks and the

loss of the service of banks.

Chairman SHELBY. Do you have any comment, Mr. Landsman?

Mr. LANDSMAN. My only comment was that trying to do a riskbased management of a bank or a country or of a law enforcement

program, the trouble you might run into is racial profiling. I think

your question was quite right, and Mr. Byrne knows better than

I do, but if I were a banker I would want to avoid anybody sending

money to the Middle East. It used to be that Latin America was

considered high risk because of the drugs but the Middle East has

trumped that.

So the logic is, if you only have a certain number of policemen,

of course you are going to send them to the high intensity crime

areas first. But that does not mean that you should write laws and

write policies that make different standards for different kinds of

people.

Chairman SHELBY. Mr. O’Malley, do you have a comment?

Mr. O’MALLEY. I do. In understanding this business I think it is

important to understand the corridor activity. Not unlike you or I,

the concentration of individuals that like to do business with people

that look like them, speak like them, culturally have similarities is

41

very important to the overall industry. It is not every part of it but

it is somewhat a part of the industry.

I think from MoneyGram’s perspective, we look at every single

transaction of runs through an OFAC review. We run our agents

through the OFAC review as well. Criminal and credit checks and

background checks that are making sure that we have the highest

quality of business partners that we are doing business with and

doing transactions. Mr. Byrne mentioned the Middle East. Certainly, we look to make sure we understand who we are doing business with. But that is across all segments and all ethnicities.

Chairman SHELBY. Mr. Goldman, according to the Financial

Services Centers of America, members of your organization process

180 million checks a year worth $55 billion. As general counsel, do

you have data on how many of those transactions involve fraudulent activity or were used to launder money? Out of all the legitimate—you said it was nominal.

Mr. GOLDMAN. Fraud and antimoney laundering are two different areas. We do get checks that are fraudulent so that is a

major problem, particularly now with modern day technology. But

with respect to check cashing related to money laundering it is

nominal.

Chairman SHELBY. I used one of your services and wanted to send $5,000 to someone in Damascus, would that be suspicious? Is

that a higher amount than you normally send?

Mr. GOLDMAN. I have to rely on——

Mr. LANDSMAN. Nobody I know is sending money to Damascus.

Chairman SHELBY. Mr. O’Malley, could you——

Mr. LANDSMAN. Somebody is doing it, but I do not know who

they are.

Mr. O’MALLEY. To your point, the activity of transactions in any

particular segment, we run through the BSA activities behind suspicious activity reports and our agents do the same thing. So we

are monitoring and running through compliance activities through

our systems to make sure that we are focusing on any particular

transaction, but we would be looking for suspicious activity across

any send to any received transaction.

Chairman SHELBY. Who uses the services of your member businesses? Is there a demographic or professional profile of some kind

that is apparent? How are know-your-customer requirements met

by the 5,000 member service providers that comprise the Financial

Service Centers of America? How much of your membership has

been denied banking sentences to date?

Mr. GOLDMAN. I would say, as I said in an ABA random survey,

half of the banks that served us have recently determined not to

serve us. So we have lost half the industry. I think that at this

point in New York alone I know that there are 40 companies that

have not been able to find other banks. The only thing that happened in New York was—we are now in New York with 660 locations in the State of New York alone, are being served primarily

by one bank. It is a State bank. If that bank decides to go, there

is nothing left. So we are on the edge of the potential for disaster.

Chairman SHELBY. Uniformity of regulation. Some of you were

here earlier when we asked the Government panel, we agree uniformity is necessary in MSB and bank regulation. Should that diVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 29429.TXT SBANK4 PsN: SBANK4
42

rection be provided at the Federal or State level? And is there any

effort within the industry to set an internal set of standards?

Mr. LANDSMAN. We were going to do it recently but then we decided to wait until today, what I received today. We will be studying that——

Chairman SHELBY. Seeing what——

Mr. LANDSMAN. Yes. We are going to try to move into training.

After we succeed in training and getting good at training we are

going to try to move into certification. Certification of the outside

compliance monitors who review these MSB’s is essential because

a bank needs to be able to rely—if you go into any other business

sector you will ask somebody for a CPA report because we rely on

CPA’s—with some problem in some cases; Enron, something like

that. But we do need people to be certified to review, and it is a

specialty. You cannot just take any CPA and rely on that.

The banks need to able to feel that they are not just delegating

out the responsibility and they will be criticized for it, but that

they can rely on somebody else doing a review. It is required by

Section 352 of the USA PATRIOT Act that we have these outside

reviews anyway. We are doing that.

Chairman SHELBY. Do you have any comment?

Mr. O’MALLEY. We work with other partners in our industry in

looking at where we can try to standardize or offer suggestions for

standardization. At the same point, we are very encouraged at

looking at the guidance that was released today. I would also state

that I think it would be helpful if we had better input into those

types of guidance in advance of them actually being released. I

think the industry itself can help in making sure that they are

practiceable activities as opposed to a guidance that may not be

able to be put into practice.

Chairman SHELBY. Mr. Goldman.

Mr. GOLDMAN. We proudly have a substantial national compliance program, both in terms of books, documents, videos, teaching

programs which have all, again, been commended as exemplary by

FinCEN itself, which again goes to the point, we have no significant record of violations, we have a significant record of compliance, uniform compliance and compliance with the Bank Secrecy

Act and yet we are still high risk and still suffering from the loss

of our banking relationships.

Chairman SHELBY. Mr. Byrne, do you have any comment?

Mr. BYRNE. Senator, I would say the key, I believe, is still making sure that the examiners that examine banks around the country get this in their hands so that when they are assessing whether

or not we have done enough to do due diligence with the MSB’s

that they will be guided by this rather than their own perceptions

of what is and is not high risk.

I would just add that on March 30 we did a national telephone

conference with about 2,000 bankers to talk about the value both

of remittances and, more importantly, dealing with MSB’s in this

environment. So we really believe it should be up to the bank, not

up to——

Chairman SHELBY. What was the response of that conference?

Mr. BYRNE. It was very positive. They were anticipating today’s

announcement, but we believe that outreach will continue from our

43

end, and certainly the people on this panel here will work with us

to see if we cannot try to get through this level of confusion, to let

them make their decisions based on pure Government direction

that we did not have before.

Chairman SHELBY. A lot of us do not want you to be the unintended victim of what we are trying to do to combat terrorist financing, money laundering, because you are legitimate businesses.

And if you are legitimate businesses, you want to stay in business,

you want to have access to capital, and you want to comply with

the regulations and the law, because if you do not, you will not be

here long anyway, would you?

Mr. O’MALLEY. That is correct.

Chairman SHELBY. Gentlemen, we thank you for your testimony,

and your patience, especially with the break today.

The hearing is adjourned.

[Whereupon, at 12:39 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional material supplied for the record follow:]

44

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Good morning, Chairman Shelby, Ranking Member Sarbanes, and witnesses.

Combating money laundering in the aftermath of September 11 has proven to be

critical. We have long seen money laundering associated with illegal activities such

as drug trafficking. These activities pose on-going serious challenges to our country,

but now we must also look at the fight against money laundering as one to ensure

our basic national security.

Our task since September 11 has not been a simple one. However, this Committee

acted swiftly and aggressively after the attacks to address terrorist financing.

I am proud to have been an active participant in that debate by insisting that

we authorize Treasury regulations to ensure that client funds moving through a financial institution’s administrative accounts do not move anonymously, but are

marked with the client name.

We now have an ongoing responsibility to examine the implementation of legislation to combat money laundering. I am very anxious to hear the testimony of our

witnesses about the promulgation of regulations related to combating money laundering. I also welcome their insight into what Congress can further do to help combat terrorist financing.

The free movement of money across borders, unnoticed and untracked is so critical to the work of terrorists. By acting quickly to cut off the supply of money, we

limit their ability to act. This is key. As I have said in this Committee before, in

this new era, economic warfare will be one of our strongest weapons against terrorism. It is an irony that terrorists who would destroy our way of life need our institutions in order to thrive.

Mr. Chairman, the problem of money laundering is a daunting and complex one.

Money laundering is nothing more than the use of our legitimate economic infrastructure to support and strengthen illegal activities. It is done by those who have

no respect for the law, who have no respect for our democratic institutions, and by

those who have no respect for the common values that we all share.

Money is such a fundamental tool of this international cabal of terrorists. It sustains them. It paid for the flight training of those who hijacked the planes on September 11 and it pays for the explosives that are killing our soldiers in Iraq nearly

everyday. By acting quickly to cut off the supply of money, we limit their ability

to act.

Clearly, we need to address this issue. But, we must be mindful that the very institutions that we must more heavily regulate—nonbank money remitters, for instance—are the very money centers that vast portions of our constituents rely on

everyday to live.

So, we must be circumspect when looking at regulations which may have the unintended consequence of limiting access of law abiding citizens to these money centers.

As we continue to strengthen our response to terrorism, I look forward to hearing

the testimony of the witnesses today and specifically how they are implementing

regulations to

—————

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Chairman Shelby for holding this hearing to examine more

closely money services business compliance with the Bank Secrecy Act and USA PATRIOT Regulation.

Title III of the USA PATRIOT Act significantly expanded antimoney laundering

efforts in the United States, requiring specific changes to the policies and procedures of many financial institutions.

These changes, however, have apparently caused a significant amount of confusion for regulators and industry, and are adversely impacting money services businesses. A lack of guidance by regulators and the banks’ fear of increased liability have

hampered the ability of many unbanked Americans to send funds to relatives within

the United States or overseas.

This Committee held a hearing last September to examine the Federal Government’s policies to enforce the Bank Secrecy Act and antimoney laundering provisions of the USA PATRIOT Act.

I appreciate the Chairman’s thorough examination of the antimoney laundering

provisions of the Bank Secrecy Act and the USA PATRIOT Act, because it is only

with an appropriate regulatory framework that this country will be able to effectively curb the financing of terrorism.

45

I look forward to hearing from the banking regulators today about the compliance

guidance they will issue to industry so that money services businesses and other

financial institutions will be able to comply with antimoney laundering laws.

I also look forward to hearing from the industry about their recommendations for

improving compliance and interpretation in a difficult regulatory environment.

I would like to thank our witnesses agreeing to appear before the Committee

today. I look forward to your testimony.

—————

PREPARED STATEMENT OF JULIE L. WILLIAMS

ACTING COMPTROLLER OF THE CURRENCY

APRIL 26, 2005

Introduction

Chairman Shelby, Ranking Member Sarbanes, Members of the Committee, I appreciate the opportunity to appear before you today to discuss issues arising in our

nation’s antimoney laundering efforts in the context of money services businesses

(MSB’s). My testimony will focus on the nature of money laundering risks posed by

MSB’s, MSBs’ loss of access to banking services, and the OCC’s position concerning

banks’ relationships with MSB’s. We very much appreciate your leadership, and

that of the Committee, in this vital area.

Money Services Businesses

A ‘‘money services business’’ is an umbrella term encompassing many different

types of financial service providers. MSB’s are defined broadly in the BSA regulations to include: (1) currency dealers or exchangers; (2) check cashers; (3) issuers

of traveler’s checks, money orders, or stored value; (4) sellers or redeemers of traveler’s checks, money orders, or stored value; and (5) money transmitters. According

to a 1997 study by Coopers & Lybrand that was commissioned by FinCEN, and is

currently in the process of being updated, it was estimated that there were over

200,000 MSB’s operating in the United States providing financial services involving

approximately $200 billion annually. Of these MSB’s, approximately 40,000 were

outlets of the U.S. Postal Service, which sell money orders. This 1997 study also estimated that check cashers and money transmitters would grow at a rate of at least

11 percent per year. The MSB industry is extremely broad and very diverse, ranging

from Fortune 500 companies with numerous outlets worldwide, to small independent

‘‘mom-and-pop’’ convenience stores offering check cashing or other financial services.

As the regulator of national banks, the OCC has long been committed to ensuring

that all Americans have fair access to the banking system and financial services,

and we recognize the positive role that MSB’s can play in this process. MSB’s provide financial services to segments of our society that do not have accounts with

mainstream banks or for other reasons do not feel comfortable in a formal banking

environment. MSB’s generally offer convenience, neighborhood locations and a variety of financial services that appeal to these customers. Furthermore, some of the

products and services offered by MSB’s (for example, foreign remittance services)

may not be available at the local neighborhood bank. According to industry trade

group information, up to 40 million Americans do not have mainstream bank accounts and satisfy most of their financial needs using MSB’s.

However, some MSB’s can also present a heightened risk of money laundering or

terrorist financing. These businesses generally engage in a high volume of cash

transactions and usually offer several types of services, including check cashing,

money transmission, currency exchange, money orders, traveler’s checks, and stored

value mechanisms. They engage in transactions with third party customers who are

unknown to the bank and, as a result of this indirect relationship, the bank has

neither verified the identities nor obtained first-hand knowledge of these customers.

As a result, transactions involving such entities could have the effect of moving the

placement stage of money laundering one step away from the bank.

OCC compliance examinations over the years have also noted situations where extraordinary amounts of cash were deposited at national banks by MSB’s. In such

situations, the OCC or the national bank filed a suspicious activity report (SAR) and

reported the transactions to law enforcement. The OCC is also aware of situations

where money launderers actually established MSB’s (check cashers) to disburse and

launder their excess cash to unsuspecting customers. Similar examples of money

laundering through MSB’s are noted by the Financial Action Task Force on Money

Laundering in its Report on Money Laundering Typologies 2001–2002. The 2003

National Money Laundering Strategy, prepared jointly by the Department of the

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Treasury and the Department of Justice, also specifically makes references to MSB’s

being used as conduits in various terrorist financing arrangements. For these reasons and others, the OCC has traditionally viewed MSB’s as ‘‘high-risk’’ for money

laundering.

State licensing, regulation and oversight of MSB’s also varies. For example, some

States require no licensing, some States license only certain segments of the money

services businesses (for example, check cashers or money transmitters) while other

States exercise strong regulatory oversight over all facets of the MSB industry. Furthermore, according to FinCEN, as of December 2004, only approximately 22,000

MSB’s have registered with FinCEN as required by law. One could surmise from

the 1997 study and its projections, that only about 10 percent of the over 200,000

MSB’s that may be operating nationwide have complied with these registration requirements.

Notwithstanding the foregoing, not all MSB’s are equally risky and most MSB’s

have never been tainted by or associated with money laundering. Some are nationally recognized and respected companies that have strong AML programs and are

licensed and supervised, while others are small businesses such as local grocery

stores whose products, services and customer base present little to no risk of money

laundering or terrorist financing. The challenge for all of us is to ensure that banks

recognize these differences and that we, as regulators, are clear about our supervisory expectations to the banking industry with respect to MSB accounts.

Loss of Access to Banking Services

The OCC is well aware of, and concerned about the problems that MSB’s are experiencing in obtaining banking services. As with any business enterprise, a bank

account is essential for the success of an MSB’s business. The reasons for MSBs’

loss of access to banking services are complex and derive from a multitude of factors, including concerns about regulatory scrutiny, uncertainty about regulatory expectations, the risks presented by some MSB accounts, and the costs and burdens

associated with maintaining MSB accounts.

Given the sheer number and the variety of services offered by MSB’s, the differences in risk profiles among MSB’s can be profound. For example, a small grocer

cashing checks as a convenience to its customers has a much different risk profile

from a money remitter that cashes checks, sells money orders, and sends wire transfers to customers in high-risk geographies.

Banks must expend resources just to identify those MSB’s that are high risk and

those that are not. In general, at a minimum they must: (1) apply their customer

identification program requirements; (2) confirm FinCEN registration, if required;

(3) confirm compliance with State or local licensing requirements, if applicable; (4)

confirm agent status, if applicable; and (5) conduct basic risk assessment to determine the level of risk associated with the account. If the MSB is categorized as high

risk, additional resources must be expended by the bank to ensure that it is fulfilling its obligations under the Bank Secrecy Act (BSA).

It is easy to see from this process that the costs and resources that must be expended by a bank to open and maintain an MSB account, while complying with its

obligations under the BSA, can be significant. As in all businesses, these additional

costs are factored into the pricing of the products offered to MSB’s, and certainly

some banks have found that the costs are too high or that they are unable to transfer the costs to the MSB customer. Thus, due to market forces, some banks may

simply decide to close the accounts or discontinue the business relationship.

These problems are further compounded by the huge number of unregistered and

unlicensed MSB’s, and the uneven regulatory scheme under which MSB’s are supervised. Registration with FinCEN, if required, and compliance with any State-based

licensing requirements represent the most basic of compliance obligations for MSB’s,

and an MSB operating in contravention of registration and licensing requirements

would be violating Federal and possibly State laws. Nonetheless, there are tens of

thousands of MSB’s that are not registered with FinCEN, and there are a significant number of MSB’s that are not licensed by the States.

Another factor is the lack of clear guidance on certain issues concerning supervisory expectations of banks that provide financial services to MSB’s. This is especially true in the case of unregistered MSB’s where clarity was needed as to whether

banks are expected to file SAR’s, close accounts, or take some other action upon discovery that its MSB customer has not complied with Federal or State licensing requirements. Similarly, we needed to clarify what minimal level of due diligence

should be conducted on low-risk MSB’s, or even the amount of due diligence expected of banks to conduct a risk assessment of their MSB customers. Additionally,

the general characterization of MSB’s as ‘‘high-risk’’ by regulators over the years at

times failed to highlight the fact that the risk profiles of MSB’s vary depending on

47

the circumstances of a particular MSB. Thus, incomplete or unclear guidance from

regulators may have discouraged banks from doing business with certain MSB’s

even though most have never been tainted by or associated with money laundering.

Banks are also concerned about the risks of doing business with MSB’s, including

reputation risk. This may be due, at least in part, to several high-profile criminal

cases brought against banks that have relationships with MSB’s. For example, in

January 2003, Banco Popular of Puerto Rico forfeited $21.6 million (the forfeiture

to the Government satisfied a civil money penalty of like amount assessed by the

Federal Reserve and FinCEN) and entered into a deferred prosecution agreement

with the Justice Department in a case involving a single count of failing to file a

SAR on an MSB customer in violation of the BSA.

In October 2003, Delta National Bank and Trust Company, which has its principal office in New York City, paid a $950,000 criminal fine and pled guilty to a

criminal information charging the bank with one count of failure to file a SAR in

connection with transactions involving two MSB accounts at the bank.

Finally, in March 2004, Hudson United Bank, a State-chartered bank which has

its principal office in Mahwah, New Jersey, agreed to a $5 million fine to settle accusations by the Manhattan District Attorney’s Office that one of its New York City

branches failed to monitor certain MSB accounts as required by the BSA.

These and other cases have understandably caused considerable anxiety among

bankers that have MSB accounts. In some cases, where a bank has been criminally

investigated or prosecuted, the investigation began as an investigation of the MSB

customer of the bank, and eventually led to the bank itself becoming a target of the

investigation because it allegedly failed to properly administer the MSB account.

Moreover, many bankers are concerned with what they characterize as the ‘‘criminalization’’ of the SAR process, and in light of the billions of transactions going

through the U.S. banking system, at least one banker has analogized this process

as running a railroad and being expected to monitor everyone who takes your train

to see if their trip is legitimate.

Without question, the stakes in this area have been raised in part due to the risk

of terrorist financing and national security concerns, consequently, the risk exposure

of guessing wrong is very high. In the current environment, banks have become understandably highly risk-averse and may simply close the accounts of businesses

that present more risk than they are willing to tolerate.

The OCC’s Position Concerning Banks’ Relationships with MSB’s

To accomplish our supervisory responsibilities, the OCC conducts regular examinations of national banks and Federal branches and agencies of foreign banks in

the United States. These examinations cover all aspects of the institution’s operations, including compliance with the BSA. The OCC’s examination procedures were

developed in conjunction with the other Federal banking agencies, based on our

experience in supervising and examining national banks in the area of BSA compliance. The procedures are risk-based, focusing our examination resources on highrisk banks and high-risk areas within banks. We continue to work to improve our

supervision in this area and we will revise and adjust our procedures to keep pace

with industry changes, technological developments and the increasing sophistication

of money launderers and terrorist financers. In this regard, we are presently working with FinCEN and the other Federal banking agencies to issue a new, interagency BSA examination handbook by June 30 of this year. This is a major step

toward interagency consistency in how we conduct our exams in this area.

We have also provided specific guidance on MSB’s to our examiners and to national banks. Since September 1996, the OCC has had guidance in its BSA Handbook addressing nontraditional financial entities, including MSB’s. Last year, in

response to concerns about unregistered and unlicensed MSB’s, the OCC issued Advisory Letter 2004–7, providing guidance to banks with respect to unregistered or

unlicensed MSB customers. FinCEN and the Federal banking regulators are providing additional guidance to banks about MSB’s and we will adjust our existing

guidance to conform to this interagency guidance.

On several occasions in the last 6 months, the OCC has participated in various

forums to better understand MSB issues and to educate the industry and our staff.

For example, OCC representatives attended the March 8, 2005 hearing on MSB’s

hosted by FinCEN. Also, in March of this year, the OCC hosted a teleconference for

the national banking industry in which we discussed a variety of BSA concerns, including MSB issues. Approximately 1,000 sites listened to the teleconference, mostly

at national bank locations. These sites included between 4,000 and 5,000 listeners.

We conducted the same teleconference for our examination staff in the week preceding the industry call.

48

As our knowledge and understanding of MSB’s and their issues have continued

to grow, our guidance has continued to evolve and develop. On March 30 of this

year, the Federal banking agencies and FinCEN issued an Interagency Policy Statement to address our expectations regarding banking institutions’ obligations under

the BSA for MSB’s. This Statement specifically states that the BSA does not require, and neither FinCEN nor the Federal banking agencies expect, banking associations to serve as the de facto regulator of the MSB industry. It provides that

banking organizations that open or maintain accounts for MSB’s should apply the

requirements of the BSA on a risk-assessed basis, as they do for all customers, taking into account the products and services offered and the individual circumstances.

Accordingly, a decision to accept or maintain an account with an MSB should be

made by the banking institution’s management, under standards and guidelines approved by its board of directors, and should be based on the banking institution’s

assessment of risks associated with the particular account and its capacity to manage those risks.

Along with FinCEN and the other Federal banking agencies, we also are issuing

Interagency Interpretive Guidance on Providing Banking Services to MSB’s to further clarify our expectations for banking organizations when providing banking

services to MSB’s. The guidance sets forth the minimum steps that a bank should

take when providing banking services to MSB’s, specific steps beyond minimum

compliance obligations that should be taken by banking organizations to address

higher risks, as well as due diligence, ongoing account monitoring, and examples of

suspicious activity that may occur through MSB accounts. The guidance is intended

to provide additional clarity regarding existing antimoney laundering program responsibilities but is not intended to create new requirements for banking organizations.

Concurrent with this guidance, FinCEN will issue guidance to MSB’s to emphasize their BSA regulatory obligations and to notify them of the type of information

that they may be expected to produce to a banking organization in the course of

opening or maintaining an account relationship. We are hopeful that this guidance

will further clarify our expectations regarding banks’ relationships with their MSB

customers. The OCC will continue to work with FinCEN and the other Federal

banking agencies to provide guidance to the banking industry that is clear and consistent, and we commend the efforts of Director Fox for the leadership he has shown

in addressing this important issue. His efforts to foster interagency collaboration

and cooperation have been extraordinary.

The BSA has been the focus of regulatory, Congressional, and media attention for

much of the last year. Clearly, these are very important issues to the banking industry, the OCC, and the United States. This emphasis and attention on BSA has

prompted the industry to feel that the regulators have adopted a ‘‘zero tolerance’’

approach to BSA/AML supervision and enforcement—that any deficiency in a bank’s

BSA processes equates to a violation triggering a cease-and-desist order. At the

OCC we take this assertion seriously—because it is flat wrong. Perhaps it arose in

response to monetary fines related to money laundering and to enforcement actions

by the bank regulators, yet the actual number of actions is less than what one

might think, given the level of concerns raised. For example, the OCC fined two

banks for BSA violations in the past 12 months. During the fourth quarter of 2004,

we conducted 368 examinations at which BSA compliance was reviewed, and cited

four banks for violations of our BSA compliance program requirement. Overall, in

2004, we issued eleven cease-and-desist orders concerning BSA—less than 1 percent

of our population of national banks.

The intense focus on BSA compliance has led to other misperceptions about the

OCC’s policies and practices relating to MSB accounts at national banks. In concluding, let me set the record straight on several key points: First and foremost, the

OCC does not supervise MSB’s and does not expect national banks to supervise

their MSB customers. Rather, it is our job to assess the systems and controls that

banks employ to comply with the BSA, and it is the banks’ job then to develop and

successfully implement such systems and controls.

Second, the OCC, does not, as a matter of policy, require any national bank to

close the accounts of an MSB or any other customer (except in the context of administrative enforcement actions, where due process protections apply). The determination of whether to open, close, or maintain an account is a business decision made

by the bank following its own assessment of the risks presented, in accordance with

policies and procedures approved by the bank’s board.

Third, the OCC expects banking organizations that open and maintain accounts

for money services businesses to apply the requirements of the BSA, as they do with

all accountholders, on a risk-assessed basis. We recognize that, depending upon the

circumstances of a particular MSB, the risks presented are not the same and it is

49

essential that banking organizations neither define nor treat all MSB’s as posing

the same level of risk. Banks need to calibrate the level of due diligence that they

apply to MSB’s, and it is entirely appropriate to conduct a lower level of diligence

for those MSB’s that present lower levels of risk.

Moreover, we absolutely are not saying that because a particular type of business

or product is high-risk, that a national bank should not be involved with it. We absolutely are saying, however, that national banks must have systems commensurate

with—and adequate to identify, monitor, manage, and control—those risks. A crucial question today may well be whether a bank has or is willing to incur the cost

to have such a system of due diligence and controls sufficient to reduce the bank’s

risk to a level that satisfies the regulatory standards that apply and is within the

bank’s own risk appetite.

Conclusion

Mr. Chairman, Senator Sarbanes, and Members of the Committee, the OCC salutes your leadership in this vital area and strongly shares the Committee’s goal

of preventing and detecting money laundering, terrorist financing, and other criminal acts and the misuse of our Nation’s financial institutions. We also believe that

important objectives are achieved when MSB’s have access to banking services, consistent with the goals of the antimoney laundering and terrorist financing laws. We

stand ready to work with Congress, FinCEN, the other financial institutions regulatory agencies, and the banking industry to achieve these goals.

—————

PREPARED STATEMENT OF KEVIN BROWN

COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION

INTERNAL REVENUE SERVICE

APRIL 26, 2005

Good morning, Mr. Chairman and distinguished Members of the Committee. I appreciate the opportunity to be here today to discuss the Internal Revenue Service’s

(IRS) efforts involving the Bank Secrecy Act (BSA) and to update you on the

progress we have made since last September.

IRS Enforcement

Under the leadership of Commissioner Everson, we have strengthened the focus

on enforcement at the IRS, while maintaining appropriate service to taxpayers. We

have four enforcement priorities, which are to:

• Discourage and deter noncompliance, with emphasis on corrosive activity by corporations, high-income individual taxpayers, and other contributors to the tax

gap;

• Assure that attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law;

• Detect and deter domestic and offshore-based tax and financial criminal activity;

and,

• Discourage and deter noncompliance within tax-exempt and Government entities

and misuse of such entities by third parties for tax avoidance.

Detecting and investigating money laundering activity is an important part of tax

compliance for the IRS. In addition, the failure to file Forms 8300 and criminal violations of the BSA, including the structuring of deposits to avoid currency transaction reporting requirements, often have a direct link to both tax evasion and

money laundering. In some cases, because the schemes are sophisticated and because we may not be able to obtain evidence from some foreign countries, it is almost impossible to conduct traditional tax investigations. In these circumstances,

money-laundering violations frequently are the only possible means to detect tax

evaders.

Money laundering not only is used by domestic and international criminal enterprises to conceal the illegal, untaxed proceeds of narcotics trafficking, arms trafficking, extortion, public corruption, terrorist financing, and other criminal activities; but it is also an essential element of many tax evasion schemes. With the

globalization of the world economy and financial systems, many tax evaders exploit

domestic and international funds transfer methods to hide untaxed income. These

schemes often involve the same methods to hide money from illegal sources and to

hide unreported income. Both activities generally use nominees, currency, wire

transfers, multiple bank accounts, and international ‘‘tax havens’’ to avoid detection.

50

1 CTR’s include FinCEN Form 104 and FinCEN Form 103 (filed by casinos).

2 Report of International Transportation of Currency or Monetary Instruments.

Money laundering is the financial side of virtually all crime for profit. To enjoy

the fruits of their crime, criminals must find a way to insert the illicit proceeds of

that activity into the stream of legitimate commerce in order to provide the resources necessary for criminal organizations to conduct their ongoing affairs.

As part of its core tax administration mission, the IRS addresses both the civil

and criminal aspects of money laundering. On the civil side, the Department of the

Treasury has delegated to the IRS responsibility for ensuring compliance with the

BSA for all nonbanking financial institutions not otherwise subject to examination

by another Federal functional regulator, including money service businesses

(MSB’s), casinos, and certain credit unions. Under this delegation, the IRS is responsible for three elements of compliance—(i) the identification of MSB’s, (ii) educational outreach to all these types of organizations, and (iii) the examination of

those entities suspected of noncompliance.

IRS’ Criminal Investigation (CI) Division is responsible for the criminal enforcement of BSA violations and money laundering statutes related to tax crimes. CI

uses the BSA and money laundering statutes to detect, investigate, and prosecute

criminal conduct related to tax administration, such as abusive schemes, offshore

tax evasion, and corporate fraud. CI also investigates the nonfiling of Forms 8300

and criminal violations of the BSA, including the structuring of deposits to avoid

currency transaction reporting requirements, which frequently have a direct link to

both tax evasion and money laundering.

BSA Program in IRS’ Small Business/Self-Employed (SB/SE) Division

In October 2004, SB/SE officially established a new organization, the Office of

Fraud/BSA, which reports directly to the Commissioner of SB/SE. The director, an

IRS executive, has end-to-end accountability for compliance with BSA including policy formation, operations, and BSA data management. The director’s operational responsibility includes line authority over all field activities, as well as the data management.

The Office of Fraud/BSA consists of four territories, with approximately 300 field

examiners located in 33 field offices nationwide. In addition to this field operation,

which is managed by 31 group managers, technical BSA staffing also includes eight

headquarters analysts located throughout the country. Our hiring plans call for us

to have between 320 and 325 field examiners on board by the end of fiscal year

2005. In addition, we plan to hire an additional 60 BSA examiners in fiscal year

2006.

As new examiners are brought on board, they receive specialized BSA training,

including the identification of noncompliant MSB’s, detection of structuring, and

identification of transactions going to OFAC (Office of Foreign Asset Control)

blocked countries. We also provide continuing professional education training classes for our BSA examiners in topics such as: (i) Audit Techniques for Anti-Money

Laundering (AML) Compliance Examinations; (ii) Civil Penalties/Referrals to

FinCEN; (iii) Disclosure; (iv) Currency Banking and Retrieval System (CBRS) Analysis; and, (v) Foreign Bank and Financial Account Reports (FBAR). To further support the development and identification of criminal activities (fraud) during BSA examinations, we also provided fraud training for our BSA examiners and Title 31

training to our Fraud Technical Advisors (FTA’s). As a result of this cross-training,

our FTA’s and BSA examiners can work together more effectively and ensure that

the cases we refer to our Criminal Investigation Division are thoroughly developed.

All of our BSA examiners and their managers devote 100 percent of their time

to examinations of BSA-related cases. This contrasts with years past, when the BSA

examiners were required to spend a substantial portion of their time on unrelated

work, such as traditional income tax audits. Additional support personnel (28 employees) provide assistance to the examiners, including workload identification.

Working in close collaboration with Treasury’s Financial Crimes Enforcement Network (FinCEN), the IRS also conducts community outreach to ensure that MSB’s

are aware of their requirements under the BSA.

Bank Secrecy Act Data

The IRS currently has responsibility for processing and warehousing all BSA documents into CBRS at the IRS Detroit Computing Center. However, FinCEN will assume this role in the future upon completion and implementation of a new system,

BSA Direct, which will replace CBRS. BSA documents include FBAR’s, Currency

Transaction Reports (CTR’s),1 Forms 8300 (Report of Cash Payments Over $10,000

Received in a Trade or Business), CMIR’s,2 and Suspicious Activity Reports

51

3SAR’s are filed by financial institutions to report suspicious activity.

(SAR’s).3 Managing the BSA data involves three separate but related functions that

include: (i) collecting and inputting BSA data from reporting institutions; (ii) housing and controlling access to the BSA data after it is entered into the central database; and (iii) supporting the IRS and other law enforcement query systems to mine

BSA data in support of law enforcement investigations. Currently, CBRS has approximately 144 million BSA documents on file. All documents entered into the

CBRS (approximately 15 million annually) are made available, at FinCEN’s direction, to other law enforcement agencies (Federal, State, local, and international) and

regulatory agencies, in addition to the IRS. It bears noting that the IRS is one of

the largest users of CBRS data.

We are aware that the U.S. Government Accountability Office (GAO) recently discovered security weaknesses at the Detroit Computing Center. We are mindful of

those problems, and, in a recent letter to GAO, Acting Deputy Secretary Havens

outlined the steps that we are taking to resolve those problems.

Usefulness of Bank Secrecy Act Data

The combined currency information in CBRS is very important for tax administration and law enforcement. The information provides a paper trail or roadmap for

investigations of financial crimes and illegal activities, including tax evasion, embezzlement, and money laundering. The detailed information in these currency reports

routinely is used by IRS CI special agents and Assistant U.S. Attorneys to successfully pursue investigations and prosecutions.

In civil matters, the IRS uses the CBRS database to identify cases for potential

examination. For example, in many of our offshore trust schemes a search of CTR’s

can produce a wealth of information. IRS field examiners also access BSA documents to assist in on-going examinations. The CBRS database is used to assist in

case building prior to beginning an examination.

The IRS CI Division has increased its emphasis on BSA responsibilities significantly, with particular focus on improving the effectiveness and efficiency of Suspicious Activity Report (SAR) Review Teams. CI now hosts 64 SAR Review Teams

located throughout its 33 Criminal Investigation field offices. This expansion allows

each team to focus specifically on SAR’s filed in its geographic area. Over 300 law

enforcement agencies participate in some manner in the review of SAR’s, and IRS

has at least 100 special agents and 36 investigative analysts assigned, either full

or part-time, to these SAR Review Teams. CI routinely reviews between 12,000 and

15,000 SAR’s per month and uses data mining tools to assist teams in efficiently

analyzing the ever increasing number of SAR’s being filed. Training on the use of

these tools is ongoing. In June, CI will host a national meeting to train teams on

a recordkeeping program and policy changes designed to improve the efficiency of

SAR Review Teams.

IRS Coordination with FinCEN

In carrying out our responsibilities under the Bank Secrecy Act, we are engaged

in a close partnership with FinCEN. Most recently, we have worked with FinCEN’s

newly established Office of Compliance to finalize an information sharing agreement

that provides for the routine exchange of BSA compliance information, including information concerning financial institutions identified as having significant BSA compliance deficiencies or violations. These exchanges, spelled out in a Memorandum

of Understanding (MOU), are intended to help FinCEN in fulfilling its role as administrator of the BSA and to assist the IRS in conducting examinations of certain

financial institutions to assess BSA compliance. The IRS and FinCEN expect this

MOU will improve and enhance the level of interagency cooperation and enable both

organizations to maximize their resources as they identify, deter, and interdict terrorist financing and money laundering. I am happy to report that IRS and FinCEN

signed the MOU yesterday, with plans for immediate implementation.

IRS Headquarters senior analysts from both SB/SE and CI participate in several

working groups involving Treasury and other agencies. As members of the Informal

Value Transfer System Working Group, we are working with representatives of

FinCEN, the Federal Bureau of Investigation (FBI), Immigration and Customs Enforcement (ICE), and the Drug Enforcement Administration (DEA) in an effort to

identify unregistered MSB’s. The working group was assembled to develop procedures relative to investigative intelligence gathering and outreach efforts to MSB’s

across the country.

IRS also is a member of the Money Laundering Threat Assessment working

group, as is FinCEN. The focus of this group is to identify money laundering threats

52

throughout the United States through investigations conducted by all law enforcement agencies.

The IRS assigns senior analysts to act as liaisons to FinCEN in both civil and

criminal matters. Key areas of coordination include:

• Conducting joint monthly meetings to discuss BSA issues, trends, andexamination

results;

• Establishing examination priorities;

• Using data-driven analysis to assist in the risk-based identification of cases as

well as to identify geographic locations of potential noncompliance;

• Improving the quality of referrals for enforcement;

• Having FinCEN participate in IRS BSA training classes and managers’ meetings;

• Incorporating feedback from FinCEN on IRS outreach materials; and,

• Establishing production schedules at DCC for new forms and form revisions.

Since fiscal year 2003, funding from FinCEN has allowed the IRS to add 82 additional full-time employees (FTE’s) to its BSA program.

Recent Accomplishments

Since I appeared before this Committee in September 2004, we have made considerable progress at the IRS in enhancing the operation of our BSA program:

• MSB Audits—Our goal for MSB examinations is to close more than 3,500 cases

during fiscal year 2005, or about 1.8 percent of the estimated 200,000 MSB’s.

With 3,200 examinations in progress or closed as of March 31, 2005, we fully expect to meet this target. The principal issues we are finding with MSB’s include:

• Lack of sufficient recordkeeping;

• Lack of an AML compliance program or one that is not tailored to the entity’s

risk;

• Failure to identify and investigate suspicious activity, or to identify structuring;

and,

• Nonfiling of CTR’s.

As advocated by FinCEN, we also are conducting examinations of some larger

MSB’s at the entity’s corporate headquarters level. Five of these examinations are

underway, with plans to begin additional examinations later in 2005. Through this

centralized approach we are able to work with the businesses to identify their

agents with the highest risk of noncompliance and then use our examination resources accordingly. The result is more carefully focused examinations for the MSB’s

and improved use of our resources. In particular, these centralized examinations

give us the potential to impact the compliance behavior of a much larger number

of MSB’s. For example, there are 29,000 MSB’s related to the five corporate entities

now under examination.

The IRS also is employing for the first time, an examination technique known as

a ‘‘saturation audit.’’ Specifically, we are conducting simultaneous examinations of

all MSB’s located within particular ZIP Codes in two cities, which were selected in

coordination with other law enforcement agencies. In addition to examining the

MSB’s for BSA compliance, this saturation approach allows our BSA examiners to

identify individuals with unusual patterns of financial activity which fall below the

reporting threshold. Upon completion of these two pilot examinations, we will analyze the results and determine whether to initiate similar examinations in additional cities.

• Increased Coordination with the States—Since the last hearing in September

2004, we have obtained the concurrence of the Conference of State Bank Supervisors (CSBS) on our model Fed/State MOU. This past month, IRS and FinCEN

conducted joint presentations to CSBS districts to promote the MOU, which provides both the IRS and the participating State the opportunity to leverage resources for examinations, outreach, and training. CSBS also is assisting us as we

‘‘market’’ this MOU to the States. I am pleased to tell you that just last week New

York State signed the MOU—the first State to do so. We expect that additional

States will sign the MOU in the near future.

• Centralized Case Selection—We are moving the responsibility for identifying BSA

workload and building these cases from the general IRS Examination program to

the Fraud/BSA organization. This newly created operation will incorporate leads

from the field and CI, as well as CBRS analysis, and is on track to be fully operational by October 1, 2005. We expect that this approach will ensure consistency

in risk-based case selection and result in improved case selection and results.

• Improved Workload Identification—We are exploring two new methods for identifying BSA workload. The first uses a risk-based scoring system based on criteria

such as BSA workload priorities, prior compliance history, and BSA reports filed.

53

It is intended to give our classifiers additional information to pinpoint which cases

in the potential universe are most in need of examination. The criteria used to

select a particular case for examination are included in the case file so that the

group manager and the examiner know why the case was selected. Our classifiers

in the Western Territory for BSA are using this methodology currently to select

all of its BSA cases and will be evaluating the results. If this scoring system

proves successful for classifying cases, we plan to implement it nationwide in October 2005, when we have our centralized workload selection unit in place.

In the second related effort, we are researching the feasibility of using CBRS data

to create an automated national workload identification and selection system for

Title 31 cases. The first phase of the project—documenting current workload selection practices and translating these into rule-based selection factors—is complete.

The second phase, which entails combining the selection factors into formulas that

will be run against the CBRS, is just getting under way. In the third phase, we will

be testing the effectiveness of the selection formulas in identifying appropriate BSA

workload, and making any necessary adjustments. If this technique is successful in

identifying the universe of potential cases, we will begin employing the new methodology early in 2006—most likely in tandem with the classification method descried

above.

• Reengineering—To increase the effectiveness and efficiency of our BSA examiners,

we are reengineering the examination process. We have developed standardized

workpapers for BSA examinations that delineate clearly the audit steps the examiner must complete to ensure that the recordkeeping and reporting requirements

of the entity under examination are being met. The workpapers also provide guidance on evaluating the entity’s AML compliance program to determine if it is

commensurate with the risk that the entity could be used as a vehicle for money

laundering or terrorist financing.

Other aspects of the BSA reengineering include managerial review meetings with

the examiner after the initial interview with the entity, and a requirement to set

a mutual commitment date for the completion of the examination which will be

shared with the entity and the manager.

We anticipate that we will begin training our employees in June 2005 on the use

of standardized workpapers to document their cases, as well as the other requirements of the reengineered examination process. All of the standardized documents

will be available on the examiners’ computers.

• Better Education and Outreach—The national strategy for education and outreach

related to antimoney laundering (AML) was designed in conjunction with

FinCEN, SB/SE, and CI to increase compliance of MSB’s and casinos with the

BSA and is carried out by SB/SE’s Taxpayer Education and Communication (TEC)

Division. Our BSA outreach specialists are located in the six top HIFCA (High

Risk Money Laundering and Related Financial Crimes Areas)—Miami, New York,

Chicago, Houston, San Francisco, and Los Angeles. They work frequently with

MSB trade associations to reach large numbers of stakeholders. Since October

2004, the TEC BSA specialists have contacted 158 new entities in an effort to establish relationships for AML/BSA outreach. They also have participated in 80

AML outreach events where they interacted with more than 8,000 individuals. In

March 2005, Tax Talk Today featured a presentation for practitioners, payroll professionals, and financial planners on BSA. The viewership of this live, Internet

program cosponsored by IRS has grown to almost 55,000 registered sites.

• Streamlined Quality Review—IRS also is in the process of implementing a centralized closed case review process which is intended to identify compliance trends

and training needs for particular programs, including BSA.

Conclusion

As I stated earlier in this testimony, the fight against money laundering and terrorist financing are top priorities for the Internal Revenue Service. We are prepared

to increase our commitment to the BSA Program, and we will continue to coordinate

our efforts closely with FinCEN.

Mr. Chairman, I thank you for this opportunity to appear before this distinguished Committee and I will be happy to answer any questions you and the other

Members of the Committee may have.

54

PREPARED STATEMENT OF WILLIAM J. FOX

DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK

U.S. DEPARTMENT OF THE TREASURY

APRIL 26, 2005

Chairman Shelby, Senator Sarbanes, and distinguished Members of the Committee, I appreciate the opportunity to appear before you again to discuss the programs the Financial Crimes Enforcement Network is implementing under the Bank

Secrecy Act, as amended, relating to the money services business sector. We very

much appreciate the support and policy guidance you and Members of this Committee have offered to us. Your leadership and commitment to understand and publicly discuss the issues facing the money services business sector is critical not only

to the safety of our financial system, but also to our Nation’s security.

I am honored to be here today with Acting Comptroller Julie Williams from the

Office of the Comptroller of the Currency; Commissioner Kevin Brown of the Small

Business/Self-Employed Division of the Internal Revenue Service; and, Superintendent Diana Taylor from the State of New York Banking Department. All of

these officials lead agencies that play critical roles in implementing a rational Bank

Secrecy Act regulatory regime on the money services business sector. I am pleased

to advise this Committee that we have continued to build on our very good working

relationship with each of these agencies, as well as with other Federal and State

regulatory agencies that share our efforts. The importance of our working relationship with these and other agencies cannot be overstated. In fact, if we are to be successful in achieving the goals of the Bank Secrecy Act, we must ensure that the government—policymakers, regulators, and law enforcement—speaks with one voice on

these issues. The confusion resulting from different messages has serious ramifications, which can be devastating. The need for such close coordination to meet the

challenges under the Bank Secrecy Act is particularly acute with respect to the

money services business industry.

When I appeared before you last June, I outlined a plan for establishing more aggressive and coordinated administration of the regulatory implementation of the

Bank Secrecy Act. In September, I updated you on that plan. Since that time, we

have made extensive progress in the following areas:

• We have executed agreements with the five Federal banking agencies and the Internal Revenue Service to provide information to us in both specific and aggregate

fashion to give us a better understanding of the overall level of Bank Secrecy Act

compliance in the industry. This understanding will enable us to better oversee

the various sectors in the financial industry we regulate and administer the Bank

Secrecy Act. In each of those agreements, we have committed our direct involvement and support to those regulators in helping them discharge their regulatory

obligations. We are currently working hard to get similar agreements with the Securities and Exchange Commission and the Commodity Futures Trading Commission.

• Working closely with the Conference of State Bank Supervisors, we have developed a model information-sharing agreement that we will seek to execute with all

States that regulate banks, money services businesses, and other types of financial institutions for compliance with the Bank Secrecy Act or similar antimoney

laundering requirements. This agreement is patterned after the agreement we

have executed with the Federal banking agencies and the Internal Revenue Service. In fact, I am pleased to tell you that the first State banking regulator with

whom we have executed the model agreement is the State of New York Banking

Department. These agreements will, in my view, take our oversight and administration of these programs to the next level. We will have a much clearer picture

of the various financial industries we regulate, including money services businesses; our collective actions and concerns can be better coordinated; and we will

better leverage information and resources as a result of these agreements.

• Our new Office of Compliance, established last year with the support of the Congress and the Department of the Treasury, particularly this Committee, is well

on its way to full staffing. This office will be devoted solely to overseeing the implementation of the Bank Secrecy Act regulatory regime by the regulators with

delegated examination authority. We are in the process of staffing the 18 positions

provided by the Congress and purchasing the desks, computers, and other equipment needed to support them. Several of these individuals have already reported

for duty.

• As I committed to you last June, we have established a new Office of Regulatory

Support in our Analytics Division, thereby devoting for the first time in the history of the Financial Crimes Enforcement Network, a significant part of our anaVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
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lytic muscle to our regulatory programs. We now have devoted over one quarter

of our analysts solely to this mission. Among other things, these analysts are

being used to identify compliance weaknesses in the reporting submitted by regulated industries as well as trends, patterns and threats. The analysts are and will

continue to assist our Office of Compliance and the other delegated supervisory

regulators to be smarter about their programs for Bank Secrecy Act compliance.

• Finally, we have established a secure web site that will form the platform for

much deeper information sharing under the authority of Section 314(a) of the

USA PATRIOT Act. Section 314(a) contemplated a ‘‘two-way’’ conversation between the Government and private sector on relevant issues relating to money

laundering, terrorism and other illicit finance. Soon, we will begin providing information to the financial industry—on both a macro and micro level—that will help

them assess the risks related to their business lines and customers, which will

enable them to better discharge their responsibilities under the Bank Secrecy Act.

When I appeared before this Committee last September, my statement provided

an overview of money services businesses and outlined the challenges we collectively

face to ensure a healthy, yet safe and transparent sector. Because that is already

part of the Committee’s developing record on these issues, I will not repeat that information here today. Instead, my testimony will focus on several specific issues of

concern that have arisen since last fall regarding money services businesses. I will

also set out for you what we have accomplished, as well as the issues that we believe still need to be addressed.

It is fair to say that the Bank Secrecy Act regulatory climate has changed dramatically since I appeared before you last September. One result of this change has

been an increase in what we call the ‘‘defensive filing’’ of suspicious activity reports.

We believe this climate change has also caused many institutions to reassess the

risks associated with large portions of their customer base. This reassessment of

risk is not a bad thing; in fact, many in the financial industry have told us that

the heightened scrutiny on Bank Secrecy Act compliance has caused their institutions to ‘‘know’’ their customers better. However, the reassessment of risk has also

led many institutions to conclude that certain customers pose too much risk for the

institution to continue to maintain an account relationship. These institutions have

begun to terminate their ‘‘risky’’ account relationships and the money services businesses sector is an industry sector that has suffered the wide-spread termination

of banking services. Unfortunately, we are concerned that often decisions to terminate account relationships may be based upon fear and confusion, or on a

misperception of the level of risk posed by money services businesses.

Once we recognized that account termination was becoming a wide-spread problem, and at the direction of Secretary Snow, we and the Bank Secrecy Act Advisory

Group’s Non-Bank Financial Institutions and Examinations subcommittees held a

public fact-finding meeting to elicit the perspectives of money services businesses

and banks why these account relationships were being terminated. The meeting,

held on March 8 of this year, confirmed that money services businesses of all types

and sizes are losing their bank accounts at an alarming rate, even when those

money services businesses appeared to be complying with the Bank Secrecy Act and

State-based regulatory requirements. We also heard an unprecedented level of concern among small and large banking institutions alike that opening or maintaining

accounts for money services businesses will be too costly, pose too great a threat

of reputational risk, or will continue to subject them to heightened regulatory scrutiny from examiners. These concerns are exacerbated by the perceived risks presented by money services business accounts, and the costs and burdens associated

with maintaining such accounts, the perception that banks are being evaluated

against regulatory standards that have not been explained, misperceptions about

the requirements of the Bank Secrecy Act, and the erroneous view that money services businesses present a uniform and unacceptably high risk of money laundering

or other illicit activity.

Individual decisions to terminate account relationships, when compounded across

the U.S. banking system, have the potential to result in a serious restriction in

available banking services to an entire market segment. The money services business industry provides valuable financial services, especially to individuals who may

not have ready access to the formal banking sector. It is long-standing Treasury policy that a transparent, well regulated money services business sector is vital to the

health of the world’s economy. It is important that money services businesses that

comply with the requirements of the Bank Secrecy Act and applicable State laws

remain within the formal financial sector, subject to appropriate antimoney laundering controls. Equally as important is ensuring that the money services business

industry maintain the same level of transparency, including the implementation of

56

a full range of antimoney laundering controls as required by law, as do other financial institutions. If account relationships are terminated on a wide-spread basis, we

believe many of these businesses could go ‘‘underground.’’ This potential loss of

transparency would, in our view, significantly damage our collective efforts to protect the U.S. financial system from money laundering and other financial crime—

including terrorist financing. Clearly, resolving this issue is critical to our achieving

the goals of the Bank Secrecy Act.

As my colleagues in the regulatory agencies and I are well aware, financial industry members across the spectrum are genuinely concerned about the heightened levels of scrutiny placed upon their institutions. Unfortunately, we continue to see

institutions with very basic compliance failures that have a significant impact, while

at the same time, we see institutions across the spectrum working harder than ever

to ensure compliance with this regulatory regime. These institutions perceive a significant regulatory and reputation risk being placed upon their institutions by examiners, prosecutors, and the press. This perception is not irrational. Institutions

are trying hard to determine what it takes to comply with the Bank Secrecy Act

regulatory regime in this time of heightened scrutiny.

Based upon what we learned at the March 8 meeting, and in discussing these

issues with other Federal regulators, we have developed and are implementing a

three-point plan for addressing these issues:

Guidance—Develop Guidance Jointly with the Federal Banking Agencies

to Outline with Specificity Bank Secrecy Act Compliance Expectations

when Banks Maintain Accounts For Money Services Businesses

On March 30, 2005, the Federal banking agencies and we took the first step toward addressing these issues by issuing a Joint Statement on Providing Banking

Services to Money Services Businesses. The purpose of the Joint Statement was to

assert clearly that the Bank Secrecy Act does not require, and neither the Federal

banking agencies nor we expect, banking institutions to serve as de facto regulators

of the money services business industry. The Joint Statement also made it clear

that banking organizations that open or maintain accounts for money services businesses are expected to apply the requirements of the Bank Secrecy Act to money

services business customers on a risk-assessed basis, as they would for any other

customer, taking into account the products and services offered and the individual

circumstances.

This was just a first step. In the Joint Statement, we pledged to issue further,

more specific guidance that would outline further our collective compliance expectations for both banking institutions and money services businesses. We believe this

guidance will help clarify the Bank Secrecy Act requirements and supervisory expectations as applied to accounts opened or maintained for money services businesses.

We are not so naı ̈ve as to believe that this guidance will solve all issues, nor that

it will repair all relationships between money services businesses and banking organizations. We are, however, committed to continue to work with the Federal banking agencies and our other Federal and State partners to do everything we can as

responsible and responsive regulators, to issue guidance, clarify expectations, and

answer questions.

Education—Provide to the Banking Industry and Bank Examiners

Enhanced Education on the Operation of the Variety of Products and

Services Offered by Money Services Businesses and the Range of

Risks that Each May Pose

We will build on the significant steps that the Federal banking agencies and we

have taken toward establishing the framework and mechanism for providing educational outreach. For example, we are working together with the Federal banking

agencies to develop a unified set of examination procedures for Bank Secrecy Act

compliance, which will include a section devoted to money services businesses.

Moreover, we have already begun joint examiner training through a partnership

with the Federal Financial Institutions Examination Council that will provide a

forum to provide training on the money services business industry. Finally, at the

Financial Crimes Enforcement Network, we are developing a series of free training

seminars for industry, regulators, and law enforcement that will undertake many

of the issues that are currently vexing all interested parties.

Regulation—Strengthen The Existing Federal Regulatory And Examination

Regime For Money Service Businesses, Including Coordinating With State

Regulators To Better Ensure Consistency And Leverage Examination

Resources

We will continue to evaluate and modify, if necessary, the existing Bank Secrecy

Act regulatory requirements relating to money services businesses. This is an imVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00060 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
57

portant exercise not just for money services businesses, but for all regulatory requirements. Our regulatory regime is not and cannot become static. We must be

willing to change course when required to ensure the goals of the Bank Secrecy Act

are being met. We have started this effort for money services businesses. For example, after consulting with law enforcement, we recently proposed to revise, simplify,

and shorten the money services businesses suspicious activity form. This action will

enhance the industry’s ease of completing the form while still obtaining critical information needed by law enforcement. We will reexamine our registration requirement for money services businesses and ensure that it is achieving the purpose

intended in the law; that is, to identify the universe of lawfully operating money

services businesses so law enforcement can focus on those businesses that are operating outside the bounds of the law. We will also take a hard at our definitions

about what is a money services business and ensure we have not captured entities

that pose little or no money laundering or illicit finance risk.

We will continue to work closely with our colleagues at the Internal Revenue

Service, to enhance the examination regime through the development of revised

Bank Secrecy Act examination procedures, information sharing and examination

targeting. Additionally, as I noted previously, we have worked and will continue to

work closely with the Conference of State Bank Supervisors and State regulators

on these issues. Executing individual agreements with State banking agencies will

ensure better coordination and synergy with state-based examiners to better leverage some of the good work and resources of those agencies.

We also will continue to work to develop indicators that can be used by law enforcement and financial institutions to help identify unlicensed and unregistered

money services businesses. By providing law enforcement, banks and other financial

institutions with indicia of illicit activity, they will be better able to help us identify

money services businesses that choose to operate outside the regulatory regime. It

remains vital that we strike the appropriate balance between education and outreach to those businesses that remain ignorant of the regulatory requirements, and

aggressive criminal enforcement of those businesses operating underground.

Perhaps the best outcome of the events of late has been the express recognition

of the need for all the stakeholders in the Bank Secrecy Act arena to work more

closely together to reach our collective goals in a consistent manner. We are working

closer with the regulatory agencies that have delegated examination authority for

the Bank Secrecy Act than ever before. Not only are we issuing joint guidance and

developing uniform examination procedures, but we also are sharing information in

a deeper and broader way, as well as developing synergies to the benefit of the regulatory regime as a whole. We are also working more closely with law enforcement.

We have formed an interagency working group that brings together regulators and

law enforcement to work together to identify and address money services businesses

that may not be complying with the law and regulations. Finally, we are setting the

stage by building platforms, systems and technologies such as BSA Direct that will

allow us to leverage information in a way that we never have before.

We understand that we must move with all possible speed we can muster and

that when we move we must get it right. September 11 raised the stakes. The old

paradigm of a Nation being able to defend its citizens from outside threats with

walls and military might—a paradigm that has been with the world since Rome—

have vanished on that terribly brilliant day three and a half years ago. That day

proved a terrible new reality we all face: The threat to our Nation’s security can

come from within; from people living next door to us, shopping at the same supermarkets, getting gas at the same gas stations, receiving cash from the same ATM’s,

and taking the same flight.

This threat demands a different way of looking at things—a different way of protecting our citizenry. No longer can citizens be passive about the defense of our

country. The Government cannot do it alone. What we know about this new reality

is that information is now central to the security of the Nation. And the simple fact

is that information is what the Bank Secrecy Act regulatory regime is all about.

This regulatory regime should be directed at safeguarding the financial industry

from the threats posed by money laundering and illicit finance and it should be directed at providing the Government with the right information; relevant, robust and

actionable information that will be highly useful to law enforcement and others. It

is my view that best way to achieve these goals is to work in a closer, more collaborative way with the financial industry. This regime demands a partnership and an

on-going dialogue between the Government and the financial industry if it is ever

going to realize its true potential. I am convinced that the vast majority of our financial industry members are committed to this partnership. Our goal is to do all

we can to ensure that the Government lives up to its side of the bargain.

58

Mr. Chairman, Senator Sarbanes, distinguished Members of the Committee, the

importance of your personal and direct support of these efforts cannot be overstated.

Your oversight will ensure that we meet the challenges that we are facing. I know

how critical it is that we do so and we hope you know how committed we are to

meeting those challenges. Thank you.

—————

PREPARED STATEMENT OF DIANA L. TAYLOR

NEW YORK STATE SUPERINTENDENT OF BANKS

APRIL 26, 2005

Introduction

Good morning Chairman Shelby and Ranking Member Sarbanes, I am Diana Taylor, Superintendent of Banks for the State of New York and a Member of the Board

of Directors for the Conference of State Bank Supervisors.

Thank you for holding this hearing on an issue that is of great interest to those

of us who oversee the financial services industry at the State level, and who are

very concerned about the sometimes conflicting priorities of regulation, law enforcement, and the ability of necessary businesses to operate. This has become a very

serious concern as issues of financial crimes, especially money laundering, figure so

prominently today.

Seven months ago, this Committee brought the issue of compliance with the Bank

Secrecy Act and antimoney laundering provisions of the law (BSA/AML) in the

Money Services Businesses (MSB’s) to the Nation’s attention with its initial oversight hearing. I testified at that hearing and I thank you for this opportunity to continue the discussion.

Who We Are

The New York State Banking Department is the regulator for more than 3,400

financial institutions and financial service firms in New York State. This number

includes State-chartered banking institutions, the vast majority of U.S. offices of

international banking institutions, all of New York State’s money transmitters,

check cashers, mortgage brokers, mortgage bankers, and budget planners. The aggregate assets of the companies and institutions supervised by the Banking Department are nearly $2 trillion.

Relevant to today’s hearing, the Department is responsible for licensing, supervising, examining, and regulating the check cashing and money transmitting businesses which operate in New York State.

We currently license 213 check cashers with 964 locations, employing 4,000 people. In 2003, in New York State alone, licensed check cashers cashed more than 36.4

million checks with an aggregate face value of some $14.9 billion.

Nationwide, according to the trade group representing check cashers, this sector

comprises some 11,000 neighborhood locations, which cash upward of 180 million

checks annually with an aggregate face value of more than $55 billion.

Beyond the check cashers, there are 72 licensed money transmitters operating in

New York through approximately 28,000 agents in New York State, employing more

than 63,000 people. In 2004, these licensed money transmitters processed more than

90 million travelers checks, money orders, official checks issued on behalf of banks

and remittances with an aggregate face value of over $101 billion in New York

alone.

These figures represent just one State. I do not have comparable nationwide figures, but a quick extrapolation would indicate that check cashers and money transmitters constitute a very large presence which serves a very large market. Check

cashers and money transmitters need banks to conduct their business. This is how

they move money. Thus, the banks become portals into our financial system. It goes

without saying that the scope of the task of overseeing this large and growing sector

of the financial services industry is enormous.

MSB’s fill a real need by providing financial services in areas where there are

very few if any bank branches. These are typically very low income areas. MSB’s

exist in immigrant and minority communities where people have varying levels of

comfort with the banking system for a broad range of reasons, from cultural to educational to personal preference. MSB’s provide an alternative to banks—they are

easy to access, and they are convenient in terms of cost, proximity to their markets

and hours of operation. In addition, an MSB location may provide a wide variety

of other services. One might ask why banks are not providing these services, but

that is outside the scope of today’s discussion.

59

We need to keep this industry viable. There are thousands of people for whom

check cashers and money transmitters are the sole means of access to their cash,

and the sole means of moving that cash. Many are immigrants who make use of

this system to send money back to families and loved ones in their countries of origin. A significant portion of the economies of many third world countries are dependent upon these resources.

The MSB Industry

The following chart diagrams how the MSB industry interfaces with the banks

and with its customers.

As with any financial service business, MSB’s have particular risk factors, or

vulnerabilities. One of the goals of law, regulation, and compliance systems is to reduce those factors as much as possible, while at the same time allowing legitimate

business to be conducted.

The first vulnerability to consider with MSB’s is the customer base. We have to

acknowledge that there will always be those who are looking for ways to exploit

MSB’s, and indeed the financial system, for the purpose of laundering funds and

other illegal activities. Second, legitimate customers and businesses are vulnerable

to the practices of unlicensed or unregistered MSB’s, or unauthorized agents as may

be applicable, where they are not afforded the same level of consumer protection as

with a licensed MSB.

Third, licensed MSB’s are open to reputational risk or guilt by association as a

result of the activities of those unlicensed MSB’s.

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Regulation and Supervision of MSB’s—New York State’s Top-Down

Approach

State regulators are a very important component in the effort to reduce the risks

and vulnerabilities of this industry. Many States are actively involved in ensuring

compliance with BSA/AML requirements. At least 45 States are now reviewing financial institutions for BSA compliance. A growing number of States are also examining for BSA in money services businesses.

In New York, we are empowered to enforce the provisions of the USA PATRIOT

and Bank Secrecy Acts through our supervisory powers over MSB’s. We are in the

process of significantly enhancing our ability to carry out our responsibility to ensure that MSB’s are sound, that they are obeying the law and that customers are

protected.

We hope that by strengthening our regulation and examination processes and personnel, banks will develop a sufficient level of confidence that New York State licensed MSB’s are operated in a safe and sound—and legitimate—manner.

In general terms, we look at safety and soundness of all institutions we regulate

banks and nonbanks—with an eye to the preservation of our monetary system as

a whole, as well as providing consumer protection.

For MSB’s in particular, our licensing criteria include, but are not limited to,

character and fitness standards; safety and soundness standards as may be evidenced by net worth, liquidity and bonding requirements; and compliance, inclusive

of BSA/AML standards, for example policies and procedures which are in place and

being followed effectively, and a designated compliance officer experienced in the

field.

For us, BSA/AML standards are pertinent from the moment an applicant seeks

permission to open a money services business in New York State. We require,

among other information, an Anti-Money Laundering Compliance Manual, and an

affidavit indicating compliance with the USA PATRIOT Act, inclusive of the four requirements for an effective antimoney laundering compliance program:

• First, policies, procedures and internal controls designed to ensurecompliance

with BSA/AML requirements; • Second, a compliance officer responsible for day-to-day compliance with the BSA/

AML and a compliance program; • Third, education and/or training of appropriate personnel; and • Fourth, an independent review to monitor and maintain an adequate program.

At a minimum, the first three points must be in place prior to our issuing a license. This allows the Department to assess the BSA/AML knowledge base of the

applicant and ensure—from the very beginning—that the compliance program is

adequate.

The subsequent examination process allows the Department to test the implementation of the compliance program presented during the application process.

The core BSA/AML examination program that we use for both banks and MSB’s

is the same as that used for banks by the Federal agencies. Although a standardized

examination program is available, it is a flexible format that may be tailored to the

risk profile of a given licensee. In addition, all sources of information available are

used to determine a licensee risk profile, for example Cash Transaction Reports and

Suspicious Activity Reports filed with FinCEN. In the field, transaction testing is

performed using a variety of sampling techniques.

Supervision of Licensed MSB’s

There are many similarities in how we look at banks and at MSB’s as businesses.

Because they differ in that MSB’s are not depository institutions, we have come up

with a slightly different protocol. While we (along with the Federal Reserve Board)

use the CAMELS system for banks, we have developed an assessment protocol

known as FILMS for MSB’s.

• F—is for Financial Condition. Our examiners look at balance sheets, levels of permissible investment, level and quality of capital, the quality and quantity of earnings, trends and stability and they analyze liquidity, profitability and leverage.

• I—is for Internal Controls and Auditing. How effective are the MSB’s controls and

overall internal control environment?

• L—is for Legal and Regulatory Compliance. This is critical—how good is the business at adhering to applicable State and Federal laws and regulations? How effective is compliance and can management spot and correct any compliance issues

or gaps? Is the BSA/AML program effective or deficient?

• M—is for Management. Examiners look at the overall performance and the licensee’s ability to identify, measure, and monitor risks. Succession plans are also important as is responsiveness to recommendations by auditors and supervisors.

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• S—is for Systems and Technology. An important part of the exam, particularly

for money transmitters, is the IT audit, testing the management, development,

and support of information systems.

Law Enforcement—Bottom-Up Approach

We have found that law enforcement agencies and their bottom-up approach dovetails very well with our top-down method of regulation and supervision of the MSB

industry. Law enforcement can identify information at the street level in terms of

the type of suspicious activity, including hawalas, or patterns of activity that may

be flowing through both licensees or unlicensed entities. Partnering with law enforcement for information sharing and coordination provides a solid basis to identify

inappropriate or unlicensed activity and assists in targeting where this activity

might be taking place.

In New York State, we have formed a very successful in partnership with law enforcement and we have been effective in shutting down unlicensed MSB’s, and licensed MSB’s who may be conducting illegal activities. For example, most recently,

on March 24, 2005, through the cooperative effort of the Department and the FDIC,

the Manhattan District Attorney announced the indictment of an unlicensed money

transmitter known as Vietnam Service, Inc. and its owners on charges of moving

almost $25 million to Vietnam in the last 3 years.

The Challenge

BSA/AML concerns have overshadowed the MSB industry to the point where very

few banks will do business with them. This does not necessarily mean these businesses will disappear—the demand for their services is very strong. It does mean

that they will have to find alternative means to move money. This result would defeat the intent of the law. Imagine the crisis this would engender: Planes and trucks

loaded with cash traversing borders. Following the money under circumstances such

as these would be made even more difficult.

One of New York’s largest banks, which has historically represented the majority

of the market for MSB’s, sent discontinuance letters to two dozen wire transfer businesses just last month, citing compliance burdens associated with servicing these

firms. These businesses, and others, have come to us asking us to intervene. They

have been experiencing profound difficulty in interesting any other banks in working with them. We are very worried that many of these transmitters may have no

alternative but to shut down their businesses, leaving thousands of legitimate customers in the lurch.

This problem of banks being reluctant to open accounts for MSB’s stems in large

part from their concerns over the lack of regulatory and supervisory guidance in the

area of BSA/AML which creates uncertainty in the market. There has been a history

of deferred prosecutorial agreements and very large penalties being extracted from

institutions for what is arguably not criminal behavior. In addition, regulators have

told them this is a high risk area of business. Many banks have decided the cost

of setting up the compliance systems and uncertainty about their own role with regard to regulation. Moreover, the fear of monetary penalties and loss of reputation

at best and the fear of prosecution by law enforcement agencies at worst is just not

worth it.

The Solutions, Next Steps

Now that these problems have been recognized, and defined, there are several

steps that should be taken to resolve these issues. Each one of these elements is

important. They range from clarification of the law, to working together cooperatively, to making sure examiners are trained appropriately and the industry is educated as to what is required, to the need more uniformity of standards across the

country.

Guidance

First and most important, FinCEN and the Federal banking supervisors recently

announced that guidance on BSA/AML compliance would be issued soon. This is

very welcome news and promises a strong step in the direction of providing more

clarity to the banks as to their BSA/AML requirements with respect to MSB customers. This guidance will assist banks in determining the measures they should

undertake. One very important issue that was made clear is that banks are not expected to become or act as MSB regulators.

One issue that I hope to see clarified in the forthcoming guidance has to do with

the OCC preemption of State depository and lending laws. Under the current OCC

rules, operating subsidiaries of nationally chartered banks, including MSB’s, may ignore any State licensing or other regulatory requirement. I think it is important

under these circumstances that a means be crafted to establish national standards

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regarding these entities, along with a very clear understanding of who is responsible

for what in this area.

Coordination Among Regulatory Agencies

I am so pleased to report that since that initial hearing last September we have

all made significant progress toward a plan to achieve a coordinated approach

through communications. I especially want to thank this Committee for recognizing

that the State regulators are an important part of the solution. Over the last few

months, the Conference of State Bank Supervisors (CSBS) has worked diligently

with all of the States, our Federal bank regulatory counterparts, FinCEN and the

IRS to produce two model Memoranda Of Understanding (MOU’s) setting forth procedures for the exchange of certain BSA information between the States and

FinCEN and the IRS, respectively. In addition, these efforts resulted in the creation

of a model side letter agreement between the States and the Federal banking agencies to facilitate sharing by the State and Federal banking regulators of jointly held

BSA examination material with FinCEN and the IRS.

In return, the States will receive analytical tools from FinCEN that will maximize

resources and highlight areas and businesses with higher risk for money laundering. The agreement with the IRS will allow for examination-sharing to reduce

duplicative efforts and establish an ongoing working relationship.

This is an unprecedented cooperative agreement. We have all recognized that no

one of us can be effective in this area without the others. Each one of us has resources needed by the others to do their jobs effectively.

Both FinCEN and the IRS have been exceptionally cooperative in outreach efforts

to answer all State questions about the agreements, and as a regulator who is keenly concerned about the MSB’s enjoying a viable and visible future, I am deeply

grateful for this.

Throughout the process of developing these agreements, CSBS has worked with

other organizations of state MSB regulators, including the Money Transmitters Regulatory Association (MTRA). The information-sharing agreement templates are designed to be signed by any State regulator with jurisdiction over those entities that

fall within the purview of BSA/AML issues.

In March, the CSBS Board of Directors endorsed the information-sharing agreements and strongly urged all State banking departments to join as signatories on

the MOU’s. CSBS is distributing the information sharing agreements to the State

banking departments.

On behalf of New York, I have signed the MOU’s with the IRS and FinCEN. Our

goal is to obtain signatures from all 50 States to cement this relationship with both

FinCEN and the IRS. Not only will these agreements provide additional information

to the regulators, but also the more information FinCEN receives and is able to analyze, the better the guidance from State and Federal regulators will be.

These MOU’s highlight the recognition by FinCEN and the IRS of the vital role

that States play in BSA/AML supervision and enforcement for both banks and

MSB’s. These MOU’s provide the mechanism for increased communication and enforcement, leading to more effective compliance for banks and MSB’s. Also, importantly, the MOU’s provide for the sharing of training and examination and other

program materials, addressing resource issues at both the State and Federal levels.

Coordination with Law Enforcement

Addressing the banks’ fear of prosecution is a challenge. Some prosecutors seem

to be of the opinion that all instances of criminal behavior can be and should be

prevented. I am in absolute agreement that criminal behavior, especially in the area

of BSA/AML issues is serious, and must be punished appropriately. However, there

is no system in the world that is going to catch every single case immediately, if

ever. This is not to say we should not try, but we must be realistic about it or we

will render inoperable a system which has served us all very well. Regulatory matters such as BSA/AML compliance failures are being criminalized and weaknesses,

deficiencies and mistakes are being prosecuted in ways which I think are counterproductive.

I believe it is more constructive for us to work with banks, in a supervisory mode,

to build strong compliance with BSA/AML. The powerful supervisory tools of administrative action and enforcement sanctions can be used toward this end.

But, in order to do this, we as regulators, the banks and the users of the financial

system need to know what the rules are, which is why FinCEN’s guidance is so critical.

Our supervisory and regulatory powers can be very helpful to law enforcement in

weeding out and prosecuting violators of the law. It is we the regulators who can

require these entities to have effective BSA/AML compliance programs in place; it

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is we the regulators who examine and detect noncompliance with BSA/AML; issue

enforcement actions to correct and penalize violations; and it is we the regulators

who oversee compliance with corrective actions. It is law enforcement that prosecutes criminal behavior when regulators are ignored, or not doing their jobs.

I strongly believe that if MSB’s are in compliance with BSA/AML as interpreted

by FinCEN, that this should be a sufficient compliance standard for the banks, their

regulators and criminal law enforcement authorities. I do not believe that banks or

their principal management should be subject to criminal prosecution if the appropriate regulator has determined the compliance standards of the banks are sufficient under the law and I believe that criminal prosecution should only extend to

a bank or any bank personnel that is knowingly violating BSA/AML standards for

criminal purposes.

The real lesson of this discussion is that to have a real and lasting effect on illegal

activity in this area, it is essential that the agencies involved in the regulatory, investigative and enforcement frameworks for MSB’s proactively cooperate with each

other. To that end, we have formed a working group in New York State which includes representatives from State and Federal Homeland Security, the NYS Department of Criminal Justice Services, the New York County District Attorney’s office,

the FBI, IRS, ICE, and the NYPD. As a designated High Intensity Financial Crime

Area, (HIFCA) we have a template for this level of cooperation. No one agency can

combat this illegal activity on its own.

Examiner Training

Another part of the solution is rigorous examiner training. Because MSB’s are not

banks, they require a different examiner perspective than the one used in bank examination. Certain organizations, such as the MTRA, do offer industry-specific examination training. This could be useful for States with a less specific protocol than

New York’s. In my testimony last fall, I suggested that the Federal Government

might play a roll in funding training for State bank examiners to ensure a uniformly high level of competence.

Continuous BSA/AML training programs for the general examination staff is essential. We take advantage of external training resources when available but we

also have developed our own training programs in-house that are based upon our

regulatory and supervisory requirements, industry best practices and real life examination experiences. In addition, we have specialists for internal controls, BSA/AML

compliance and systems technology. Special training is needed in each of these

areas.

In developing a national standard, it is key that these training opportunities and

resources can be effectively shared among the States. This may be accomplished by

sharing training programs and examination manuals that may be available for

MSB’s. Hands-on examination experience can be obtained through joint or coordinated examinations as evidenced through the efforts of the MTRA. In addition, the

CSBS is currently working on plans for a BSA examiner ‘‘boot camp’’ training program that will be offered nationwide later this year. Federal assistance in these

areas would be very valuable.

Industry Education

Education must not be restricted to the regulators. Both the MSB and banking

industries need to be thoroughly knowledgeable concerning BSA regulatory and supervisory standards.

I firmly believe that it is the regulator’s job to ensure that the entities—all the

entities—under its purview fully understand what is expected of them through the

exam process and in day-to-day behavior. This is, for many people, where we experience the disconnect, or misconnection, between law enforcement and regulators. Our

job is to help banks and MSB’s understand what the law is, what the regulations

do, and ensure they have the systems set up to comply, which will help avoid prosecution which can harm the reputation of an entire industry and close down a business.

We continue to work with the MSB industry to ‘‘raise the bar’’ of supervisory

standards and communicate those standards and our supervisory expectations. The

banking industry must be informed of our standards for MSB’s and what they

should expect from their MSB customers in terms of compliance, for example licensing, FinCEN registration and compliance programs. Something as simple as the requirement by banks that any MSB opening an account prove that they are licensed

and registered would go a long way. This question has not always been asked.

We are planning a conference to take place at the end of this quarter to which

we will invite both MSB and banking industry participants to discuss the regulation

and supervision of MSB’s. This conference will include regulators as well as repVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00067 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
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resentatives of law enforcement who will explain how they view the industry and

will give us all an idea of what they consider to be behavior that could be subject

to criminal prosecution.

The Need for More Consistency Nationwide

I have described my Department’s approach to MSB supervision and mentioned

a need to push for national consistency in our approach to monitoring the MSB’s

and their relationship to the banking industry. As you may know, across the country, supervision and regulation of this industry as a whole remains uneven.

On the bright side, this is an area that the State regulators collectively have

worked on and will continue to work on by sharing best practices either on a oneon-one, State-to-State basis or through organizations such as the MTRA.

To ensure that both banks and MSB’s know what is expected of them we need

to create more than a rulebook—we need a uniform supervisory system, we need

all States to adopt stringent safety and soundness requirements if they have not already done so. We are working through CSBS and other organizations of State regulators of MSB’s to make that happen.

Conclusion

There are serious regulatory challenges posed by the MSB’s. These companies deliver services that are necessary for many legitimate customers, most of whom are

low income, immigrant populations. We must devise a system that allows them to

operate while at the same time assuring that our laws and regulations are obeyed.

We have made a great start toward reaching this goal through a clearer understanding of the law, through cooperation by and among all the regulatory agencies

involved, and through all of our cooperation with law enforcement and vice versa.

But we still have a long way to go.

Thank you again, Mr. Chairman for allowing me to share the New York view of

where we are, what the challenges are and what we need to do about them. In holding this hearing, you have performed a valuable service for us all.

—————

PREPARED STATEMENT OF JOHN J. BYRNE

DIRECTOR, CENTER FOR REGULATORY COMPLIANCE, AMERICAN BANKERS ASSOCIATION

APRIL 26, 2005

Mr. Chairman and Members of the Committee, I am John Byrne, Director of the

Center for Regulatory Compliance with the American Bankers Association (ABA).

ABA appreciates this opportunity to discuss how the financial industry is addressing

compliance with the USA PATRIOT Act as well as with all laws covering antimoney

laundering (AML) obligations in this current regulatory environment. At the Committee’s request, we will focus on how these challenges have impacted the banking

industry’s relationships with money services businesses (MSB’s).

ABA, on behalf of the more than two million men and women who work in the

Nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional, and money center banks and holding companies, as well

as savings associations, trust companies, and savings banks—makes ABA the largest banking trade association in the country.

ABA and our members continue to work closely with our Government partners

in the challenging area of detecting and reporting the myriad of financial crimes

that involve money laundering and terrorist financing. Despite our mutual support

for cooperation, there are a number of concerns regarding how to achieve compliance. These problems can best be seen in the immediate issue of MSB’s.

We offer the following three observations:

• Banks are exiting relationships with MSB’s due to the severe lack of guidance as

to what constitutes an acceptable due diligence program. Immediate direction is

essential;

• The lack of direction in the MSB area is emblematic of the overall problem with

Bank Secrecy Act (BSA) oversight—the labeling of an entity as ‘‘high risk’’ without accompanying guidance on how to mitigate that risk; and,

• Until the financial sector receives assistance in the form of guidance and clear examples of what constitutes suspicious activity, the volume of suspicious activity

reports (SAR’s) will continue to skyrocket.

In order to address these issues, ABA recommends a series of steps similar to the

themes in our January 20 joint letter sent together with the 50 State banking assoVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00068 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
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* Held in Committee files.

1 A 2003 survey by ABA Banking Journal and Banker Systems Inc. found that Bank Secrecy/

AML/OFAC was the number one compliance area in terms of cost in the banking industry. It

is also interesting to note that in banks under $5 billion in assets, 75.6 percent of the employees

said that compliance was not their only job.

ciations to all Federal banking agencies, the Department of the Treasury, and the

Financial Crimes Enforcement Network (FinCEN). The letter is attached,* but I

would like to restate its three main points:

• There is a need for joint industry/Government training of bankers and examiners

on BSA/AML obligations and procedures that are expected in June; • A BSA staff commentary, a list of answers to frequently asked questions, and/or

centralized regulatory guidance to achieve consistency in BSA/ AML interpretations in areas such as implementing proper risk assessment is needed; and, • The establishment of a Bank Secrecy Act Advisory Group (BSAAG) subcommittee

to look at the variety of issues arising from the SAR process, particularly the

problem of defensive filing, is called for.

While the Federal banking agencies have responded to our letter with a strong

statement for the need for consistency in applying the requirements of the BSA, the

current actions of examiners suggest that the policy of consistency has not yet been

fully implemented.

Industry Efforts in Addressing AML/BSA/SAR Challenges

Mr. Chairman, ABA has worked together with the Government to provide assistance to the industry on the ongoing challenges regarding compliance with the many

requirements of BSA. Among other things, ABA holds an annual conference with

the American Bar Association on money laundering enforcement, produces a weekly

electronic newsletter on money laundering and terrorist financing issues, offers online training on BSA compliance requirements, and has a standing committee of

more than 80 bankers who have AML responsibilities in their institutions. In addition, we have provided telephone seminars on important issues such as the one we

address today, the banking of MSB’s in the current confusing environment, and

compliance with Section 326 of the USA PATRIOT Act. We plan to address the expected interagency BSA/AML examination procedures later this summer. The industry’s commitment to deterring money laundering continues unabated, and we have

trained hundreds of thousands of bankers since the passage of the Money Laundering Control Act in 1986.1

In addition to this training, ABA has been collecting examples from our membership on problems with BSA examination oversight. It is clear that communication

to examiners on how to implement BSA oversight has been mixed at best, despite

the good intentions of the agency representatives in Washington and around the nation. The hearing today focuses on the area where that lack of consistent communication has been the most profound—working with MSB’s.

MSB’s and Banks: Direction on Compliance is Confusing

As indicated in the letter of invitation for today’s hearing, in dealing with MSB’s,

there is a need to have a ‘‘consistent and equal policy used to prevent potential

abuse of the financial system while at the same time enabling that system to provide sound access to its services.’’ In order to achieve that goal, the current state

of confusion must end.

The industry certainly understands and appreciates the need to analyze the levels

of risk involved with maintaining MSB relationships. The problem, however, is how

much analysis is sufficient. At times, banks will appropriately exit relationships due

to the risk inherent with a particular MSB. At other times, banks want to continue

valued relationships. We know the importance of providing all segments of society

with banking services. For some, remittances are an essential financial product and

MSB’s frequently provide the service.

Remittance flows are an important and stable source of funds for many countries

and constitute a substantial part of financial inflows for countries with a large migrant labor force working abroad.

Officially recorded remittances received by developing countries are estimated to have exceeded $93 billion in 2003. They are now second only to foreign direct investment (around $133 billion) as a source of external finance for developing countries.

In 36 out of 153 developing countries, remittances were larger than all capital flows,

public and private.

Remittance flows go through both formal and informal remittance systems. Because of the importance of such flows to recipient countries, governments have made

significant efforts in recent years to remove impediments and increase such flows.

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At the same time, however, there has been heightened concern about the potential

for remittance systems, particularly those operating outside of the formal banking

system, to be used as vehicles for money laundering and the financing of terrorism.

It is believed that the risk of misuse of remittance systems would be reduced if

transfers were channeled through remittance systems that are subject to regulation

by governments.

To address the risks, a two-prong approach is evolving—one prong involves efforts

by governments to encourage the use of formal systems (such as banks) by lowering

the cost and increasing the access of users and recipients to the formal financial sector. Such efforts should concentrate on the reduction of artificial barriers such as

unnecessary regulatory standards that impose costs ultimately borne by consumers.

The second prong includes initiatives by governments to implement antimoney

laundering standards for entities such as MSB’s. These initiatives are progressing

in the United States and, as we have heard from other witnesses, the MSB regulatory infrastructure is robust and effective.

An underlying challenge is that there exists in most countries a large pool of

‘‘unbanked’’ individuals. Such individuals are often accustomed to using both formal

(and regulated) financial institutions and very informal (unregulated) financial services providers. Economic and social incentives that move this group toward ‘‘underground’’ financial services providers ultimately harm the interests of the unbanked,

of law-abiding financial services providers, and of the general public. Moreover, the

underground financial services providers may service law-abiding unbanked persons

as well as criminals. Thus, governmental actions that discourage the unbanked from

entering depository institutions may have the effect of also making antimoney laundering goals far more difficult to achieve. Therefore, it is the view of ABA that the

current MSB-bank regulatory environment must change in order to advance the

goals of reducing money laundering and combating terrorist financing.

If the environment does not change, the important services offered by MSB’s will

continue to be severely hampered by regulatory excess. While the Federal banking

agencies issued an interagency policy statement on March 30, the promised guidance (not yet released as of this writing) supplementing the statement must be specific and be clearly communicated to the examiners.

The Current Regulatory Confusion is Having a Dramatic Negative Effect

On March 8, I had the opportunity to co-chair a meeting of BSAAG on the MSB

problem. For eight hours we heard 44 witnesses discuss dramatic examples of lost

business, economic failures, and rampant regulatory confusion. The theme of confusion was echoed by all of the banks. For example, Alex Sanchez, head of the Florida

Bankers Association told us:

Financial institutions are closing legitimate accounts. Particularly in the area

of money services businesses or MSB’s, financial institutions feel compelled to

close their accounts. Most of these are the accounts of perfectly legitimate businesses. Many of them in Florida are businesses run by small entrepreneurs.

They are gas stations, convenience stores, and grocery stores. They serve as a

place where paychecks can be cashed. Some of them serve as agents of regulated money transmitters. These accounts are closed not because there is any

evidence that they are engaged in improper activity, but because they fit into

a regulatory profile.

The Florida Bankers Association also surveyed its members and found that 58

percent have curtailed activities with MSB’s and 83 percent experienced the change

of attitude or approach of examiners conducting examinations in this area.

Another banker emphasized the value of small MSB’s:

One of the common types of small businesses in our community is the small grocery store or convenience store. These are the businesses that often serve the

immigrant and less advantaged community. These businesses are the connecting point for many in our society to the economic system. They are legitimate businesses serving a genuine need. Under the current regulatory scheme,

we can no longer serve them.

Finally, the problem was best illustrated by a recent agency training session on

BSA that used a slide featuring the following text:

Two Important Things to Remember about MSB’s:

• May be high risk for money laundering;

• Play a vital role in the financial services of the United States.

Mr. Chairman, this statement sends the ultimate mixed message.

FinCEN and the Federal banking agencies are to be commended for working toward a guidance to address this policy morass. We urge the agencies to act swiftly

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and immediately inform the examiners to adjust their review of how banks work

with MSB’s. As we finally improve this situation with MSB oversight, it is time to

move to address overall BSA examination inconsistency.

Uniform USA PATRIOT Act/BSA/AML Examination Procedures Are Needed

ABA has previously emphasized that the banking agencies need to reach agreement on how the financial services industry will be examined for compliance under

the USA PATRIOT Act and the other AML requirements. As we indicated at the

time, ‘‘too often, institutions of the same approximate size, in the same geographic

area and offering the same financial products are treated differently for compliance

purposes. This should not continue.’’

There is formal movement to coordination of examination procedures by the agencies but the process is not complete and there are some outstanding issues. We will

discuss one glaring problem—assessment of the adequacy of SAR programs, later in

this testimony.

While we repeat our 2003 and 2004 calls for Congress to ask the regulatory agencies to report on efforts in this area, ABA has seen a commitment to consistency

in 2005. For example, not only has FinCEN Director Fox expressed public support

for uniform assessments, but he has also directed BSAAG to form a subcommittee

on examination issues. This subcommittee, co-chaired by ABA and the Federal Reserve Board, has met several times to discuss the pending interagency examination

procedures and we are meeting again on April 29.

Mr. Chairman, uniform exam procedures will assist with the industry concerns

about examination inconsistency and the continued threat of ‘‘zero tolerance’’ by

some examiners. However, we strongly urge Congress to ensure that all banking

agencies engage in industry outreach when the AML exam procedures are made

public.

Lack of SAR Guidance Results in Unnecessary Filings

With the increased number of entities required to file SAR’s, as well as the

heightened scrutiny by regulators on SAR policies and programs, it is essential for

the regulatory agencies, law enforcement, and FinCEN to assist SAR filers with

issues as they arise. This need is particularly obvious in the area of terrorist financing. This crime is difficult, if not impossible, to discern as it often appears as a normal transaction. We have learned from many Government experts that the financing of terrorist activities often can occur in fairly low dollar amounts and with basic

financial products (for example retail checking accounts). Guidance in this area is

essential if there is to be effective and accurate industry reporting. The bottom line

is that terrorist financing can only be deterred by Government intelligence.

For money laundering and other financial crimes, Government advisories and

other publications are a critical source for recognizing trends and typologies. As the

industry emphasizes in the April 2005 issue of the interagency-authored publication,

SAR Activity Review, there are a number of examples of activities that represent

reported financial crimes. This information is extremely useful for training purposes. As the private sector co-chair of the SAR Activity Review, I can assure you

ABA supports the efforts of FinCEN and the participating agencies in crafting a

publication that provides necessary statistical feedback to the SAR filing community. The SAR Activity Review has provided a variety of examples of the characteristics of such diverse suspicious activity as identity theft, bank fraud, and computer

intrusion.

We are pleased that the 2004 edition of the SAR Activity Review provided for the

first time the summary characterization of all of the suspicious activity categories.

This summary should assist filers in advancing their understanding of the reporting

requirements.

As stated above, there are several problems affecting banks in the AML exam

process related to SAR’s. ABA has previously mentioned the many examples of examiner criticisms received by our members in reviews of their SAR programs.

Whether it has been criticism of the number of SAR’s that the institution has flied

or the ‘‘second-guessing’’ by examiners as to why a SAR was not filed, this situation

demands immediate attention.

In addition, banks have been reacting to the recent concerns echoed by the Federal banking agencies that threatened prosecutions for BSA regulatory matters is

also adding to the increase in SAR filings. As the agencies emphasized in their April

18 letter to ABA and the State banking associations, the Federal banking agencies

and FinCEN are working with the Department of Justice to better define the ‘‘appropriate role for criminal prosecutions of banks under the BSA.’’

We applaud these efforts and hope they succeed in ensuring that regulatory problems do not turn into criminal actions.

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Moreover, regulatory scrutiny of SAR filings (and the recent civil penalties assessed against banks for SAR deficiencies) has caused many institutions to file

SAR’s as a purely defensive tactic (the ‘‘when in doubt, file’’ syndrome) to stave off

unwarranted criticism or ‘‘second guessing’’ of an institution’s suspicious activity

determinations. As FinCEN Director Bill Fox stated so eloquently in the April SAR

Activity Review:

While the volume of filings alone may not reveal a problem, it fuels our concern

that financial institutions are becoming increasingly convinced that the key to

avoiding regulatory and criminal scrutiny under the Bank Secrecy Act to file

more reports, regardless of whether the conduct or transaction identified is suspicious. These ‘‘defensive filings’’ populate our database with reports that have

little value, degrade the valuable reports in the database and implicate privacy

concerns.

We would like to commend Mr. Fox for addressing our third recommendation and

creating a BSAAG subcommittee on SAR issues. We hope and expect that the subcommittee will tackle the issue of SAR confusion head on.

Mr. Chairman, our members share the concerns expressed by Mr. Fox but there

are no other options to defensive SAR filings without improved examiner training.

Our hope is that the examination procedures and a mechanism for receiving interpretations on SAR issues will result in returning suspicious activity reports to their

original place—forms filed only after careful analysis and investigations with no second-guessing by regulators.

Conclusion

Mr. Chairman and Members of the Committee, ABA has been in the forefront of

the industry efforts to develop a strong public-private partnership in the areas of

money laundering and now terrorist financing. This partnership has achieved much

success but we know that more can be accomplished. We commend the Treasury Department, banking agencies, and FinCEN for their recent efforts to ensure a workable and efficient process. ABA will continue our support for these efforts.

Thank you. I would be happy to answer any questions.

—————

PREPARED STATEMENT OF GERALD GOLDMAN

GENERAL COUNSEL, FINANCIAL SERVICE CENTERS OF AMERICA, INC.

APRIL 26, 2005

Mr. Chairman, Members of the Committee, my name is Gerald Goldman. I serve

as General Counsel to the Financial Service Centers of America, also known as

FiSCA. I thank you for the opportunity to appear today to present our views on the

relationship of money services businesses and banks in the current environment of

examinations and enforcement actions. Those view will provide the experience of

check cashers, as one segment of the MSB industry, with the phenomenon that we

call ‘‘bank discontinuance.’’ In simple terms, bank discontinuance is the indiscriminate termination by banks of the accounts of all of the members of an industry.

FiSCA is a national trade association that represents more than 5,000 neighborhood financial service providers throughout the United States. Our members provide

nontraditional financial services including check cashing, money orders, wire transfers, and utility bill payment services. We serve hundreds of thousands of customers, banked and unbanked, who use us for the advantages that we provide: Convenient access, service, and the ability to obtain instant liquidity. The most common

service that we provide is a place for hard-working people to cash their paychecks;

a necessary service that they cannot always obtain at a bank, or choose not to.

Our industry is also transitioning into one that provides customers with a portal

to traditional financial services. We do this in partnership with certain banks and

credit unions, through Point of Banking facilities. In fact, in the next 2 weeks, our

industry will unveil a revolutionary national savings program for the unbanked.

Perhaps our most important trait as an industry is that we evolve to meet the needs

of our customers, instead of requiring our customers to fit into a predetermined

model of what they need.

The value that our members provide to our customers and our role as a key component of a healthy financial sector has been recently recognized by public officials.

For example, on February 10, 2005, U.S. Treasury Secretary John Snow stated that

money services businesses are a key component of a healthy financial sector and

‘‘. . . it is very important that they have access to banking services.’’

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On March 11, 2005, Julie L. Williams, the Acting Comptroller of the Currency,

said:

MSB’s play a vital role in the national economy, providing financial services to

individuals who are not otherwise part of the mainstream financial system

and

[i]t is absolutely not OCC’s intent that national banks should be forced to sever

their relationships with money service businesses.

In a letter dated October 13, 2004, to Congresswoman Carolyn Maloney, former

Comptroller John Hawke said:

I would also like to make it clear that the OCC recognizes the important role

that check cashers and similar money services businesses (MSB’s) play in providing financial services to segments of our society that do not have access to

the banking system. Check cashers generally offer convenience, neighborhood

locations, and a variety of financial services that appeal to certain consumers.

We also were for a long time recognized as good customers by our banks, and we

worked hard to nurture the banking relationships that we had. Witness the statement of JP Morgan Chase Vice President Peter Grassl, who, a mere year or so ago,

said:

The Chase and predecessor banks have been servicing the check cashing industry in New York State for close to 50 years. In the 90’s, we started servicing

check cashers in our neighboring states of New Jersey and Connecticut, and we

are now the leading bank serving the industry in the tristate area. We’re looking to expand our business to Philadelphia and also to Texas. We’ve developed

a mutually beneficial relationship with the industry over these years.

Over the last 20 years, we’ve had only one loss and that’s a pretty good record.

Obviously our experience over the years has been favorable. We wouldn’t stay

in it if it weren’t.

Nevertheless, just 6 months ago, our 50-year old friend, JP Morgan Chase, notified its 500 licensed check casher customers that it had made a general business

decision to: ‘‘ . . . no longer maintain credit relationships with or provide other financial accommodations or services to check cashing businesses.’’

In addition to Chase, over the past several years scores of banks, including Bank

One, Am South, Citibank, Fleet Bank, Chamber One, Sovereign, Sun National,

Bank of America and others, have indiscriminately terminated the accounts of thousands of check cashing locations and financial service centers.

The results of a recent survey conducted by the American Banker reported that

70 percent of banks do not lend to check cashers or that there are none in their

market area. Of the remaining 30 percent of the banks that responded, 50 percent

said that they had ‘‘recently stopped’’ lending to check cashers. This is a staggering

number and has caused thousands of check cashers to scramble to find new banks

among an already limited number. Apart from the check cashers, the ones most directly impacted are the hundreds of thousands of customers that they serve.

What has essentially happened can best be described by an exemplified hypothetical which might bring this matter close to home, your home. What if the banks

in the United States announced that they would no longer provide banking services

to Members of Congress and that they were doing it for business reasons. Could

they do it? Yes. Banks could cut Members of Congress out of the banking system

and essentially that is what they are doing to our industry.

The irony is: Banks do not make serving our customers the priority that we do.

Yet, they have the power to stop us from serving them. It makes no sense and it

is not fair.

The question is, ‘‘why is this happening?’’ The facts should point otherwise. Our

industry is financially sound, it is stable, it is responsible, and it is profitable for

banks as well as ourselves. We use our own money, we pay our bills, and we do

not go bankrupt. In surveys of customers, we have even higher satisfaction ratings

from our customers than most banks do from their customers.

Our industry is not one that operates underground. Our businesses are licensed

and regulated in 38 States, in many instances by the same agencies that regulate

banks. We are regulated under the Bank Secrecy Act and the USA PATRIOT Act,

including the requirement that we register with the Internal Revenue Service as

MSB’s. And, we have an exemplary record of compliance with Federal and State

antimoney laundering laws. In fact, James Sloan the former Director of FinCEN,

stated that check cashers ‘‘have set the standard for the financial services industry

in the fight against money laundering, financial crimes and terrorism.’’

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Among the reasons that we can identify for banks discontinuing check cashers is

the designation by the OCC in Advisory Letter 2000–3, of check cashers as businesses that are a ‘‘high risk’’ for money laundering. AL 2000–3 was followed by the

Comptroller’s Handbook, released in September 2000, addressing BSA Anti-Money

Laundering. In its Handbook, the OCC advised its examiners that certain types of

businesses, including nontraditional financial entities such as check cashing facilities, could be a potential source of money laundering. Interestingly, also included

among the list of high-risk businesses were professional service providers, such as

lawyers, accountants, and investment brokers. What followed since 2000 was not a

spate of terminations of the accounts of lawyers and accountants, but a rash of terminations of the accounts of check cashers and other nontraditional financial entities. This knee-jerk reaction has occurred despite the fact that many regulators, including former FinCEN Director Sloan, have publicly stated that, in his view, the

check cashing industry is no more a risk than any other business.

Following the release of AL 2000–3, we warned the regulators that the unintended result of the ‘‘high risk’’ designation would be the indiscriminate termination

of bank accounts. I myself, as a charter member of FinCEN’s Bank Secrecy Act Advisory Group, started beating the drum in November 2000 and repeated the warning

many times thereafter. Our warnings fell on deaf ears, but our predictions came

true; and the bleeding has continued for 4 years.

So again we ask ‘‘why is this happening?’’ There is no better evidence than the

statements of banks themselves. For example, in a January 3, 2005 letter from Sun

National Bank, which terminated all of its check casher clients, we were told:

. . . the Bank Secrecy Act and its required due diligence program are intended

to control money laundering activities . . . these relatively new and expanded

regulatory requirements place an administrative burden on national banks far

beyond the anticipated scope. Consequently, Sun National Bank has made a decision that we will no longer be able to service this type of business.

A similar sentiment was expressed in a letter to the Federal Reserve Board, written by Fleet Bank Vice President Jonathan Fine, who wrote:

In making its determination, FleetBoston weighed the costs associated with implementing and maintaining the additional control systems necessary to monitor its relationships with service providers to ensure the legitimacy of transactions being processed, the legal and enterprise risks associated with maintaining such relationships, and the benefits of maintaining such relationships. On

this basis alone, FleetBoston determined that the risk and cost associated with

having service providers as customers out-weighed the benefits.

These letters are examples of letters that we have received from banks throughout

the United States.

Finally, after the damage was done, former Comptroller Hawke, in a letter to

Congresswoman Carolyn Maloney dated October 13, 2004, said:

Absent extraordinary circumstances, the OCC will not direct or encourage any

national bank to open, close, or refuse a particular account or relationship.

Just 6 months earlier, OCC Commissioner Hawke, appearing before the House Financial Institutions Subcommittee, had stated:

. . . I would say that we’ve done nothing that should have resulted in banks

dropping check cashers as a class, and I think that’s one of the things that has

to be looked at on a case-by-case basis.

The irony is that all of this discontinuance activity is done in the name of fighting

terrorists and money laundering, both goals that we all support. However, the activity has had the unintended effect of punishing law abiding business owners and the

customers that they serve. Where are the bad guys? It is the good guys who are

being penalized. What we have is overkill imposed by regulators, and adopted by

banks.

Most recently, a parade of public officials, including FinCEN Director William

Fox, have been decrying bank discontinuance. On March 8, 2005, FinCEN conducted

a hearing at which representatives of MSB’s were permitted to testify on the extent

of this problem.

Following the Hearing, on March 30, 2005, FinCEN, the Federal Reserve, FDIC,

the National Credit Union Administration, the OCC, and OTS, issued a Joint Statement, in which it was officially recognized that:

Money services businesses are losing access to banking services as a result of

concerns about regulatory scrutiny, the risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts.

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The Statement went on to say that the concern of banks:

. . . may stem, in part, from a misperception of the requirements of the Bank

Secrecy Act, and the erroneous view that money services businesses present a

uniform and unacceptably high risk of money laundering or other illicit activity.

We do wish to commend FinCEN and the Federal banking agencies for their recent efforts to respond to the bank discontinuance problem. FinCEN has also promised to issue a Guidance on account relationships with money services businesses

that will clarify the Bank Secrecy Act requirements and supervisory expectations for

the accounts of money services businesses. We remain skeptical, however, as to the

effects of the Guidance, unless it aids in retaining and bringing banks back to our

segment of the market.

And we are not certain that even a successful clarification of compliance requirements will undo the damage done to our banking relationships. We see no evidence

of banks coming forward since FinCEN’s Joint Statement.

No industry, including Congress, should be subject to the awesome power of blanket termination at will. Until this issue of blanket termination at will is addressed,

the mistakes made and the arrogance of power of some will continue to prevail. We

would like to see this Committee really tackle not only the injustice that has occurred, but also to define the responsibilities of banks in serving MSB’s based upon

the merits of the individual MSB, so that access to the banking system will be available to all, particularly to the unbanked.

When we were invited to speak here today, we were asked to help in finding solutions to this problem. During the FinCEN hearing, we proposed one immediate solution, but that solution was designed merely to preserve the status quo, to stop the

bleeding. We proposed that FinCEN and the Federal banking agencies immediately

issue a statement encouraging a voluntary moratorium on the blanket discontinuance by banks of MSB accounts. We repeat that call today, and ask this Committee

to consider expressing support for this interim solution.

We also stand ready with ideas, borne from the ingenuity that comes from entrepreneurial minds, to assist in finding concrete, long term solutions to this problem.

Among our thoughts are the following:

• Definite standards should be developed before agencies can assign the label ‘‘high

risk’’ to an industry; • The labeling of an industry as ‘‘high risk’’ should be done only after appropriate

due process, including fact finding hearings with the right of the targeted industry

to be heard; • Congress should consider passing a ‘‘Banking Services Continuation Act’’ that

would permit banks to discontinue the accounts of MSB’s only after it could be

shown that the customer has failed to meet its statutory and regulatory

antimoney laundering obligations, or for legitimate business reasons unrelated to

the costs of compliance;

• A group should be created by the Secretary of the Treasury, made up of representatives of the Federal banking agencies, banks, check cashers, and money transmitters, with the sole purpose of ensuring access to banking services;

• CRA Credit should be given to banks that serve MSB’s in neighborhoods that

serve low- and moderate-income consumers; and

• There should be more transparency in the bank examination process, so that all

can be assured that regulatory directives that are designed to ensure the safety

of our financial system, and to keep it free from terrorist and other unlawful financing, do not punish the law-abiding, but only the law breakers.

In sum, there must be a process created so no group can be denied access, directly

or indirectly, to the Nation’s financial system, of which banks are the trustees.

We once again thank you, Mr. Chairman, and the entire Committee, for the opportunity to appear before you today and present the views of our industry.

—————

PREPARED STATEMENT OF DAN O’MALLEY

VICE PRESIDENT OF THE AMERICAS, MONEYGRAM INTERNATIONAL, INC.

APRIL 26, 2005

Good morning Mr. Chairman and Members of the Committee, my name is Dan

O’Malley, and I am Vice President of the Americas for MoneyGram International.

MoneyGram is an international payment services company conducting business in

more than 170 countries, through more than 79,000 locations. In the United States,

MoneyGram is licensed and regulated as a money transmitter by each State’s bankVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00075 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
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1Money services businesses ‘‘MSB’s’’ are defined in 31 CFR 103.11uu, and include money

transmitters, money order issuers and sellers, check cashers, travelers check issuers and sellers,

and stored value providers.

ing department. In addition, MoneyGram fully complies with the antimoney laundering laws promulgated by the Bank Secrecy Act and the USA PATRIOT Act, and

is registered with the Treasury Department as a money services business. Today,

I am pleased to have the opportunity to provide background information on my company, discuss MoneyGram’s antimoney laundering compliance program, and offer a

few comments on the recent problems that members of the money services business 1 industry are experiencing with maintaining and establishing bank accounts.

I should also mention that I am joined today by Tom Haider, MoneyGram’s Chief

Compliance Officer and Vice President of Government Affairs, who can also assist

in answering any of your questions.

Company Background

MoneyGram was founded in 1940 under the name Travelers Express as a money

order company in Minneapolis, MN. Over the years, the company has grown to be

a leading international payment services company that remains headquartered in

Minneapolis, but which now has major operations centers in Denver, CO, and

Miami, FL, with international offices in London, Hong Kong, Dubai, Moscow, Frankfurt, and Johannesburg. Just last summer, MoneyGram became a publicly traded

company and is now listed on the NYSE. The company employs nearly 1,800 people

worldwide, and offers its money transfer service through more than 79,000 locations

in 170 countries, and its money orders at 60,000 locations throughout the United

States. With only 1,800 employees worldwide, and over 100,000 locations worldwide,

it is easy to see that MoneyGram is a company that must rely on agents to sell its

services. The agents who sell MoneyGram’s services include banks, credit unions,

supermarkets, convenience stores, and many other retail locations. MoneyGram’s

services are sold through such well-known businesses as Wal-Mart, Albertsons, CVS

Pharmacy, US Bank, and many small, independently owned ‘‘mom-and-pop’’ convenience and corner grocery stores. These ‘‘mom-and-pop’’ locations, along with many

check casher outlets, are the MoneyGram agents that are experiencing the majority

of the banking relationship problems, which I will address in greater detail later

in my testimony.

MoneyGram offers consumers three primary services. First is the MoneyGram

money transfer service that provides consumers an affordable, reliable, and convenient means to send money across the country or around the world in a matter of

minutes. MoneyGram conducts its money transfer service through a network of

‘‘agents’’ which enable consumers to send money from one MoneyGram agent to another. The way it works is that a consumer walks into a MoneyGram location and

tells the merchant how much money they wish to send, and where and to whom

they want the money sent. After the sender pays for the transaction they are given

a transaction number (similar to a PIN) that the sender then relays to their recipient, generally by way of a phone call. The recipient can then go to any MoneyGram

location, and with proper identification and the transaction number, collect the

money that was sent. This entire process can be completed in a matter of minutes.

For example, if a sender was in a MoneyGram location in Chicago they could be

on their cell phone with their recipient who was in a MoneyGram location in Paris.

As soon as the sender receives the transaction number they could tell it to the recipient who could then go to the counter and pick up the funds in the local currency.

It is a fast, safe, and reliable service that is used mainly by workers to send money

home to their friends and family, and the average amount of a MoneyGram money

transfer is less than $300. In addition to its regular money transfer service,

MoneyGram also offers an emergency bill payment service called Express Payment.

This service is offered at all MoneyGram locations in the United States. Express

Payment allows consumers to manage the payment of their bills by paying them on

the exact due date. It also provides billers with the assurance of a guaranteed payment in those situations where a consumer may have become delinquent and is required to make an immediate payment in order to avoid a collection proceeding.

Our company started as Travelers Express, a money order issuer, and today it is

the Nation’s largest issuer of money orders. While most consumers pay their bills

with a check, there remain millions of consumers who pay their regular monthly

bills with money orders, which are often less expensive and more convenient than

a personal checking account. Travelers Express money orders are sold in many of

the same locations that sell MoneyGram money transfers throughout the United

States, and the average face amount of a Travelers Express money order is approximately $150. Finally, MoneyGram provides check-processing services for several

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thousand banks and credit unions in the United States. This service processes ‘‘official checks’’ which consist of cashiers’, tellers’, and other bank checks that are most

commonly associated with mortgage closings and other large transactions.

It is important to note that the services provided by MoneyGram are closely regulated, and that the company is licensed by State banking departments as a money

transmitter and an issuer of money orders. The State banking departments impose

many of the same requirements on money services businesses that they impose on

State-chartered banks, such as audited financial statements, investment restrictions, surety bonds, and on-site safety and soundness exams. In a typical year,

MoneyGram will submit more than 600 licensing reports to its various State regulators, and undergo about 10 on-site exams that can last from a few days to several

weeks. Thus, even though there is no Federal regulator for money services businesses, licensed companies like MoneyGram are well regulated by the States.

Anti-Money Laundering Compliance Program

Shifting gears slightly, I would now like to focus on antimoney laundering compliance. While I cannot speak for the entire money services business industry, I can

address the issue as it relates to MoneyGram, and by analogy to other responsible

money services businesses. MoneyGram has a comprehensive antimoney laundering

compliance program that has been in place for many years, even before such programs were mandated by the USA PATRIOT Act. Likewise, MoneyGram was voluntarily filing Suspicious Activity Reports with the IRS long before such reporting was

mandated for money service businesses. At MoneyGram, we are very proud of our

compliance efforts and I would like to note that in 1996 MoneyGram’s subsidiary,

Travelers Express, was given a $100,000 reward by the IRS for its help in cracking

a major money laundering ring. We have since continued to make significant investments in our compliance and antimoney laundering programs.

MoneyGram’s antimoney laundering compliance program is built around three

main components: Training; monitoring; and reporting. From a training perspective,

MoneyGram trains and tests all of its employees, from the CEO to the clerk in the

mailroom, on key aspects of the antimoney laundering laws. The satisfactory completion of this training and testing is a condition of employment. In addition,

MoneyGram takes steps to ensure all agents who sell its services are trained on

antimoney laundering laws so that they understand their duties under the law. In

order to facilitate the training process, MoneyGram employs bilingual staff to ensure accurate communication of the requirements, and to respond to any questions

raised by the agents.

Before authorizing any agent to conduct transactions on its behalf, MoneyGram

first conducts its own investigation of the entity to be certain that its owners and

management are of a reputable character. This process, which MoneyGram calls its

‘‘Know Your Agent’’ program, involves credit checks, criminal background reviews,

data mining, and OFAC screening. MoneyGram will not conduct business with any

individual or entity that fails to meet its background investigation standards. This

means that MoneyGram walks away from potential business opportunities, but

MoneyGram would rather forego some business than put its own reputation in jeopardy by affiliating itself with disreputable parties.

Once an agent is trained and begins to sell MoneyGram’s services, the

MoneyGram compliance team closely monitors the agents’ activities and will terminate the relationship with any agent who fails to fully comply with their antimoney

laundering obligations. The ‘‘monitoring’’ component of MoneyGram’s antimoney

laundering compliance program is built around sophisticated computer programs

that search for unusual patterns that may indicate structuring or other forms of

suspicious activity. In addition to using computer programs, MoneyGram’s compliance team physically reviews millions of transactions every year in an effort to

detect possible money laundering or terrorist financing. The compliance team also

reviews the names of every MoneyGram money transfer ‘‘sender’’ and ‘‘receiver’’

against the OFAC database to guard against doing business with sanctioned individuals. These monitoring efforts lead to the third component of MoneyGram’s compliance program, which is ‘‘reporting.’’

MoneyGram files thousands of Suspicious Activity Reports, but they only represent a small fraction of the millions of transactions the company conducts. These

reports range in size from transactions involving several hundred dollars to transactions involving tens of thousands of dollars. In most situations the suspicious activity involves structured transactions in which the money launderer moved from

one agent to another conducting relatively small transactions at each agent so that

no individual agent would notice anything suspicious. However, MoneyGram’s systems are designed to detect such activity and it is then reported to the IRS. Over

the years, MoneyGram has continued to invest heavily in its antimoney laundering

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compliance efforts through additional compliance staff located around the world;

with enhanced computer systems to analyze transaction activity and to comply with

OFAC; and, by enhancing training programs for its agents and employees. These efforts are expensive, and in many cases they go beyond what is required by law.

Thus, there should be no doubt that MoneyGram takes its antimoney laundering obligations very seriously—not just because it is the law, but also because MoneyGram

values its reputation as a good corporate citizen.

MoneyGram is also well aware of the discussion that is currently taking place in

legislative and regulatory circles regarding the filing of Suspicious Activity Reports,

and agrees with many of the sentiments expressed by FinCEN and other organizations that the defensive filing of Suspicious Activity Reports poses a potential serious problem for the law enforcement community. That is one reason why

MoneyGram was pleased to see the announcement from FinCEN on April 18, 2005,

that it intends to streamline the SAR form used by money services businesses.

MoneyGram welcomes the opportunity to provide FinCEN with comments on the

proposed changes, and believes that a streamlined form will be a great benefit to

MoneyGram and the thousands of agents who use the form.

Bank Account Concerns

Now I would like to address the problems that many money services businesses

and their agents are experiencing in opening and maintaining bank accounts. In the

past year this has become a serious problem for many MoneyGram agents, as well

as many other Money Services Businesses. In most instances for MoneyGram, it appears that the small ‘‘mom-and-pop’’ shops and check cashers are the ones who are

being targeted for account closings. These businesses are often being told by banks

with which they have had relationships for years that they now must choose to either close their account, or cease conducting any kind of money services business.

When they ask their bankers ‘‘why?’’ they are frequently told that the bank’s regulator has informed them that money services businesses are high-risk entities and

the bank is advised to avoid doing business with such entities.

At MoneyGram we have heard from dozens of agents in New York, Illinois, Virginia, Florida, California, and other States that this situation is forcing them to consider no longer serving as an agent. In some cases, our agents have sought accounts

at other banks only to be told the same story. These agents are frightened and unwilling to provoke their banks upon whom they depend for their financial needs.

After all, for most of our agents the sale of money orders or money transfers is only

a small portion of their business; it is just another product they offer to their customers, like milk or bread.

In order to help our agents, MoneyGram has begun negotiating with banks

around the country to offer special accounts. In some situations, we have negotiated

a master MoneyGram account with sub-accounts for our agents. While this may

sound like the ideal solution, it is not. It is far more costly for MoneyGram and it

is far less convenient for our agents. In some cases, agents have refused this arrangement because they cannot afford to be away from their store to travel to new

banks across town when they were used to their old bank that might have been

across the street. Thus, in order to retain some agents, MoneyGram is now paying

for armored car service to collect the funds from these agents, which adds even more

costs to conducting the business. These added costs present a difficult challenge to

MoneyGram as we strive to maintain our value proposition to our customers in a

rising cost environment. I fear too often that is the point that gets lost in all of the

discussion regarding banking relationships and compliance requirements. We simply

forget that all of these issues cost money and, in turn, lead to higher costs for consumers.

MoneyGram itself has not had banks threaten to close its accounts, but in the

course of the past year, every major bank that MoneyGram does business with has

requested in-person meetings with MoneyGram’s compliance team to verify the

quality of MoneyGram’s antimoney laundering compliance program. While this is

not a terrible hardship, it demonstrates the pressure that banks are under from

their regulators. For instead of focusing their compliance resources on true risks,

the banks are merely duplicating the efforts of the State banking departments and

other regulators who are already reviewing MoneyGram’s compliance program.

MoneyGram was very gratified that FinCEN took the lead in holding an informational meeting on this subject on March 8, 2005. This meeting was a critical first

step in getting the problem out in the open, but the real challenge will be getting

the regulatory examiners in the field to change their practice of recommending to

banks that they stop conducting business with money services businesses. Likewise,

MoneyGram was also pleased with the Joint Statement on Providing Banking Services to money services businesses that was issued on March 30, 2005, by the Federal

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Banking Agencies. That Statement correctly identified a major source of the problem to be the misperception regarding the compliance and regulatory requirements

that apply to money services businesses. That misperception is one of the driving

factors that has caused banks to believe they must take on the duty of ‘‘regulating’’

money services businesses, and since most do not want such an additional duty,

they find it far easier to simply terminate those accounts.

So what can be done about this problem? The March 30 Statement said that

FinCEN and the Federal banking agencies would soon issue guidance for banks on

their account relationships with money services businesses, and that FinCEN would

issue concurrent guidance for Money Service Businesses on their compliance obligations. MoneyGram is solidly behind the issuance of such guidance, with one minor

caveat. That is that the guidance does not impose new compliance obligations on

money services businesses. As the March 30th Statement noted, money services

businesses are already subject to the Bank Secrecy Act and related antimoney laundering laws. It would be a great injustice to money services businesses if the final

outcome were to impose even more regulatory requirements on them, at the same

time that many in Government are calling for a reduction in the regulatory burdens

imposed on banks. Instead, there needs to be a balancing of the requirements imposed on both banks and money services businesses so that neither industry is

handicapped or forced to spend even more resources on the spiraling costs associated with compliance.

We hope that the Guidance for banks and money services businesses will focus

on key elements of an effective compliance program, including:

• that the money services business is licensed in all jurisdictions where it conducts

business (some Internet and card based money transmitters claim the licensing

laws do not apply to them, or they establish themselves in one of the few States

that does not license money transmission);

• if the entity is an agent, that it only serve as an agent for licensed money services

businesses;

• that the entity have a written compliance program;

• that the entity train its employees on antimoney laundering compliance; and,

• that the entity have an effective OFAC screening program (once again, many

Internet and card based money transmitters are not conducting OFAC screening

on the recipients of funds, but only on U.S. ‘‘senders.’’)

Recommendations

MoneyGram appreciates the opportunity to offer the Committee a few suggestions

on how the bank account issue might be addressed, and how compliance with the

USA PATRIOT Act might be improved. The two are somewhat tied together, since

improving USA PATRIOT Act compliance will help banks and their regulators gain

confidence in the money services business industry. With regard to the bank account

issue, MoneyGram believes part of the problem stems from the fact that banks and

their regulators do not understand the existing State licensing regime that applies

to money services businesses. That is why MoneyGram recommends that the Committee consider legislation that would establish a dual chartering system for money

services businesses analogous to what banks and credit unions enjoy. Under such

a system, a money services business that only operates in one or a few States could

opt to be State chartered, while others could choose a Federal charter. The establishment of a primary Federal regulator may significantly reduce the concerns and

misperceptions about the oversight of the industry. Too often MoneyGram has heard

from banks, lawmakers, and law enforcement officials, as well as in the press, that

money services businesses are largely unregulated. As we have already noted, that

is not true, but it is a perception that simply will not go away. A primary Federal

regulator would instill greater confidence by banks, their regulators, and the public

in money services businesses.

A Federal regulator could also help to close the loophole that some unscrupulous

operators try to use to avoid any licensing requirements. Today, 35 States license

money transmission. However, these tend to be the biggest States and the ones

where most money transmission occurs, so responsible money transmitters are licensed and regulated. Nonetheless, some operators have been known to establish

themselves in one of the States that does not require licensing, and then only conduct business in licensed States via the Internet or by phone in order to avoid a

physical presence in those States. Similarly, some operators claim that since they

only move their money through banks they do not have to be licensed. This is one

of the more convoluted arguments since all money transmitters must use banks in

order to move money from one location to another; it is only couriers who actually

transport currency.

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Of course, any new Federal regulator would need to be separate from the State

regulators. MoneyGram would not support merely adding an additional regulator to

the process if it meant that it was now subject to all of the State regulators and

a new Federal regulator. After all, one of the biggest challenges for MoneyGram and

other nationwide money transmitters is the lack of uniformity among the State licensing laws. The requirements imposed on MoneyGram and its agents in one State

will often differ significantly from those imposed in a bordering State. These conflicting regulatory requirements impose a heavy burden for companies like

MoneyGram that offer their services throughout the country, as opposed to small

transmitters that may only operate in one or two States. Thus, the option of a dual

chartering system for money services businesses could prove to have a beneficial impact on the money services industry’s overall image, as well as easing the regulatory

burdens for the members of the industry.

MoneyGram would also like to offer a recommendation that would add clarity to

the USA PATRIOT Act requirements. One of those requirements is that money services businesses (as well as all other entities subject to the Act) conduct a periodic

review of their compliance program. For banks and licensed money services businesses, such a requirement is appropriate, but for the thousands of ‘‘mom-and-pop’’

convenience stores that sell money orders or money transfers as an agent for a licensed money services business, this requirement is nearly unintelligible. These

businesses need greater direction from FinCEN as to what constitutes an adequate

‘‘review’’ and who can conduct the review. For example, a simple one page form

could be developed that the owner of the business would be required to complete

on an annual basis confirming the adoption of a compliance program, that the business trains employees, and that it has designated a responsible individual as its

compliance officer. The form could also require verification that the business is

aware of its duty to file Suspicious Activity Reports and Currency Transaction Reports. It could also pose several questions to confirm that the business fully understands the concepts of structuring and suspicious activity, and what to do when

such situations are encountered. This type of direction from FinCEN is badly needed

by the money services business industry and its agents. It will also help those businesses better demonstrate to their bankers that they are fully compliant with the

Bank Secrecy Act and the USA PATRIOT Act. MoneyGram has the greatest respect

for FinCEN, and has a long history of working in a positive relationship with that

organization. Going forward, MoneyGram would welcome the opportunity to continue to work with FinCEN on any changes to the regulations implementing the

USA PATRIOT Act, as well as the regulatory guidance for the money services business industry.

Conclusion

In conclusion, I want to thank you, Mr. Chairman and Members of the Committee, for the honor of having the opportunity to present testimony on behalf of

MoneyGram International. We at MoneyGram are proud of our company’s strong efforts at antimoney laundering and the prevention of terrorist financing, and we remain dedicated to working with regulators and law enforcement officials to defeat

the attempts by criminals to use any of our services for illegal purposes. We think

there are proactive measures that the banking regulators can take to resolve the

problems that many money services businesses are experiencing with establishing

and maintaining bank accounts, and we believe Congress can also provide a solution

with the establishment of a Federal regulator for money services businesses. Finally, we believe the majority of the USA PATRIOT Act as it applies to money services businesses is workable, but some minor refinements of the requirements by

FinCEN will greatly assist money services businesses in complying with the periodic

review requirement. Thank you again.

—————

PREPARED STATEMENT OF DAVID LANDSMAN

EXECUTIVE DIRECTOR, THE NATIONAL MONEY TRANSMITTERS ASSOCIATION, INC.

APRIL 26, 2005

We appreciate the opportunity the Committee has given us today to have our

grievances on this subject heard. We are also grateful to New York Superintendent

of Banking Diana Taylor, for meeting with us last month on this issue.

FinCEN is now working hard with Federal bank regulators to publish guidelines

as soon as possible. For this we are also grateful, and we applaud the stance they

have taken. They are doing what they can to fix the problem and correct this injusVerDate 11-MAY-2000 07:53 Aug 23, 2006 Jkt 025856 PO 00000 Frm 00080 Fmt 6621 Sfmt 6621 29429.TXT SBANK4 PsN: SBANK4
77

tice, an injustice that has ominous implications for other industries untouched by

this problem as yet.

Yet relief will not come soon enough for many of us. If nothing is done, and done

quickly, many licensed remittance companies will lose their last bank account in 3

days, and probably breathe their last.

In the March 30 Joint Statement, FinCEN publicly acknowledged for the first

time that there may have been ‘‘. . . a misperception of the requirements of the

Bank Secrecy Act, and the erroneous view that money service businesses present

a uniform and highly unacceptable risk of money laundering or other illicit activity.’’

This is an understatement.

Further clarification of minimal best practices will help, as a first step, but most

of these guidelines have been in the public domain for years, available to us and

the banks. For our part, many of us have been early adopters of these best practices,

even before the regulations were finalized for MSB’s, out of concern for self-preservation. But many bankers are still not aware of their own State’s license requirements.

Now, regulators are properly alarmed at the idea that two entire licensed industries—money transmitters and check cashers—can be so red-flagged as to make it

impossible for even the best of them to get an account anywhere.

The main reason for these closings is a fundamental misunderstanding of licensed

remittance companies, compliance, money laundering and the law, by both the

banks and the Federal regulators. (State regulators have traditionally left

antimoney laundering initiatives to the Federal Government.)

Who We Are

We are licensed to engage in the money transfer business by the State banking

departments in the States where we operate. The money transfer services we provide are vital to our customers and their beneficiaries and the economies of the

many countries that receive these remittance flows. We provide outstanding service

at affordable prices for the large number of immigrants who send money home to

these countries. We provide employment and income for our agents and the neighborhoods they serve.

We comply with all State and Federal regulations, and are committed to using

best industry practices to detect and prevent money laundering through our facilities. We are committed to knowing our agents, our employees, our correspondents,

and our customers. We are committed to using adequate computer systems and internal controls, appropriate to the nature and volume of business we are doing and

the type of customers being served.

We are committed to fulfilling our recordkeeping and reporting requirements

under the Bank Secrecy Act, and our obligations under state and Federal antimoney

laundering statutes. We comply with the applicable provisions of Title III of the

USA PATRIOT Act. We are committed to OFAC SDN-screening and we cooperate

with law enforcement whenever called upon. Our training and supervision of employees and agents are both constant and close.

We are audited not only by the states and the IRS Title 31 examiners, but by

our independent (usually external) compliance reviewers which are required by Section 352 of the USA PATRIOT Act. Licensed money transmitters take identification

at lower transaction thresholds than banks, and we do it every time a customer

comes to our window. Proportionately, we file more SAR’s than do banks themselves.

Our databases of remittances are available upon request, as are the due diligence

folders we maintain on our agents. This would easily satisfy any bank’s CIP obligations under Section 326 of the USA PATRIOT Act, and 31 CFR 103.121.

What is Happening?

What we are seeing now is the culmination of 20-odd years of various arms of

the Federal Government demonizing all nonbank financial institutions as hotbeds

of money laundering, not making any distinction between licensed and nonlicensed

entities. This has led to the irony that those most compliant, sometimes have the

roughest time. This is a trend that will not be easy to reverse.

Since we domestic licensed transmitters have to do much more than register with

FinCEN as MSB’s, we understandably resent being routinely classified with unlicensed transmitters who range from the ignorant but innocent, to the willfully sinister, and everything in between.

Instead of speaking of Informal Value Transfer Systems, let us be more specific:

In the money transmission industry there are licensed and unlicensed money transmitters. That is all. Licensed money transmission is not only permissible and beneficial, but it is also altogether necessary and irreplaceable. It is to be regulated and

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monitored, yes, but it is also to be encouraged and protected. The alternative will

drive the underground economy further underground.

The closing of our accounts goes back at least 10 years, although in those early

days, no reason was given; the letters simply cited the bank’s right to terminate any

relationship at will. Now, the letters are more explicit. Now, there can be no doubt

what the reason is. Back then, it was just an account here and there; no alarm was

raised. No one would have listened. We kept a low profile. But an account could

usually be had somewhere.

Over the years, with the continued closings and continued bank mergers, our accounts became concentrated in fewer and fewer banks. So when the last few banks

went in rapid succession, things got very dire, very quickly. Even banks that were

committed to our markets realized they had not only regulators, but also prosecutors threatening criminal charges to worry about. That tipped the scale for even the

most courageous bank.

For a time it seemed every week we heard of another major bank closing licensed

MSB accounts, and those that did not deny those accounts before, merged with

those that do. This situation has undermined public confidence in licensed financial

institutions.

That this acceleration has coincided with the accelerating rate of bank prosecutions, fines, enforcement actions and scandals, is no accident. The more heat that

is brought on the regulators by Congress, the more they will ‘‘crack down’’ on the

banking industry. The more heat that is brought on the banking industry, the less

it can afford to appear to be associated with those who look even slightly suspicious

to some eyes.

No one has done a scientific survey, but I have collected closing letters and can

relay some anecdotal evidence. New York is the epicenter of the problem: The problem started earliest in New York and New York is the hardest hit today. The problem spread along the Eastern seaboard, then migrated to the West Coast. The

middle section of the country is now catching up. This pattern roughly tracks examination trends, which recently have had significantly enhanced AML components

added. Our agents, if they handle too much cash, are also having trouble finding

and maintaining bank accounts.

The movement of money which is the lifeblood of our business, relies on banks

that enjoy a public charter. We need bank accounts to collect money from our

agents, and to wire that money to our correspondents abroad. Yet we are the only

sector in the country that is routinely denied bank accounts, most times without

even being given a chance to demonstrate compliance.

Regulators do a difficult job and enforce the law in good faith. They are beginning

to appreciate the critical role we play in meeting the financial needs of the Nation

and the world. But the perception of risk they have fostered on the part of the banks

has reached such a level that banks feel they have no choice but to close our accounts.

Regulators will tell you that they never told banks to close all MSB accounts.

They will tell you that no regulator ever tried to persuade or dissuade a bank from

taking on a particular customer or type of customer. Yet banks continue to feel pressure to close our accounts due to lack of guidance and reassurance.

From the moment it became acceptable, even advisable, to cure a bank’s own compliance deficiencies by closing our accounts, the pattern was set that we be treated

as pariahs, even scapegoats, with no recourse, and no chance of appeal.

Bankers, influenced by regulators, deemed it logical and a good solution to sidestep the problem in this manner. It was as if a doctor, finding a certain disease distasteful or intractable, decided to ignore it, and just stop treating those patients

that had it. The more challenged a bank is found to be in their own compliance programs, the more likely it is that they will be pressured to close our accounts. This

is beyond dispute, and is totally unjust.

Are We Risky Customers?

Much to the contrary, no adverse regulatory action has ever befallen a bank because of a licensed MSB account, unless it was because the bank forgot to ask to

see a license.

Government controls tightening slowly over the last few decades, always starting

with the banks and only coming to nonbanks years later, have predictably driven

some bad customers to nonbanks, and attracted some bad elements into the money

transfer business itself, causing legitimate licensees to be unfairly marked with a

stigma we do not deserve, a presumption of guilt.

In most cases, closings have occurred, not because of any actual problem in our

history or deficiency in our compliance programs, but simply because we are in a

business designated ‘‘high-risk’’ by Federal banking regulators. Banks no longer feel

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they can do enough due diligence on us no matter how much time and money is

spent. They do not feel secure, nor do they feel they can satisfy the probing questions of their examiners in this regard.

If some members of our industry have had compliance problems, they are lessons

dearly learned and frankly, are dwarfed by comparison to the compliance problems

the banks themselves have had.

Image vs. Reality

We do not consider our money laundering risk to be as great as has been portrayed: We take in money an average of $300 at a time from consumers; most of

us do employment verification for any sum over $5,000; we are licensed, we are domestic, and we are held fully responsible for any misdeeds by our agents. Despite

all this, we are routinely classified together with any type of informal transmitter

you can name: Wholesale, foreign, or unlicensed, it does not matter—we are tarred

with the same brush.

If the respect afforded the State money transfer license needs to be upgraded and

standardized, then let us look at that. But all that should be necessary is proof of

licensure, some initial due diligence and some affordable monitoring.

The banks are not wrong to be fearful of our accounts. The greatest risk they face

with our accounts, is getting into serious trouble with their regulators for having

‘‘too many’’ MSB accounts.

No financial institution should refuse to consider, nor unreasonably deny, account

facilities to another class of lawful business, as is happening right now to the licensed remittance industry. Since we have been categorized as ‘‘high risk,’’ the presumption of guilt is so strong, that we are not even given a chance to demonstrate

our compliance programs.

We and banks need a roadmap to an affordable due diligence process and the

message needs to go forth that it is okay to have licensed remittance companies as

customers, and that no discrimination shall be tolerated. The only message that has

reached the banking community so far, is that MSB accounts, licensed or not, are

to be feared as risky and expensive to maintain.

This problem can no longer be seen as the occasional result of prudent business

practices on the part of banks. The problem is pervasive. Whether it is the direct

consequence of compliance guidance the banks have been given, or the lack thereof,

or because the guidance and our industry have been misunderstood and taken to

irrational extremes, no longer matters. Something must be done to correct the current trend.

Considering that no bank has ever gotten into trouble for having a licensed remittance company as a client, as long as they remembered to do a few simple things,

one wonders where our ‘‘risky’’ reputation came from? It is clear as day that this

is a regulator-caused problem, and therefore needs a regulatory about-face to solve

it.

What Can Be Done About It?

We seek a National Money Transmitters Act that will require a national money

transmitter’s license not to deal with safety and soundness, but with antimoney

laundering requirements. The purpose of this new license would not be to add more

regulatory burdens, but to ensure uniform and universal application of our

antimoney laundering laws, eliminate duplicative exams, and provide a certification

that banks may rely on.

We seek a broad, clear, national definition of money transfer and when a money

transfer license is required, even application of the licensing requirement, respect

for the license itself, and meaningful punishment for those who willfully refuse to

get a license.

With this license, any bank should be required to give the account applicant a fair

evaluation and, if there is a rejection on AML grounds, the bank should be compelled to give a specific reason. The applicant should then be given the chance to

cure and reapply, or a chance to appeal the decision to FinCEN.

It is time for FinCEN, the functional regulators, and Congress, to insist that licensed MSB’s not be unreasonably denied access to banking facilities. Not just for

our sake, but for everyone’s, it is time to change the course we are on.

Treasury has long spoken about how important the remittance business is to

world economic stability and why remittances are an important public policy issue,

but has seldom made mention of licensed-remittance companies in this connection.

The movement to bank the unbanked, which includes poor people in general, as well

as immigrants, is a laudable goal, which we support.

But there seems to be a myth that banks are really the preferred way to send

money, both from a customer perspective and a public policy perspective. In fact we,

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1 ‘‘National banks should perform careful due diligence of the accounts of MSB’s to control

money laundering and reputation risks. For example, banks should verify registration and licensing status, and consider visiting customers at their place of business and implementing

monitoring procedures to identify and report suspicious activity. As part of their due diligence

programs, banks should also consider obtaining and reviewing the following on the MSB:

• Financial information, including primary lines of business and major customers, and local

reputation; • The MSB’s antimoney laundering policies, procedures and controls; • Third-party references and information from verification services; • Information on owners of the MSB; • The MSB’s license, including any restrictions; • Consideration of the purpose, source of funds to open the account, and expected activity.

MSB’s who have registered with FinCEN receive letters of acknowledgement from the Internal Revenue Service, Detroit Computing Center (DCC). A bank may rely on the DCC correspondence as verification that the MSB has properly registered with FinCEN and may ask

its MSB customers to provide a copy of this form.’’—From OCC AL 2004–7.

the licensed MSB’s, are the Government’s best ally in the fight against money laundering, and the best guarantee of competitive conditions, favorable to the consumer.

We are the last channel with any hope of vetting those other ‘‘unrecorded’’ customers, or preventing their number from growing. The worthy goal of thwarting

money laundering must not be allowed to hurt the innocent, and that is what is

happening today.

No financial institution can be required to guarantee that no tainted funds ever

pass through its facilities. Such a guarantee would be impossible. What is required

is that we and the banks, build systems that are adequate to the nature and volume

of customer activity and take reasonable steps to detect and prevent money laundering.

This is no longer just a company problem, nor even just an industry problem, but

a pervasive societal problem and one that involves national security, consumer protection, humanitarian needs, and global economic stability.

It is distressing to me that, in some circumstances, smaller licensees are likely

to be ‘‘priced’’ out of the market, in various ways, by both banks and government.

We do not believe anyone would consciously intend this result either. Small licensees who can demonstrate good compliance should not be overburdened with fee upon

fee for multiple, expensive audits.

All of these effects are predictable consequences of the present trend, and we have

been well alerted to the problem so, if we do nothing at this critical time, history

will not judge our motivations so kindly.

Clarification and Guidelines are Not Enough

Banks themselves are clamoring for clarification, and FinCEN has pledged to give

it. But in this topsy-turvy atmosphere, sometimes ‘‘clarification’’ can have negative

consequences. In June 2004, the OCC came out with its Advisory Letter 2004–7

which contained a few simple steps for opening an MSB account.1

Those guidelines looked simple enough to me, in fact, they looked like what a

bank should do on all business customers of a certain size. Yet, it was enough to

prompt most banks to close some more accounts. In fact, some closing letters quote

AL 2004–7 verbatim and cite it as the reason the account is being closed.

The letter simply advised caution with MSB’s, especially when doing business

with unlicensed or foreign MSB’s. Although we fall into neither of these sub-categories, no such distinction was made in the minds of bankers or examiners. It was

all one more big red flag on MSB’s in general, to them.

No wonder regulators will not admit a causal connection: Who would take responsibility for such a non-sequitur?

The country of highest money laundering volume is the United States, and the

preferred and predominant financial institution home for such monies is the U.S.

bank itself. The whole premise of ‘‘high-risk’’ is relative. A proportional comparison

of the laundering done through licensed MSB’s with that done through banks,

makes the negative reputation we have all the more unjust.

We are not looking for leniency. To the contrary, we licensed MSB’s welcome

stringent regulation and we demand vigorous enforcement. At no time have we

thought that the problem was due to regulations that were too stringent. To the contrary, closing accounts is a total abdication of and a running away from, responsibility. All we are asking for is a level playing field and a fair chance.

Section 311 of the USA PATRIOT Act anticipated this problem and tried to prevent it by ordering Treasury to consider ‘‘. . . whether the imposition of any particular . . . measure would create a significant competitive disadvantage . . . cost

or burden associated with compliance, for financial institutions . . . licensed in the

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United States . . . any significant adverse systemic impact on the international payment . . . system, or on legitimate business activities involving a particular jurisdiction, institution, or class of transactions; and . . . the effect of the action on United

States national security and foreign policy.’’

If ‘‘clarification’’ works to some degree, it will be nice. It will help to see the number of account closings go down and the number of account openings go up, but this

is not the whole story. We will never achieve true transparency until we have the

right to know exactly why we have been rejected by any particular bank, and given

a chance to cure the problem and reapply, or given a chance to appeal to a higher

authority . . . . until then, there will be no due process for us, even when everything gets ‘‘clarified;’’ to the nth degree.

The primary way we separate the good guys from the bad guys, ever since the

BSA was passed in 1970, is to ask the customer for identification. That, and explaining any deviations from expected activity, are the essence of compliance for any

financial institution. Without us around, the majority of senders will never get

asked for identification. We will have our own Government-induced parallel market

where no identification will ever be requested and no records are kept.

From the moment no distinction was made between licensed and unlicensed

MSB’s, and nothing was known about what tests we go through and how good we

are, we were in for trouble as an industry. From the moment it became okay, even

recommended, to deal with a bank’s own compliance deficiencies by closing all its

MSB accounts, we were in for trouble as a nation.

We look forward to working with all parties toward a day when good compliance

comes with viable procedures, by definition, without presumption of guilt and, if

those procedures are not followed, that the right party gets educated and then

leaned on, if necessary—when our legitimate reactions to crime, or terror threats

or bank scandals, no longer cast undue suspicion on innocent parties, or encumber

legitimate commerce.

Our shared obligation as financial institutions is not to guarantee that tainted

money will never pass through our facilities. What is required is that we design and

maintain systems and procedures that are reasonably designed to prevent, impede,

and/or report money laundering, in proportion to the size of our operation and type

of risks posed by the customer.

Are Civil Rights and Anti-Trust Laws Being Violated?

If decisions continue to be made behind closed doors and banks continue to reject

certain licensed customers without giving specific, rational reasons, and that rejected customer has no right to even try to improve or to appeal the bank’s decision,

we will be right back where we started. Remember, we are going for transparency

here, not just a one-way mirror.

If even one person is terminated for subjective reasons, it is one person too many.

If two entire licensed industries—check cashers and money transmitters—can be

treated this way, imagine how much worse is the plight of the everyman with no

such credentials.

For example, the last big bank I know of in the business is starting to close accounts selectively. So far, the only closings I have heard of is a small Muslim licensee in New Jersey, and a one-shop Florida licensee, who is mono-lingual Spanish.

Selectively, indeed. How often will compliance concerns coincide with other sorts of

profiling?

It is true: Banks can take or refuse any customer they wish. Hotels and restaurants in the South used to have that right, too.

There is no such thing right now as a civil right to a bank account, even though

bank accounts are as necessary as air to us, and we are being denied it in most

cases not because of any transgression, but because of who we are. While overt racism may not be visible on the surface, the societal consequences are to the detriment

of immigrants and minorities.

What may have started out as legitimate money laundering concern on the part

of government and banks, has turned into nothing less than a denial of civil rights,

not only to the community-based businesses we represent, but to the broader public

they serve.

We have been told that this situation does not meet the legal definition of discrimination, nor does it rise to the level of an antitrust violation. But one need only

look around to see that the transmitters losing their accounts are the smaller, independently owned money transfer businesses. These businesses also just happen to

be ethnically owned and serve ethnic communities.

Discrimination can never be adequately judged on a case-by-case, alone, and in

a vacuum. Only after time, in the aggregate, and by comparison to the way others

82

are treated, can one say whether discrimination is taking place. We believe it clearly

has and is.

Money is the lifeblood of our business. Banks control the pipeline. Access to a

bank account is access to life. It is a public accommodation, working under public

charter, and should not be unreasonably denied to any class of people.

Treasury wants to see the cost of remittances reduced, yet fails to emphasize that

we licensees are the reason costs have come down in the first place. This thriving

competition must be maintained.

The bulk of remittance flows is not going through banks nor through large transmitters, but through small and mid-size companies. Just as small business collectively accounts for most of our economy and for most economic growth, so do we

‘‘smaller’’ transmitters, collectively, account for the bulk of recorded international

migrant worker family remittances.

The banks, and even the larger transmitters, have only relatively recently ‘‘discovered’’ our markets. Previously, service through those channels was poor and expensive, or nonexistent. The competition that has improved these conditions was provided by us. Now, picking up the scent of profit, and with prodding from Government itself, those same banks slowly but surely are shutting us off from the facilities they control with an iron grip, even as they position themselves to take on our

customers, if they can.

Government has discouraged banks from banking us because of alleged compliance concerns, and simultaneously cajoled the banks into offering our services, on

consumerist grounds. Yet anyone who is truly interested in keeping costs down for

the remitting consumer, and anyone who cares about containing money laundering,

should be a big booster of our industry. Surely our Government did not mean to foster and further reinforce what may well become a de facto monopoly of these services by the banking sector.

While overt monopolistic behavior may not be visible, the result is anticompetitive

and unjust in the extreme. Racism and monopolistic behavior are seldom overt, but

they are nonetheless real, very painful, and unbecoming of a free society.

Why Are These Closings Wrong?

Most banks stopped doing business with nonaccountholders a long time ago. This

was a convenient way to encourage people to open accounts, assure some kind of

paper trail for AML purposes, focus on their core business, and avoid having the

teller lines clogged up with nonaccountholders. But some people could not afford the

accounts.

The unbanked, the undocumented, the poor, those who did not speak English,

would have to find somewhere else to go. It was okay to lose those ‘‘other’’ customers, because the banks regarded them as unprofitable, anyway. And there were

no laws saying that banks had to offer any particular service to any particular person. There still are not any such laws. Thank God for check cashers and licensed

remittance companies.

Treasury itself has repeatedly asserted the national and world importance of

cheap, efficient remittance flows. We independent licensed remittance companies are

responsible for the lion’s share of those flows, and will be for the foreseeable future.

We are the best way to document, vet and control those flows for AML, safety and

soundness, and consumer protection reasons. Were we to disappear tomorrow, most

of our senders would not flock to banks but rather, would simply go underground.

We hope the Senate looks carefully into our plea, and gives it the same intelligent, proactive attention that we are required to give our compliance obligations.

We do our best to comply. Now, we need your help to survive. Please fight for us.

Our strongest argument is on compliance grounds. The challenge of a free society

in the age of terror, is to separate the good money from the bad, without impeding

the flow of commerce or stepping on civil rights. In this particular case, I believe

the pendulum has swung too far in one direction.

The challenge of a free society in the war on drugs and money laundering and

the war on terror, is to separate and stop the tainted money, while letting the good

money through and, especially, to separate the flows of migrant worker remittances,

from the flows of nefarious schemes. The only way to do that is to encourage a vital,

transparent nonbank sector. To do this, we need practical and rational measures,

as opposed to impractical and irrational, knee-jerk responses.

The guidelines will be a great start, but banks will not restore our accounts until

the field examiners have shown they really get the message that it is not appropriate nor required nor even a good idea for a bank to shun an entire industry because the compliance challenge is perceived to be difficult.

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RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY

FROM KEVIN BROWN

Q.1. The New York Times, on April 26, 2005, described ‘‘a surge in

schemes involving sophisticated counterfeiting of . . . United

States postal money orders.’’ According to the article, ‘‘[s]ales of

postal money orders [although] declining, from 233 million money

orders in 2000 to 188 million last year. . . brought in about $230

million in fees. . .’’

As you have noted in prior testimony before the Committee, the

Postal Service is an MSB subject to the BSA. The volume of money

order sales reported by the Treasury may make the Postal Service

one of the Nation’s largest MSB’s. Does the IRS have authority to

audit compliance by the Postal Service with the BSA? Has the

Postal Service been subject to an examination of BSA compliance,

either by the IRS or any other agency? What were the results of

each such examination? Does the Postal Service file suspicious activity reports with FinCEN? Has the quasi-government status of

the Postal Service caused any BSA examination or enforcement

issues or problems? What has been the compliance history of the

Postal Service, under the BSA, as an MSB?

A.1. In accordance with Treasury Directive 15–41, dated December

1, 1992, the IRS has not conducted a BSA examination/audit of the

Postal Service. See http://www.treas.gov/reqs/td15–41.htm. As a

result of the Directive, the IRS is not aware of any BSA examinations, or other BSA related compliance and enforcement issues relevant to the Postal Service.

The Postal Service does file suspicious activity reports. They

have filed over 99,000 SAR’s since January 1, 2002 when sellers,

issuers and redeemers of money orders were required to file SAR’s.

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