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THE FIRST LINE OF DEFENSE:

THE ROLE OF FINANCIAL INSTITUTIONS

IN DETECTING FINANCIAL CRIMES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 26, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–34

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman 

EDWARD R. ROYCE, California 

STEVEN C. LATOURETTE, Ohio 

MARK R. KENNEDY, Minnesota 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

CAROLYN B. MALONEY, New York 

STEPHEN F. LYNCH, Massachusetts 

ARTUR DAVIS, Alabama 

EMANUEL CLEAVER, Missouri 

DAVID SCOTT, Georgia 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 26, 2005 ..................................................................................................... 1

Appendix: 

May 26, 2005 ..................................................................................................... 45

WITNESSES 

THURSDAY, MAY 26, 2005

Byrne, John J., Director, Center for Regulatory Compliance, American Bankers Association ...................................................................................................... 33

Cachey, Joseph III, Compliance Chief, Western Union Financial Services, 

Inc .......................................................................................................................... 35

Fox, William J., Director, Financial Crimes Enforcement Network, Department of the Treasury ........................................................................................... 5

McClain, Scott K., Winne, Banta, Hetherington Basalrian, P.C., on behalf 

of the Financial Centers of America, Inc. .......................................................... 37

Morehart, Michael, Director, Terrorist Financing Operations Section, Federal 

Bureau of Investigation ....................................................................................... 8

Taylor, Diana, Superintendent of Banks, New York State Banking Department ...................................................................................................................... 31

APPENDIX 

Prepared statements: 

Byrne, John J. ................................................................................................... 46

Cachey, Joseph III ............................................................................................ 54

Fox, William J. .................................................................................................. 64

McClain, Scott K. .............................................................................................. 73

Morehart, Michael ............................................................................................ 80

Taylor, Diana .................................................................................................... 83

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Paul, Hon. Ron: 

Letter from Center for Financial Privacy and Human Rights ...................... 89

(1)

THE FIRST LINE OF DEFENSE: 

THE ROLE OF FINANCIAL INSTITUTIONS 

IN DETECTING FINANCIAL CRIMES 

Thursday, May 26, 2005

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:40 a.m., in Room 

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

Present: Representatives Kelly, Paul, Royce, Kennedy, McHenry, 

Gutierrez, Moore, Maloney, Davis of Alabama, Cleaver, and Scott. 

Also present: Representative Crowley. 

Chairwoman KELLY. The committee will come to order. Today 

the committee is going to hold a hearing on The First Line of Defense: The Role of Financial Institutions in Detecting Financial 

Crimes. 

The Bank Secrecy Act requires financial institutions across the 

United States to know their customers and to keep track of large 

cash transactions and suspicious activity. FinCEN is statutorily responsible for administering the BSA. Through FinCEN, power is 

delegated to eight different agencies for examining financial institutions and determining their compliance with the law. 

Through this system, Suspicious Activities Reports (SARs) and 

Currency Transaction Reports (CTRS), are collected by FinCEN for 

analysis and distribution to law enforcement and intelligence units. 

Unfortunately, the utility and relevance of these reports has come 

to be doubted by many in the financial services industry, and in 

Congress. FinCEN is still seen by many as a library of data rather 

than an active part of our Nation’s defense as our finance intelligence unit and analysis center. 

These views need to change. This skepticism about the utility of 

the BSA process has been reinforced by the pendulum swing responses to failures in the BSA system this subcommittee has examined in the past. There is a widely held view that frontline regulators now take an unreasonable, overly aggressive approach with 

institutions that they are examining. 

Financial institutions feel pressure from examiners to increase 

their filing of SARs, and many view this pressure as creating new 

burdens for institutions without any real sense of the utility of the 

information being provided to the government. Institutions have 

2

felt pressure to drop MSBs as clients, financial institutions, feel 

they have lost their ability to exercise the discretion granted to 

them in the law by using their best judgment in identifying potentially suspicious transaction. 

The compilation of these concerns has led many to believe that 

there must be a pushback on the regulators so that they will ease 

up. There are valid, critical, important points about undue burdens 

and about the dearth of feedback from the government that must 

be addressed promptly. But our focus must not dwell simply on the 

short term, on how we might best pull back the ratings on the regulators compensating for failures of the past. 

We need to look more broadly at the system we have in place for 

ensuring the BSA compliance. We should not focus exclusively on 

what may be an overreaction to failures of the past, but also on 

how those failures of the past came to be. Informed by these facts, 

we can move forward toward a better clarity in the future. 

Our focus should be on achieving a system that is effective in 

preventing crime and generating useful intelligence without placing 

unnecessary costly burdens on financial institutions and their customers. It is a difficult balance to strike, but we must continue 

working toward this ideal. 

I hope this hearing today will help illuminate the government’s 

efforts in creating a more effective and coherent regime. In this 

hearing we will hear from Director Fox and Agent Morehart about 

the utility of data collected under the BSA and improvements within the examination and data collection system. That will ease the 

burden on financial institutions. 

On the second panel, we will hear from New York State Banking 

Superintendent Diana Taylor about the recent MOU between her 

agency and FinCEN on the impact of the current system on New 

York banks. 

We will also hear from representatives of the American Banking 

Association, Western Union, the American Financial Service Centers Association, about their perspectives on the BSA and ways 

that the data collection, examinations, and feedback from FinCEN 

might be improved. 

I now yield to the gentleman from Illinois for his opening statement. 

Mr. GUTIERREZ. Thank you very much, Chairwoman Kelly, for 

calling this hearing. I also want to thank you on the record for your 

help yesterday with my amendment providing a liability shield to 

GSEs, in which they disclose expected or actual mortgage fraud to 

their regulator. 

We have worked very well together on issues related to financial 

crime and terrorist financing. I look forward to continuing our excellent working relationship. 

I am pleased to see all the witnesses here today, but in particular, I want to welcome Diana Taylor, the New York Bank Superintendent with whom I have worked on the OCC preemption 

issue. I expect to work with her on this issue in the future. 

I am also looking forward to hearing from Director Fox, and I 

have to thank him for the work of his very responsive staff, particularly William Langford and Joyce Lin. 

3

It is good that we are joined today by Mr. Morehart, a representative of the FBI—an agency we don’t often see represented in this 

hearing—and from whom we can gather more help. 

As many of you know, I have worked on issues around the remittances since I was a member of the Chicago City Council and have 

offered legislation to provide for fair and full disclosure of the often 

exorbitant and often hidden fees charged by certain money transmitter companies. 

Now I know that Mr. Cachey of Western Union and Mr. McClain, 

representing the money transmitters, will disagree with me here, 

but I think that more of these transactions ought to be handled directly by banks—why it is certainly preferable to have people sending money through licensed MSBs than through underground channels. It is even better to have these transaction handled by a regulated financial institution. More banks entering the market means 

more competition and disclosure, and lower prices in the end for 

consumers. 

I am not trying to put the money transmitters out of business, 

but I think they need competition from banks to bring prices down. 

I am pleased that guidance was finally issued on April 26th for 

banks regarding money service businesses. While, as I mentioned, 

I would prefer that the banks provide these services directly to consumers, until enough banks and credit unions enter this market, 

MSBs will necessarily fill the gaps and service for many communities. I want you to be able to stay in business serving populations 

who send remittances for those who are currently unbanked. 

As MSBs are currently thriving, the top four U.S. nonbank 

money transmitters—one of which is Western Union—increased 

their global market share from 12 percent in 2000 to 18 percent in 

2003, when they handled 40 percent of outbound remittances from 

the United States. This is in spite of the fact that more than half 

of the Latin American immigrants hold accounts at banks and 

credit unions. 

So a significant number of people are still using money transmitters to send remittances even though they have a bank account. 

Clearly, not only do more financial institutions need to offer this 

service, but they need to do outreach and make sure the community knows they offer remittances services. Some banks have recognized the opportunities in this market, particularly Bank of America, which is now offering free remittances to their customers to 

Mexico. This is not merely the right thing to do, it is simply good 

business. 

Furthermore, getting unbacked remittance senders into banking 

relationships has additional advantages. I have encouraged the financial services industry to take into account an individual’s documented remittance payments to family members abroad as evidence of creditworthiness when making decisions regarding the extension of a mortgage or a credit line to those without a significant 

credit history. Frequently, families are remitting a large portion of 

their income and demonstrating incredible financial discipline, but 

these payments do not count toward the building of a credit history. 

I believe that the entire financial services industry will soon recognize that the risk is minimal when lending to these customers. 

4

As they demonstrate, say, a record of remittance sending, their fiscal responsibility and creditworthiness will become apparent. 

Many financial institutions currently offer I–10 loans because 

they recognize these customers can be a good financial risk. I hope 

they continue to look for nontraditional ways to give worthy customers access to capital. 

In fact, along with Congressman Barney Frank, I have asked the 

National Credit Union Administration and several individual 

banks to look into the feasibility of offering loan products that take 

remittance-sending into consideration. I think that this will also 

help greatly in getting the business of remittances into regulated 

financial institutions for fees or generally less—in Bank of America’s case, nonexistent. 

At the appropriate time I would like to hear from Mr. Byrne, 

who has testified before us many times on financial crimes issue, 

what the financial services industry and the ABA is doing in particular to encourage more—into the business of remittances. 

Thank you, Congresswoman Kelly, for calling this hearing. I 

yield back my time. 

Chairwoman KELLY. Thank you. 

Mr. Morehart, I opened this hearing mispronouncing your name. 

Mr. MOORE. That is all right, ma’am. 

Chairwoman KELLY. I notice my ranking member followed suit. 

I want to offer you an apology. 

Mr. MOORE. None needed. 

Chairwoman KELLY. I also want you to know our staffs got it 

right. We are the people who got it wrong. 

Mr. Moore. 

Mr. MOORE. Madam Chairperson, I appreciate the opportunity to 

make an opening statement here, but I really would like to hear 

the testimony of the witnesses, and I think we will just proceed 

there. 

I would—let me back up 1 minute and say this. I was a prosecutor, a district attorney for 12 years in my county back home and 

in a suburban county of Kansas City, Missouri. I understand the 

need for effective law enforcement and I understand what happened with the PATRIOT Act. 

In fact, I voted along with a great majority of Members of Congress for the PATRIOT Act. I was willing to do that and give up 

on a temporary basis some of our individual personal liberties and 

freedoms to protect our country from another strike—and we didn’t 

know what was going to happen. I think a great majority of Congress felt that way as well. 

I am still very supportive of law enforcement measures, but I 

want to make sure that in this rush to renew the PATRIOT Act 

we don’t give up our personal liberties and freedoms, because those 

are the things that separate us from almost every other country in 

the world to make our country greatest Nation in the whole world. 

So I am here to listen today to what you have to say about the 

provisions of the Bank Secrecy Act, provisions of the PATRIOT Act, 

and I certainly will consider all of those. But I certainly think that 

all of us—and this should not be about Republicans and Democrats—this is about the thing that sets our Nation apart from every 

5

other country in the world, is our Bill of Rights and the personal 

liberties and freedoms we have in this country. 

So with that, I really appreciate your being here. I will listen 

with interest to your testimony. 

Chairwoman KELLY. Thank you, Mr. Moore. 

Mr. McHenry, do you have an opening statement? 

Mr. Scott? 

Mr. SCOTT. No, Madam Chair. I am anxious to get to the testimony. 

Chairwoman KELLY. Thank you. Well, I am anxious to get to the 

testimony also. 

Our first panel consists of Director Bill Fox from FinCEN and 

Michael Morehart, who is the Director of the FBI Terrorist Financing Operations Section. 

Prior to his appointment as FinCEN’s Director, Mr. Fox served 

as the Treasury’s Associate Deputy General Counsel and Acting 

Deputy General Counsel. Since September 11, 2001, he has also 

served as the principal assistant and senior adviser to Treasury’s 

general counsel on issues relating to terrorist financing and financial crime. 

Michael Morehart has served as Director of the TFOS since 

March 2004. He is a 19-year veteran of the FBI and a CPA. Gentlemen, we look forward to your testimony. 

Chairwoman KELLY. We begin with you, Mr. Fox. 

STATEMENT OF WILLIAM J. FOX, DIRECTOR, FINANCIAL 

CRIMES ENFORCEMENT NETWORK, DEPARTMENT OF THE 

TREASURY 

Mr. FOX. Thank you very much. 

Chairwoman KELLY. Mr. Fox, please turn the microphone on. 

Mr. FOX. Got it. 

Chairwoman KELLY. Thank you. 

Mr. FOX. Thank you, Congresswoman Kelly, Congressman 

Gutierrez, and other distinguished members of this committee. I 

wish to thank you for the opportunity to appear before you to discuss the Financial Crimes Enforcement Network’s administration 

and implementation of the Bank Secrecy Act. We thank you for the 

support and policy guidance you and the members of this committee, on both sides of the aisle, have offered to us on these 

issues. 

I would like to acknowledge the work of your staff that was very 

helpful to us in preparing for this important hearing today. They 

worked tirelessly and they are extremely well-informed. The committee is fortunate to have such dedicated and talented professionals. I have submitted a written statement for the record that 

outlines much of what we are attempting to accomplish at the Financial Crimes Enforcement Network. I will try to keep these remarks very brief. 

I am very happy to appear here today with my good friend and 

colleague, Mike Morehart, who is the Chief of the Terrorist Financing Operations Section in the Counterterrorism Division of the Federal Bureau of Investigation. 

Special Agent Morehart’s office is working tirelessly to keep our 

country safe from terrorists. Every day the men and women in the 

6

Terrorist Financing Operation Section accomplish that mission, utilizing some of the most valuable information to the government—

financial information—in the process. I know—I have seen them at 

work, and I am aware of the fruits of their labor. 

We have entered into a very deep partnership with the FBI that 

is allowing Mr. Morehart’s office and other components of the Bureau to exploit information collected under the Bank Secrecy Act in 

a much more meaningful and relevant way. 

This partnership, which will become part of our BSA direct paradigm, will make a significant difference in the way we interact with 

our key customers, ensuring that the valuable information we collect is put to the best use possible. 

I hope we get to explore this more today with the committee, because I believe it is a true success story. In fact, I believe it is a 

model that the rest of the government could follow in sharing sensitive information. 

I would also like to acknowledge Superintendent Diana Taylor 

from the New York Banking Department, who is appearing on the 

second panel this morning. As you know, we have entered into a 

very important information-sharing agreement with Superintendent Taylor’s agency that I believe will add a great deal to ensuring that the Bank Secrecy Act is implemented properly. Superintendent Taylor exercised outstanding leadership in ensuring this 

agreement was reached and signed. 

Everyone in this room knows that September 11th changed the 

world. What we may not have realized on that bright morning 

nearly 4 years ago, we now know for certain: September 11th revealed a new reality. What we know about this new reality is that 

information is the key to the security of our Nation, and information is what the Bank Secrecy Act is all about. 

I believe that through the USA PATRIOT Act, the Congress recognized this new reality. You broke down walls that prevented the 

sharing of information between law enforcement and the intelligence community. Most significantly to the issues being addressed 

today, under the leadership of this committee on both sides of the 

aisle, you provided us tools to better acquire and share information 

both between the government and the financial institutions, and 

between financial institutions themselves. 

These tools highlight a couple of important truths. First, that information sharing is necessary and important to the national security of our country; and, second, that these tools demonstrate the 

recognition that financial information, in particular, is highly reliable and valuable to identifying, locating, and disrupting terrorist 

networks that mean to do us harm. 

That is why this hearing today is so timely and important. Your 

hearing has been entitled ‘‘The First Line of Defense: The Role of 

Financial Institutions in Detecting Financial Crimes.’’ 

Since the beginning of the year, I have traveled across the country and have spoken with bankers, broker dealers, money services 

businesses, and other financial institutions. These financial institutions have expressed candid concern about how the Bank Secrecy 

Act is being implemented. I am very grateful for the opportunity 

to try to outline for the committee those concerns, and what we are 

attempting to do to try to address them. 

7

From my perspective, nothing is more important, simply because 

I do believe that financial institutions are the first line of defense 

to the security our financial system. We must make the partnership envisioned by the USA PATRIOT Act real, if we are truly to 

achieve our goals. 

The goals of the Bank Secrecy Act are simple. 

One, safeguarding the financial industry from threats posed by 

money laundering and illicit finance, by ensuring that the financial 

industry, the first line of defense, has the systems, procedures, and 

programs in place to protect the institution and, therefore, the system from these threats. 

Two, ensuring a system of reporting that provides the government with the right information—relevant, robust, and actionable 

information—that will be highly useful in these efforts to prevent, 

deter, investigate, and prosecute financial crime. We must keep our 

eye on these goals. 

It is my view that the 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 ongoing dialogue between 

the government and the financial industry if it is ever going to realize its true potential. It is why, for example, we are working so 

hard to implement section 314(a) of the USA PATRIOT Act in a 

much deeper way, which will result in a sensitive, yet systematic, 

two-way dialogue with the financial industry. 

This dialogue will make our financial system safer and more 

transparent. I am convinced that the financial industry is committed to this partnership and dialogue. Our goal is to do all we 

can to ensure that the government lives up to its side of the bargain. 

Madam Chairwoman—if you can bear with me, I would like to 

bring up one issue that is not directly related to the hearing today. 

I am happy to report to you that we have had very good conversations with the officials of the Kingdom of Saudi Arabia regarding 

their efforts to set up a financial intelligence unit. We are poised 

to offer whatever assistance the Kingdom will accept in setting this 

unit up. 

Having an FIU in place in Saudi Arabia will add a great deal of 

transparency to the Persian Gulf region. Madam Chairwoman, I 

am convinced that we would not be having these conversations except for your direct, personal efforts on your recent travel to the 

Middle East. 

I want to thank you for your efforts, and I want you to know that 

your efforts are having a real-world effect. I believe it shows what 

we can accomplish when our government works closely together 

hand-in-hand. 

Again, I wish to thank the members of this committee for inviting me here today. I am happy to answer any questions you wish 

to ask. 

[The prepared statement of Mr. Fox can be found on page 64 of 

the appendix.] 

Chairwoman KELLY. Thank you very much, Mr. Fox. 

Mr. Morehart. 

8

STATEMENT OF MICHAEL MOREHART, DIRECTOR, TERRORIST 

FINANCING OPERATIONS SECTION, FEDERAL BUREAU OF 

INVESTIGATION 

Mr. MOREHART. Thank you, Chairwoman Kelly, Congressman 

Gutierrez, and distinguished members of the committee. I appreciate the opportunity to appear before you to discuss the efforts of 

the U.S. Treasury’s Financial Crimes Network, otherwise known as 

FinCEN, and the Federal Bureau of Investigation, particularly as 

they pertain to the utilization of information obtained pursuant to 

the Bank Secrecy Act, also known as BSA, as amended. 

I am honored to appear before you today with William Fox—Bill, 

the Director of FinCEN, to discuss how FinCEN and the FBI work 

together closely to ensure the appropriate and successful utilization 

of BSA information in the war on terrorism. Over the years, the 

FBI has enjoyed a longstanding and productive relationship with 

FinCEN. 

The importance and quality of this working relationship cannot 

be overstated. Under the leadership of Director Fox, our relationship as well as the quality and successes of our joint efforts have 

flourished. This mutually beneficial working relationship serves as 

a prime example of what can be achieved when agencies unite in 

a common effort to ensure the safety of our financial system as well 

as our Nation’s security. 

The critical role that financial information serves in investigative 

and intelligence matters cannot be overemphasized. This underlying premise was enumerated in the PATRIOT Act of 2001 and an 

example is as follows: Defects in financial transparency on which 

money launderers rely are critical to the global financing of terrorism and the provision of funds for terrorist attacks. 

Financial information, lawfully acquired, significantly enhances 

the ability of U.S. law enforcement and intelligence community 

members to overcome defects in financial transparencies, as mentioned in the previous excerpt that I just read from the PATRIOT 

Act. 

Likewise, BSA data is of incalculable value in this important effort. When combined with other data collected by law enforcement 

and the Intelligence Communities, investigators are better able to 

connect the dots. 

More recently, BSA data has proven its utility relative to matters. For example, BSA data is used to obtain official information 

about subjects under investigation and their methods of operation. 

Analysis of BSA data permits investigators to acquire biographical 

and descriptive information to identify previously unknown subject 

associates and/or co-conspirators—and in certain instances, to determine location of those subjects by time and place. 

The value of BSA data to efforts is reflected in the results of the 

review of the BSA data that the FBI has conducted. In this instance, the FBI, using information technology, reviewed approximately 71 million BSA documents for their relevance to, investigative, and intelligence matters. 

The review identified over 88,000 suspicious activity reports and 

currency transaction reports that bore some relationship to subjects 

of terrorism investigations. The FBI also uses BSA data to identify 

trends and patterns of relevance to terrorism financing. 

9

For example, 64 percent of the CTRs associated with cash depos- its were for amounts which totaled less than $20,000. Conversely, 

the analysis showed that 75 percent of the CTRs associated with 

cash withdrawals were for amounts greater than $20,000. 

This is consistent with traditional money laundering activity or 

structuring, which involves a deposit of small amounts, followed by 

the withdrawal of larger amounts. Director Fox and his staff clearly understand the importance of BSA data to the investigative and 

intelligence missions of the FBI, and, in turn, its critical importance to the protection of this Nation’s financial infrastructure as 

well as its security. 

This understanding is evidenced by FinCEN’s assistance in helping the FBI develop new ways to access and to share the BSA data. 

As a result, BSA data has been integrated into the FBI’s investigative data warehouse, otherwise known as IDW. By way of background, IDW is a centralized Web-enabled closed system repository 

for intelligence and investigative data. 

The system maintained by the FBI allows appropriately trained 

and authorized personnel throughout this country to query information of relevance to investigative and intelligence matters. In addition to the BSA data provided by FinCEN, IDW includes information contained in a myriad of other law enforcement and intelligence community databases. 

The benefits of IDW include the ability to efficiently and effectively access multiple databases in a single query. As a result of 

the development of this robust information development technology, a review of data that might have previously taken days or 

months now only takes minutes or seconds. 

In conclusion, the partnership between the FBI and FinCEN is 

a model for the effective sharing of information. Director Fox has 

accurately identified a process which maximizes the information 

collected by FinCEN to be used by the FBI within the confines of 

current laws and regulations in the war on terrorism. The FBI has 

developed IDW as a tool to find the most critical pieces of information included in BSA data and other data sets to ensure that efforts 

of FinCEN and its banking partners are utilized as directed by 

Congress to protect the United States. 

I would like to thank the committee for this opportunity and welcome the opportunity to answer any questions that you might have. 

Thank you. 

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

80 of the appendix.] 

Chairwoman KELLY. Thank you very much, Mr. Morehart. 

Director Fox, I am going to ask you three questions. Mr. 

Morehart, I would be interested in your responses as well. 

I am wondering, Mr. Fox, can you discuss efforts over the last 

year to strengthen our BSA compliance regime? I have often spoken with you as well about my concern about the structural issues, 

which seemed to be presenting vulnerable areas of fragmentation 

and causing inefficiencies. 

I know that the finalization last year of—the MOU was designed 

to help address some of the concerns so that a more unified and 

effective BSA compliance system could be achieved. But is it 

enough? It seems to be a highly segmented system at this point. 

10

I want to know what we can do to ensure that it is an effective, 

synchronized and capable system providing a unified message 

about what is expected of the financial institutions. 

Mr. FOX. Thank you very much, Chairwoman Kelly, for that 

question. 

I think it is an interesting system in the sense that we administer the Bank Secrecy Act. Yet, the act is implemented by no fewer 

than eight separate Federal agencies that examine for its compliance. Working to make sure that all the folks involved are pulling 

the oar in the same direction is a challenge from time to time. 

I will tell you that we have received outstanding cooperation 

from most of the regulators. The Federal banking agencies and the 

IRS, in particular, have been incredibly helpful in trying to coordinate this effort in a better way. 

I think we are, today, more coordinated and working together 

with a single unified message than we perhaps ever have been. 

I think this is evidenced by the guidance that has been recently 

issued. There has been joint guidance to the banking agencies, and 

I think that really helps depository institutions when their regulator joins with our guidance, even though technically our guidance 

is the definitive guidance when it comes to the Bank Secrecy Act. 

That being said, I think I would not be completely candid with 

you if I didn’t tell you that there are issues, and we hear—one of 

the things that I have heard from time to time, as I have discussed 

these issues with the banking industry in particular, but with 

other banking industry sectors as well, is there does seem to be a 

disconnect between the actual examination forces and the policymakers in Washington. 

We are doing all we can to close that void. We are training examiners, together and jointly. We are making sure that there is no 

daylight between what we are saying both publicly and to our own 

people. We have created a FinCEN Office of Compliance, with this 

committee’s help, to actually monitor this situation and to receive 

from the agencies what is actually happening out there as they examine—not just from the banking agencies—but hopefully from the 

other regulators in the Bank Secrecy Act milieu as well. 

What I can tell you is that folks across this spectrum are trying 

very, very hard to make this work. We are doing all we can to lead 

this effort and to make sure that the government speaks with one 

voice. I think that is the very least that the industry can expect 

from us. 

I also will tell you that, again, I believe that this system is critical to the national security of the United States. We can’t get it 

wrong, and we can’t be speaking with different voices. So we are 

going to watch this very closely, and we will certainly continue the 

dialogue that we have begun with this committee and other Members of Congress because I think it is a critical issue. 

I am happy to report that folks are really trying, and I think it 

is getting better. 

Chairwoman KELLY. It is a new system, so the concern is whether or not we are moving toward a unified message, and I think that 

is important. 

Mr. Morehart, do you want to comment on that, please? 

11

Mr. MOREHART. From the oversight standpoint, obviously, the 

FBI has no role in that. However, I can comment on it from this 

standpoint. I am often asked, particularly when I go out and deliver presentations and interact with our partners in the financial 

community—whether it be banks or whatever—what are the indicators of terrorism; financing, particularly? That is a very difficult 

question to answer. 

They ask that question in this context. How will we know—how 

do we know, how are we supposed to know what to report on a suspicious activity report? And it is a very good question and a very 

logical question. Bottom line, it boils down to the same guidance 

that was given to financial institutions when the Bank Secrecy Act 

was implemented and throughout the past years in terms of what 

we call regular financial crimes, for instance, not terrorism, but 

know your customer. 

The bottom line is if it seems unusual, report it. However, to address those issues, Bill and I have worked together. We are constantly trying to identify or provide a definition of what constitutes 

suspicious activity in terms of terrorist financing. 

Bill—on the forefront again—we have had conversations, and he 

actually delivered to financial institutions a somewhat—not complete, but a start as to what indicators they might look for, so that 

they can appropriately comply with BSA requirements in terms of 

SARs specifically. 

So we are making every effort, together, as a team to try to identify whatever information we can and provide it to the financial institutions and entities affected by BSA so that they know what to 

report, they know how to report it, when to report it, and what is 

appropriate. 

As always, through our contacts, we make it clear that if there 

is a question, they should call. 

Mr. FOX. Madam Chairwoman, if I could, I forgot one element of 

this issue. 

Chairwoman KELLY. All right. 

Mr. FOX. The States are a huge part of this. Each State has its 

own regulatory regime and bank regulator or regulatory services. 

I think our efforts to coordinate better with the States—which is 

our MOU within New York—is a real key aspect to this as well. 

Chairwoman KELLY. As you know, the concern is an overabundance of information and sifting it out to get accurate appropriate 

information. 

Mr. Gutierrez. 

Mr. GUTIERREZ. Thank you. 

I want to ask Director Fox, is FinCEN consulted by banking regulators when a bank has committed a Bank Secrecy Act violation? 

In other words, are you consulted in the determination of enforcement actions on BSA matters? How much input do you have in the 

final determination of what violations merit disciplinary action? 

Mr. FOX. Thank you, Congressman. We are now, as a result of 

our MOU that we have executed with the Federal banking agencies, notified whenever the agencies determine, discover, or uncover 

a significant violation of the Bank Secrecy Act. The art, of course, 

is defining the word ‘‘significant’’ but I can tell you that the agenVerDate 0ct 09 2002 16:23 Aug 23, 2006 Jkt 029454 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 F:\DOCS\29454.XY HFIN PsN: TERRIE
12

cies have been very good about providing the information to us 

when they uncover it. 

This is a brand-new system. We are very pleased with the responses so far. The fact is agencies will—the agency has a responsibility that relates to safety and soundness—decide whether or not 

to issue a consent decree along those bases. But we are engaging 

with them in a fair way to determine what the appropriate enforcement action is. 

Certainly, any action that rises to the point where simple monetary penalties are contemplated, it is our view that actually it must 

be a coordinated effort on behalf of the government. So we are 

working very, very hard so that when that extraordinary case happens, we do it together. We don’t think it is fair to whipsaw the 

industry with separate enforcement actions that are based essentially on the same facts. 

So if a regulator—one of your co-managers of the industry—will 

let you know if they believe it is substantial, then you will work 

together. 

Mr. FOX. Yes, we do work together. If a conversation is started—

in fact, I don’t want to mislead you either. I don’t think that agencies, particularly the banking agencies and certainly the SEC and 

CFTC all have their own enforcement capabilities through their 

safety and soundness responsibilities, and technically they can go 

forward without us on those issues. 

But the reality is, at least so far, I am happy to report that this 

is not occurring, that we are enjoying the conversation that is occurring. I think we are having valuable input to it, we know about 

it, and it helps us to address the administration of the system as 

a whole. 

Mr. GUTIERREZ. I asked the question, because—I mean, I understand it from a processing point of view. The financial institution 

would probably prefer, as you said, you just not get whipsawed. 

But at the same time, when more people are looking at it, let us 

say an OCC or someone sees something and they consult with you 

and others in terms of saying here it is, a substantial—and everybody is looking at it—I just think the public is better served. Our 

security and soundness is better even though you don’t have that 

issue at FinCEN. 

Mr. FOX. I agree. I will tell you it is critical that we make sure 

our enforcement actions are geared to achieving the policy goals of 

the statute. So I couldn’t agree with you more. 

Mr. GUTIERREZ. Let me ask you, following up on that same, I 

would like to ask Mr. Moore and you, Director Fox and Director 

Morehart, does the FBI also share information with FinCEN or is 

it a one-way street? Specifically, does the FBI provide information 

regarding situations where, perhaps, a crime hasn’t been committed but the bank may be in violation of some regulatory statute? Do the regulators get this information so they can act on it? 

So I understand what you might do, I guess I would like to hear 

what Mr. Morehart and his team might do if it is not a crime in 

the sense, but it is a violation, it is a regulatory violation. 

Mr. MOREHART. Certainly. Obviously we comply with our guidelines in terms of the classified information and how it can be disseminated in terms of a nonclassified investigation, if you will, a 

13

typical fraud. As one might expect, we provide as much information 

as necessary to obtain the information we require. 

In other words, if Bill and I were working together on a particular investigation, it might be necessary for me to provide him 

certain parameters, certain guidelines, that would allow him to respond to my questions. 

So the answer to that generally is yes. But obviously within the 

laws and within the guidelines as they pertain to, for example, 6(e) 

material, grand jury secrecy and so forth, as well as the classification requirements on information. 

Does that answer your question? 

Mr. GUTIERREZ. Yes. Let me just—in the spirit of clarity—so let 

me just ask you this question. Has there been an example, a situation, where the FBI is examining something, looking for fraud, but 

then finds regulatory flaws; that is, if they didn’t respond? There 

was no fraud, but the financial institution didn’t carry out all its 

responsibilities in terms of regulatory issues. 

Mr. MOREHART. Honestly, I can’t think of one off the top of my 

head, sir, but logic would dictate that if we did run across that type 

of violation, we would contact the appropriate regulatory body that 

would handle it. 

Mr. FOX. I can tell you, Congressman, that we would work closely as well, not only with the Counterterrorism Division of the FBI, 

but also with the Financial Crimes Division. We have received such 

referrals from the FBI indicating that it appears something is 

going on here and you, FINCEN, ought to look at this. I think that 

this is really the important part of this partnership. 

I would also like to emphasize that while we have picked the Bureau to be the first one to enter into this extraordinary relationship 

with the data because of their terrorism responsibilities, our goal 

is to have similar arrangements with other key Federal law enforcement agencies. We really do have a terrific relationship with 

those agencies. 

The Bureau of Immigration and Customs Enforcement just announced a big action on unregistered MSBs this past week. We 

helped and supported that effort at ICE and it is that sort of information sharing that occurs all the time. It is part of what we try 

to make ourselves, and that is a network of information, and we 

try to be a hub for financial information. 

Mr. GUTIERREZ. Thank you both, gentlemen. Thank you very 

much. 

Mr. FOX. Thank you. 

Chairwoman KELLY. Mr. Crowley. 

Mr. CROWLEY. Are you recognizing me for questions? Or recognizing me to be on the committee? I am not a member of the—

standing member of the subcommittee, so is that okay? Thank you. 

Chairwoman KELLY. I am sorry. They would like—I have been 

asked by Mr. Gutierrez to allow you to ask questions. You are welcome to do that. 

Mr. CROWLEY. Thank you very much, Ms. Kelly, I appreciate that 

very much. I represent a very, very diverse district in New York 

City, Queens and Bronx. I may have one of the most diverse districts in the country. I have many, many immigrants from various 

parts of the world. 

14

Very recently it has come to my attention that a major bank—

I won’t mention the bank—was considering suspending the remittance program, where moneys that are derived here in the United 

States through work—more likely than not—from undocumented 

workers who are sending those funds back to their homelands. 

Their families, many of those families rely upon those dollars to get 

by in those developing countries. 

But due to the fear that they possibly could be prosecuted under 

the PATRIOT Act, money laundering issues, etc., that they may be 

somehow financing unwittingly someone who is on the suspected 

terrorist list, that they are no longer providing those services. It is 

a real concern that we have. 

On top of that has been what has been described as arbitrary enforcement, where some are being told this and others aren’t necessarily getting that same direction. 

Could you, either one or both actually, answer what actions you 

have taken and what will you be doing in talking to these companies or these banks to address the concerns about arbitrary enforcement and uneven regulation? 

Mr. FOX. Thank you, Congressman. I actually think you know 

that this is clearly—this has clearly been one of the issues this past 

year in the area of the implementation of the Bank Secrecy Act relating to money services businesses and also remittances generally, 

and possibly a misperception on the part of the financial industry 

on the risks associated with that. 

As you may know, we have implemented the Bank Secrecy Act 

through what we call a risk-based regulatory approach. We think 

that this is a very smart way to do it, just because of the nature 

of the problem. But it requires institutions to essentially study the 

risk that may be associated with its business lines or its customers, 

and then take appropriate safeguards to make sure that those risks 

are addressed. 

I think there were a couple of problems. One, I think there was 

a lot of confusion about what was actually required under our regulations. We attempted to address that by issuing guidance, which 

we issued last month, that I believe—at least the feedback that we 

have initially received has been very helpful in sort of calming the 

waters, or at least gaining some understanding, some better understanding about these issues. 

Now, I will tell you to the extent that we have not completely 

covered that field, we will work very hard and try to, because I 

agree with you that—I think it is certainly the position of my agency, the Department of Treasury, that remittances are an incredibly 

valuable part of the world’s economy, an incredibly important part 

of the world’s economy. So, I believe that they can be managed 

with the appropriate level of attention and risk by institutions. 

What we hope to do, sir, is to make sure that folks understand 

clearly what we are expecting of them in the financial industry and 

to the extent that we can do that, these decisions will become business decisions for the institutions and not based on sort of 

misperceptions about what the risk may be. 

Mr. MOREHART. Thank you, sir. I can’t speak as to the uneven 

regulation, obviously. I am going to have to defer to Mr. Fox for 

that. 

15

However, may I ask a question, sir, in terms of arbitrary enforcement? I assume you are talking about criminal laws as opposed to 

regulatory? 

Mr. CROWLEY. Correct. 

Mr. MOREHART. With that clarification, thank you, I would not 

characterize what the FBI does in terms of law enforcement, 

whether on the criminal side, or, if I may distinguish, on the terrorism side as arbitrary. Obviously we have to have appropriate 

predication to initiate an investigation. SARs, obviously, can be 

used for informational purposes, but not as probable cause, if you 

will, on a legal action. Nevertheless, they are of value. We rely on 

that information in terms of initiating investigations. 

As you I am sure understand, sometimes those investigations 

lead to prosecutions, sometimes they don’t. But our determination 

on whether to initiate an investigation is largely dependent upon 

what area of the country we are in. As you know, every United 

States Attorney’s office has different persecutive guidelines in 

terms of dollar amounts and so forth. So that offers us some guidance as to what we look at and what we don’t. 

In terms of terrorism, obviously, it is a little different, if we are 

looking at threats as opposed to dollar values; if it poses a credible 

threat and if there is significant information to initiate an investigation into terrorist matter, potential terrorist matter, we will do 

that. But, again, it is based on threat. Does that answer your question? 

Mr. CROWLEY. It does. I appreciate it. I think what puts the 

chilling effect on it is the potential criminal aspect. Not necessarily 

regulatory, because regulatory we can work through those issues 

and ask questions. When it is a threat of a criminal prosecution, 

it is a totally different subject. 

One quick question, just for the record and not for response. 

Mr. Fox, I am currently working on drafting some legislation 

that would require the Treasury Department, especially FinCEN, 

to conduct a feasibility study to force the greater consistency, greater transparency, and to improve accuracy and deliverability of information in a form that is more amenable for subsequent analysis 

by regulatory law enforcement agencies. May I request your assistance as I develop that information? 

Mr. FOX. Yes. 

Mr. CROWLEY. Thank you very much. I yield back. 

Chairwoman KELLY. Yes. Mr. Royce. 

Mr. ROYCE. There was a story today—there was a hearing yesterday, I think it was the Government Reform Subcommittee that 

was—the Homeland Security on the Senate side had a hearing on 

remittances and especially on financial crimes that are occurring in 

the United States. For example, just to take one segment of that, 

20 to 30 million a year is the sum of financial crimes committed 

by Hezbollah, and admittedly we view it as a terrorist organization. 

Many of those who participate in this view it as a legitimate arm 

of Islamist liberation struggle. 

But the fact is that these crimes are being committed in the form 

of identity theft and in the form of credit card fraud and other 

forms of financial crimes. Then our wire agencies are used to remit 

that money that then goes to fund Hezbollah. 

16

The Bureau of Immigration and Customs Enforcement this week 

announced some significant action related to unregistered money 

remitters. In previous testimony, I think it was you, Mr. Fox, who 

stated that you believe there are as many as 250,000 money service 

businesses in the United States. But we only have 23,000 registered? 

Mr. FOX. Approximately. 

Mr. ROYCE. A quarter million. That gap is cause for concern. So 

I want to ask you, to what do you attribute that gap and what are 

you doing to address it? 

Then my other line of questioning has to do with what can be 

done in terms of the user regulation on the problem with three 

States. Delaware is of particular concern to me, because we have 

Interpol officers who come over here looking to track money for 

companies that claim to be U.S. corporations, all right? 

They set up in Delaware or one of these other two States that 

permit the formation now of what I think you and I would call 

shell corporations. The States collect, in these cases, no information 

about the identity of the officers, about the directors, no information about beneficial ownership. 

So if we allow anonymous corporate shells, how are we going to 

be able to pressure other jurisdictions around the world to clean up 

our act? 

I know a lot of what Congresswoman Sue Kelly and I work on 

is how to figure out how we bring pressure to bear internationally 

on some bad actors, some other State governments, but, you know, 

using your view that our treaty commitments and our international 

commitments on the proceeds of crime should make what these 

States are doing illegal here in the United States, and can you do 

that by regulation? 

I would like you to look into that. Isn’t it a fact that these issues 

have been raised against the United States when we have meetings 

with the FATF that our colleagues in the international community 

are bringing this up? Do we have similar problems with trusts and 

with some types of omnibus trust accounts? Are they also being set 

up under this same shell corporation system in Delaware and these 

other two States? 

Mr. FOX. Thank you, Congressman Royce. 

If I can address your second question first, it is a very timely and 

very good question. Yes, I believe, without speaking about the policies associated with the setting up of LLCs and other sorts of corporate mechanisms, from my perspective, which tends to be a perspective with blinders on, these entities pose great difficulty for us. 

I mean, it is a fact that we criticize other governments for similartype activities, yet we are running into the same sort of problems 

here in the United States. It is just a simple fact. 

What I can tell you is we are studying this issue pretty closely 

from an analytical perspective to try to determine what is required, 

what is not required, and also, the problems that those entities are 

causing for our law enforcement. 

Mr. ROYCE. Have you put these three Governors on notice and 

asked them— 

Mr. FOX. No, sir, we have not at this point. 

17

Mr. ROYCE. I would think that would be one of the actions you 

would want to take, given the enormity of the significance of getting compliance on transparency with respect to some of our—some 

governments in the Middle East. When we are trying to track the 

flow on terror finance, it is enormously helpful to have our local jurisdictions complying with Federal law. 

I would argue that they are out of compliance. I would give them 

the opportunity, these Governors, if I were you, of contacting the 

Governors, bringing this to their attention, explaining the consequences. I am sure you are aware also, if some of the meetings 

over here from Interpol and others who are hot on the trail of some 

very dangerous people, and asking them if they would like to be 

part of the solution by suggesting to the president pro tems and the 

speakers of their house of delegates and State senates, that they 

quickly move legislation to correct this. 

Mr. FOX. I think that is actually a very good strategy, Congressman. I think what we are trying to do is make sure we fully understand the issue before we actually go and engage in some way like 

that. I want to make sure our ducks are in a row, if you will. 

Mr. ROYCE. Line them up. 

Mr. FOX. You have got it. So I think that this is an incredibly 

important question. I don’t know whether Mike has any comments 

on that issue or not. 

Mr. MOREHART. No, sir, I don’t; not on that. 

Mr. FOX. But it is a very important one that I think we need to 

address. Going back to your first question? 

Mr. ROYCE. Please. 

Mr. FOX. Yes, this is a very serious issue that we have identified 

and we realize we have to do something about it. Now the 200,000-

plus number that you have comes essentially from a study that was 

conducted, I think if I am correct, in the late 1990’s as we were 

beginning to think about how to regulate the money services business sector. It was a study that was done by one of the consulting 

firms, one of the big six or four or however many of them are left. 

The number actually includes outlets of the U.S. Postal Service, 

certainly every outlet of Western Union, MoneyGram and others, 

that are not required presently to register with FinCEN because of 

their agency relationship. There is an exemption for the U.S. Postal 

Service, so that can account for some of the gap but certainly not 

all of it. 

Mr. ROYCE. Right. 

Mr. FOX. We are convinced that there is a gap. How big the gap 

is, I am not sure. But I think what we are doing, and we are doing 

with some alacrity, is we are reviewing our regulatory scheme that 

was implemented in 2001, I believe, before September 11th, to determine whether or not that registration scheme makes sense. Because I think one of the very first things we need to do for law enforcement and for our purposes is to know where these businesses 

are conducting their business. 

I think if we make the registration requirement easy; in other 

words, Web-based, or make it a very simple form, at least we will 

know where they are and then we can reach out and help them 

comply and add greater transparency to this important financial 

services sector. 

18

So I think you can expect from us very soon regulatory action to 

address this issue. It is a very serious issue. 

Mr. ROYCE. In closing, Mr. Fox, there is some urgency to this as 

well. $20 to $30 million in the hands of Hezbollah, that is a lot of 

dynamite. 

Mr. FOX. It keeps me from sleeping at night, sir. 

Mr. ROYCE. Thank you, Mr. Fox. 

Chairwoman KELLY. Thank you, Mr. Royce. 

Mr. MOREHART. May I comment on that, Madam Chairwoman? 

Chairwoman KELLY. Yes, please. 

Mr. MOREHART. Let me add this if I might, Congressman. 

One of the databases that was provided to us by FinCEN is their 

money services database, which is a listing of all registered MSBs. 

In an open forum I can’t go into great detail but I will add this 

comment, that we have a number of interagency initiatives with 

ICE and IRS, Treasury, you name it, ongoing to identify those 

types of businesses. 

This is a perfect example of the value of the data provided to us 

by FinCEN on the BSA. It is important from the standpoint that 

we can immediately evaluate whether or not a subject of an investigation who may be involved or suspected of an involvement as an 

MSB, either witting or unwitting, is registered or not. 

In addition, we have a number of proactive efforts underway, 

again interagency efforts, to identify these types of entities so that 

appropriate regulatory and legal action can be taken to resolve that 

issue. 

We recognize the import of that. We recognize that these individuals may be being used to move money to facilitate terrorists 

whether it is Hezbollah, Hamas, PIJ, al Qaeda or any of them, 

quite candidly, and we take it seriously. 

We are working every day, day-to-day, with Mr. Fox and his staff 

to utilize that information to exploit it to the interests of our country, to make sure that the financing that is out there is not being 

sent for terrorism purposes. 

Chairwoman KELLY. Thank you, Mr. Morehart. 

Mr. Scott. 

Mr. SCOTT. Thank you very much, Chairwoman Kelly. 

Mr. Morehart, may I start with you? Critical to the success of 

your job is being able to collect the transaction data, the BSA data, 

to be able to use that, is that not correct, as well? 

Mr. MOREHART. That is correct, sir. Utilize it but not collect it, 

other than through FinCEN. 

Mr. SCOTT. From what we hear from the banking community and 

the banks and the financial institutions, they are very critical that 

it is too much information, that it is overburdensome to them. Do 

you question why so much information, what is the Federal Government doing with that information, and are they in the eye of the 

storm as well? Can you address this conflict of opinion and share 

with us why you need this much information, and secondly, where 

is that burden with the banking finance community? 

Mr. MOREHART. Start with the latter aspect of that question, sir. 

I am not sure I can answer where the burden would be with the 

community in general. That might be better addressed— 

19

Mr. SCOTT. I meant why they feel that it is this burdensome and 

too worrisome and too much, and of course, you can address why, 

just the opposite, you need it. 

Mr. MOREHART. The information we receive, the BSA data we receive and have received has been invaluable, as I mentioned in my 

opening comments. The information is not too much. I would wholly disagree with that. 

I think the question here is perhaps that the financial sector of 

our country probably doesn’t realize and in certain instances we 

can’t tell them how we utilize that data nor would I think it prudent. 

I can give you some examples of how we use that information 

and how valuable it is, and I will emphasize that our use of that 

information, in conjunction with FinCEN and the forward-thinking 

approach that Mr. Fox has worked with us to develop, has been 

critical. The information technology we have developed has allowed 

us to do things to exploit that data, to look at it, to use it like never 

before. 

As I mentioned, in the old days, and I shouldn’t say the old days, 

20 years ago, as long as I have been in the Bureau, when I first 

joined, when we got information, back then they weren’t SARs, and 

I forget what the documents were, 567s or whatever they were, we 

would actually have to flip those documents and look through 

them. A real person would look through those to identify a name 

or something of import. 

That is no longer the case wholly. What we do is we take IDW, 

our Investigative Data Warehouse as I described, if I could characterize it as a Google on steroids, that is essentially what it is, and 

it is amazing. We can actually take millions of documents, BSA 

documents, and query them for a specific set of metrics within 

hours, within minutes sometimes, and even seconds. 

For example, we may be interested in identifying CTRs or SARs, 

identifiable with a particular subject that we have intelligence that 

suggests they may be money laundering, whether for what I call 

typical crimes or terrorism purposes, we can run against all those 

billions of documents and in a very short period of time identify 

every document associated with that individual and pull them up. 

After, we can analyze them and we can determine information 

quickly, very quickly. For example, we can identify the pattern of 

activity. We can identify what banks they have dealt with. We can 

identify the dollars and where they have been sent and biographical data that may help us locate that individual and/or an address, 

and those are just certain examples of the things we are able to 

do. 

As to the volume of information provided, all things must be reasonable. We recognize that, and that is why there are limitations 

on dollar amounts with CTRs and things like that because it would 

be truly overburdensome if we had to report on every transaction. 

I will point this out, however. SARs are very subjective in nature. What I mean by that is what is suspicious to me may not be 

suspicious to you. Nevertheless, it comes back to what we have always discussed with our banking partners or partners in the financial sector, is know your customer. If it is unusual, report it. 

20

I would like to give you a couple of statistics in a moment that 

kind of prove what I am saying. 

On the CTR side of the house, the Currency Transaction Reports, the current limit is $10,000—I know there has been some discussion as to whether it should be raised to $20,000. We are opposed 

to that. We think it is a huge mistake, and I think the numbers 

that I will give you will explain why. 

Those are objective in nature. That is, there is no decision, either the amount of money is either deposited or withdrawn, i.e., $10,000 

or more, or it is not and the information included on there, name, 

address, biographical information and so forth, can be extremely 

valuable in an investigation, whether it relates to terror or otherwise. 

Let me just give you a couple of examples of some numbers that 

may bring this home. 

The total BSA documents in IDW now are about 63 million, and 

they constantly increase as the banks send in data, and they in 

turn give them to us and we enter them into the database. We did 

a search that I would characterize as main hits; that is, all the subjects of current and closed FBI investigations were compared to 

that BSA data. Out of 63 million documents, there were 1.5 million 

hits. 

Now, it is incumbent upon us to evaluate that information, particularly on those more threat-based cases that are of import, and 

that we send that information out to the field and/or they access 

it themselves through IDW. We have some 5,000, if I am not mistaken, users trained in FBI offices to access that data, which is immediately available to the investigator and can be of significant import. 

Mr. SCOTT. My time is about up. I did have one follow-up on that 

when I set that question up because we want to make sure that 

the system of data collection that is in place is exactly what you 

need. I do think that we need, because the banks have to give it 

to you, but maybe there is some things we can do to make sure 

there is nothing too burdensome that prevents us from giving you 

the information. 

Do you think that the system of collection of this data that we 

have with the BSA is sufficient to catch, say, what I think is one 

of the main sources, the hawalas; are we okay with that? 

Chairwoman KELLY. Mr. Scott, we are running out of time here. 

Mr. SCOTT. Just give me a response. 

Chairwoman KELLY. Can you give a quick response to that, 

please? 

Mr. MOREHART. It is difficult for me to assess whether it is perfect or not, by any stretch of the imagination. I think that is a very 

subjective measure. However, I would say that the BSA data we 

get is critical, and I repeat that, critical to the identification of 

those types of activities, whether witting or unwitting, in support 

of terrorism or otherwise. 

Chairwoman KELLY. Thank you. 

Mr. Davis. 

Mr. DAVIS OF ALABAMA. Thank you, Madam Chairwoman. 

Mr. Fox, I direct these questions at you. As you may know in the 

last several years, various States, I think about 17, have entered 

21

into voluntary alliances that are loosely called FraudNet and what 

happens is that financial institutions within the member States or 

the partner States agree to share information regarding suspicious 

credit activities. 

There has been some controversy and some discussion since the 

renewal of FCRA last year as to, number one, the utility of alliances like FraudNet, and number two, of whether or not they 

somehow violate FCRA. 

I recognize that obviously other agencies will make the determination as to whether they are violative. Let me get you to comment for a moment. 

Do you perceive the FraudNet alliances as being in any way in 

violation of FCRA? 

Mr. FOX. Congressman, I am sorry I have not analyzed FraudNet 

from the FCRA, but we would be happy to do that in a question 

for the record and at least give you our view of it. We have not 

looked at FraudNet, in particular, against that standard. 

Mr. DAVIS OF ALABAMA. Well, moving beyond the legal interpretation of whether or not there is a collision with FCRA, can you 

a comment for a moment just on the utility of alliances like 

FraudNet? 

Mr. FOX. I think if I understand FraudNet correctly, I believe 

that Gramm-Leach-Bliley sort of made FraudNet capable or enabled it, so to speak, and I am somewhat familiar with it. I have 

seen it. And I believe, frankly, that it is a very useful—it is kind 

of a bulletin board where folks post—I think if I’m not mistaken 

it has been sponsored by the Florida Bankers Association, or underwritten by them. I know that they have significant instances 

where fraud has been either halted or stopped as a result of the 

sharing of that information, and from that perspective it seems to 

me to be quite valuable. 

I will tell you that one of the things that we must do a better 

job of is living up to the mandate that you all gave us in section 

314(a) of the USA PATRIOT Act and that is to create a conversation with the financial industry on issues relating to money laundering and terrorist financing, and I am very keen to do that at 

FinCEN. 

In my view, we have not done enough there, and I think it is important that we do much more. In fact, we have created a secure 

Web site that may form the platform for the sharing of some of this 

information that might be valuable in this context. To be very candid, FraudNet’s idea or concept was one that we utilized when we 

thought of how to do this platform. It is not fully implemented yet, 

but we are working very hard to get there. 

Mr. DAVIS OF ALABAMA. Let me go for a moment back to Mr. 

Scott’s questions and Mr. Royce’s questions. One of Mr. Scott’s 

questions regarding the FCRAs, do we have any indication, even an 

approximate, of how many SARs are filed in the United States in 

a given year? 

Mr. FOX. The number has been roughly between, if I could just 

correct my statement later if I need to, but I think roughly around 

400,000 has been the number. We have, however, seen a significant 

spike in that during the past year. 

22

Mr. DAVIS OF ALABAMA. Do we have any ability to quantify how 

many of those 400,000 lead to a detection of either domestic or foreign illegal activity? 

Mr. FOX. Currently, no. It is our hope, sir, with the development 

of our BSA Direct system, and this is why we are so excited about 

the partnership with the FBI, that we will be receiving feedback 

on the utilization of these reports and will be able to report back, 

not only to the Congress but to the industry as well, in a much 

more robust way about the value of those reports, almost on an individual basis. 

Now, we are never going to see a situation I think where every 

report results in some action. It is just not going to be the way that 

we do things, but I think that, frankly, we know how valuable this 

information is because a lot of that data is being used as a basis 

for investigation. 

Mr. DAVIS OF ALABAMA. Let me ask you one quick follow-up. Do 

we have any sense of how much time or how many manpower 

hours are consumed on chasing what amount to false positives or 

chasing what amount to misreads that come out of SARs because 

obviously, as I wrap up, clearly we have a concern about you having enough data, but the consequence of sometimes having too 

much data is that time is wasted chasing false leads? So can either 

of you briefly comment on that? 

Mr. FOX. I don’t have any metrics for you today. What I will tell 

you is this is a great concern of ours, and there are a number of 

ways to address it. 

I think we have a problem here in this country, particularly over 

the last year, with a phenomenon that we are calling defensive filing. It is where institutions are filing to protect themselves from 

any regulatory or reputational risks that is associated with some 

adverse action. 

I think it is very important for us also from a regulator’s standpoint to try to point the institutions in the right direction. 

If I can give you a trite example that I am not prepared to implement yet, but I am just about ready to, I think, every morning on 

my machine at FinCEN I get an e-mail from a Nigerian fraud 

scam. I am sure we have all seen them, and we have a number of 

suspicious activity reports that relate to Nigerian fraud scams. It 

is clearly suspicious activity. It would fall within the bounds of our 

current regime for reporting, but I think law enforcement generally, particularly at the Federal level, has decided that unless 

there is some real pecuniary loss on the part of a person, that we 

are just all going to get smart about it by educating our public who 

these messages are aimed at. You know, it is kind of a financial 

literacy issue to be honest with you. 

I would think we would get much better bang for our buck if we 

educate the public about these scams, tell them to ignore them, tell 

them to delete the e-mail, and then tell institutions don’t waste 

your time reporting on Nigerian fraud scams; we would rather 

have information about X, Y, or Z. 

I think we have to get much better at sharpening the reporting 

on suspicious activity and I think it will only make it more relevant 

and more robust, and we will get more reports that are of higher 

value. 

23

Mr. DAVIS OF ALABAMA. Thank you. 

Mr. MOREHART. May I add to that, please? 

Chairwoman KELLY. Please do. 

Mr. MOREHART. I think I can give you at least a metric that will 

sort of answer the question, sir, in terms of SAR usage and how 

we view that. We haven’t done a study in terms of how many cases 

have been opened, how many cases have been advanced as a result 

of that. 

However, of the data we have, as I mentioned, we have about 63 

million BSA documents in our Investigative Data Warehouse. For 

SARs specifically, we have approximately 1.7 million documents in 

that database. We ran that database against the FBI’s databases 

for references and main subjects. We came back with 5.7 million 

hits, i.e., IDENTS against 1.7 million documents. Again, I cannot 

specify which ones of those resulted in case openings or resolutions 

or that kind of thing, but I strongly suggest that that information 

is of great value. 

Let me just define hits again. It is for example an individual 

compared to the BSA data, you would get a hit or not. So there 

may be more than one individual listed on a SAR for example. That 

is why you might have more hits than there are actual documents, 

but these statistics in metrics would tend to suggest that that information is of extreme value to our investigators out in the field. 

Chairwoman KELLY. Thank you very much, Mr. Morehart. 

Mr. Cleaver, have you any questions for this panel? 

Mr. CLEAVER. No. 

Chairwoman KELLY. Thank you. As you know, gentlemen, this 

subcommittee has been looking very closely at actions taken by the 

OCC with regard to the Arab Bank’s New York City branch. 

In respecting the limitations on what can be said at the moment 

because this is an ongoing investigation, I would like to hear more 

about how our government is responding to some of the serious 

concerns that have been raised there. In this subcommittee’s last 

hearing, Under Secretary Levey talked in detail about the issue 

and said that OCC and FinCEN were working together on the case. 

So I am wondering if you could elaborate as to how the different 

entities within the Treasury are working together to address the 

issue. 

In addition to OCC and FinCEN, I have read reports that OFAC 

has been involved, and it might be useful for us to hear which entities are involved and what they are doing and how they are working together to make sure that there is a fair and effective response 

from the government, yet we as the citizens are protected. 

I would also like to hear your perspective as to where this particular situation might fall within the context of our ongoing efforts 

to combat money laundering and terror finance. What does it mean 

to the important issue that we are really addressing here today? 

Does it illuminate any of the systemic weaknesses in our regulatory regime and are we working, having found that information, 

to fix those? 

I know those are several questions. I’ll start with you, Mr. Fox. 

Mr. FOX. Thank you. You are right, Madam Chairwoman. There 

is really not much I can say at the table today in this forum about 

this matter because it is an active and ongoing matter with our ofVerDate 0ct 09 2002 16:23 Aug 23, 2006 Jkt 029454 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 F:\DOCS\29454.XY HFIN PsN: TERRIE
24

fice. The only thing I can tell you is that we are working very closely with the agencies that you identified to ensure, as we have said 

previously this morning, that if an action is actually taken, it will 

be coordinated and it will achieve the purpose of the action, which 

is compliance with the regime, greater financial transparency, and 

to ensure that the U.S. Financial system is at least protected from 

the threats of money laundering and terrorist financing. 

So we are working very hard to resolve the matter. We think it 

is in everyone’s interest to resolve it quickly or as quickly as possible, and we are working very, very closely with, and again I am 

happy to report we have received very good cooperation from, all 

the agencies that you mentioned. 

Chairwoman KELLY. Thank you. Mr. Fox, during the 1990’s, 

FinCEN was described fairly or not as the elephant graveyard of 

the U.S. Treasury Department. I have had the opportunity to work 

with a number of very talented and very intelligent FinCEN employees who are so smart, I really am very impressed with the 

quality of what has been happening at FinCEN. I wonder if you 

would describe for the committee your agency’s recruitment process 

and your work on building a sense of mission. 

Mr. FOX. Thank you, ma’am. I will take that compliment. We are 

trying very, very hard to develop FinCEN into what I believe it can 

be, and that is a model of a financial intelligence unit as that concept is conceived. 

FinCEN is a relatively young organization. It began in 1990 as 

sort of a law enforcement fusion center. In fact, it is not odd that 

FinCEN is new. Our money laundering laws have only been around 

since 1985. The Bank Secrecy Act has only been around since 1970. 

So I think the issues revolving around financial crime have been 

relatively new developments in this area. 

FinCEN has worn some different hats and I appreciate your 

characterization because I have heard that as well. Again, it started out as sort of a fusion center. During the mid-1990’s, FinCEN 

was instrumental frankly in the development of the FATF as a robust, international body. Also, FinCEN was one of the six founding 

members of the Egmont Group, which has now expanded to 102 

members from around the world of financial intelligence units 

sharing key, relevant information to further the investigation and 

detection and prevention of financial crime. I think those were incredibly noble efforts and very important. 

Recently, one characterization I have heard about FinCEN is 

that FinCEN is a library. It houses BSA data and its analysts are 

essentially librarians that help law enforcement sort of get at the 

data but do not do much else. 

I have to tell you we are changing that. I have redefined the mission at FinCEN to safeguarding our financial system from the 

abuses of financial crime, and that is a very hard mission to reach 

but it is one that I think is worth a stretch. And I think what we 

are really trying to do is to make FinCEN a fully functioning financial intelligence unit. 

It is starting to pay off, I think. First of all, we have to remember 

that FinCEN is also, and maybe the key thing that it is, is the administrator of the Bank Secrecy Act and it is a regulatory agency. 

If you think about this in intelligence terms, our whole regulatory 

25

effort, in many respects, is that of managing the collection of the 

information that the Bank Secrecy Act mandates, the reporting 

that it mandates. I think that is why we have to exercise leadership on the regulatory side and make sure that we are collecting 

information that is relevant and robust for law enforcement. 

On the analytic side, ma’am, I will tell you that it is my goal to 

make our analysts the best financial analysts in the world. I have 

with me today something that we published recently. It is a document that I think some of your staff may have. It is not a document for public consumption outside the government, but it’s a reference series on wire transfers. I will tell you that we have developed this manual for the benefit of law enforcement and other policy-makers on issues relating to a very key method of moving 

money, and that is, funds transfers. The feedback we have received 

has been terrific and we are actually quite proud of it. 

I think you will see similar analytic product from us, and we are 

doing our very best under the constraints of the system to attract 

the most energetic, highly talented people that we can to try to 

move the agency into a better place. 

Chairwoman KELLY. I thank you for that. You do have a high energy level. It is tough, hard work, but your people are very smart, 

and I have enjoyed working with them. I hope that continues. 

Mr. Morehart, I have a question for you about what this committee has been doing on the Terror Finance Task Force in Congress, and I have been following, we have all been following, the 

career of Charles Taylor very closely. We are concerned that he has 

not been brought to justice. The FBI promised to establish an office 

to help us bring Charles Taylor to justice and to stem the flow of 

terrorists in West Africa, but our information so far is that this office has not been established. 

I want to know if you can tell the committee whether you are actively assisting in the effort to bring Charles Taylor and that criminal conspiracy that he is in charge of to justice. 

Mr. MOREHART. Yes, ma’am. In terms of the LEGAT, if you will, 

the legal attache that is to be established, I am not familiar with 

the status of that, but we can find that out for you. That is in a 

different section, if you will, a division than is under my purview. 

In terms of the investigation of terrorists, if you will, on the 

whole, from public documents obviously I have kept up with this 

issue and otherwise, and I think the suggestion is that Mr. Taylor 

is perhaps not a terrorist in and of himself but somewhat of a 

facilitator if you could characterize it that way, other than perhaps 

obviously the war crimes and those kinds of things, if you would 

define those as a terrorist, but there have been allegations obviously publicized that he has been facilitating, for example, al 

Qaeda’s negotiation of conflict diamonds and those kind of things. 

Obviously, we are very interested in any information that anyone 

would provide us that would allow us to further that type of investigation to bring that individual to justice. I cannot say that I am 

involved in every aspect of what might be going on in that realm. 

However, I will say from a terrorist financing standpoint, my section, my division, the Counterterrorism Division, obviously is very, 

very concerned with any terrorists, any facilitator, or any individual and/or entity that wittingly supports those types of individVerDate 0ct 09 2002 16:23 Aug 23, 2006 Jkt 029454 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 F:\DOCS\29454.XY HFIN PsN: TERRIE
26

uals. So we are making every effort to do everything we can, not 

only in that realm but quite candidly every other realm where 

there is a threat. 

Chairwoman KELLY. Well, thank you, Mr. Morehart. I am extremely concerned about the Charles Taylor case. We have good 

people who have put their lives on the line whose lives are really 

literally under the gun, and until we move Charles Taylor to justice those people are under great threat. We owe them a debt of 

gratitude for what they have done. It is extremely important, and 

I would like very much to have you give me back that information. 

This committee is very interested in this issue. 

I would like to go back to you, Director Fox, and ask you a question about what steps—first of all, let me just say, I want to know 

if you can discuss the completion of BSA Direct and how that is 

going to improve the security of the SARs but also what steps you 

are taking in response to the IG report on data security. That is 

a big issue we need to quickly address. 

Mr. FOX. Thank you, ma’am. BSA Direct, as the committee 

knows, is probably the highest priority for my agency because it 

will form the platform through which we will eventually collect all 

of the BSA data, house it, analyze it and disseminate it, even in 

the extraordinary circumstance of some key law enforcement partners like the FBI. 

It will house feedback and information about how the data is 

being used, and it will also provide us with the security to ensure 

the data so that we know who is hitting it. 

This system will provide law enforcement, at the State and Federal level, with a very modern and robust data query and mining 

system. So we are moving very, very quickly. We are building the 

heart of that system now, a modern data warehouse that will be 

completed this October, and that will take care of sort of the dissemination end of the data. 

We have also an E-file system that will connect to BSA Direct. 

We are building BSA Direct in a way that all of these different 

components, whether it is our E-file system, or what we used to 

call Gateway, where we captured information about those people 

who are hitting the data, all of those components will be knitted 

into one solid project. 

I think having the entity that is responsible for administering 

the act, for collecting the data, for disseminating the data, in 

charge of the data, makes perfect sense. If there is then a problem, 

you can hold me directly accountable and you should because this 

data is very sensitive with serious privacy concerns. I think it is 

not something that should be dispersed across agencies of the government. 

We are moving with all speed that we can muster, based on 

funding and other issues, to get this system completely built so 

that we can then control the data from collection all the way 

through to dissemination. 

Chairwoman KELLY. I want to thank you very much for responding with great strength to that. That security is extremely important. 

I also want to thank you for the guidance that you sent out to 

the delegated examining agencies and the work that the BSAAG is 

27

doing to make the BSA process more effective and user friendly. I 

am concerned that OFAC is not a member of the BSAAG. Given 

the complementary nature of their missions and the institutions 

that are affected by their missions, I am wondering why OFAC is 

not a member of this. 

Mr. FOX. The Bank Secrecy Act Advisory Group, as you know, is 

a statutorily created body. It is really a gift from this committee 

and the Congress. I will tell you I think it is one of the most effective government/private partnerships that I have ever been a part 

of. I served on some other advisory committees and because of the 

exemption from the FACA you actually can have robust conversations, real conversations, candid conversations on key policy issues. 

One of the things the BSAAG is tackling, ma’am, is this issue 

about CTRs and whether or not we have too many of them and 

how we can get rid of the obvious ones that none of us are really 

interested in, the McDonalds and the Wal-Marts. 

Turning to your specific question about OFAC, I know in the interest of time we would be happy to expand on this too if you want 

for the record, but the BSAAG was technically created to address 

issues relating to the Bank Secrecy Act, and OFAC does not have 

any direct responsibilities relating to the Bank Secrecy Act. 

I suspect, ma’am, if you ask Director Warner about whether or 

not he would love to have a similar entity to deal with issues relating to sanctions, I think he would be very keen to do that. I don’t 

want to presume to speak for him, but I think we all recognize the 

value of having the government as a whole, regulators, policy-makers, law enforcement, meeting with affected regulated industry and 

working. 

So I think we are actually probably constrained from having 

OFAC participate on that issue, but we can look at that as well. 

Chairwoman KELLY. You know, yesterday, this committee voted 

for legislation that required the GSEs to report suspected activity 

or financial crimes that they thought they were experiencing. Are 

you working with OFHEO to provide the kind of necessary assistance for that, and are you going to be working with the new Federal housing finance authority if it is passed into law to establish 

a robust system there. Will you be working with them? 

Mr. FOX. Yes, ma’am, absolutely. I think we have in the past and 

I think we will continue to do so. I will tell you that none other 

than the Deputy Attorney General has brought this to my plate 

about the concerns that the Justice Department and the FBI have 

about mortgage fraud, as does the industry by the way. 

I think the key thing about that provision of law is that we make 

sure that reporting, when it does occur, is accessible to all of law 

enforcement and we can actually put that to good use. So we would 

be happy to work with the committee, and OFHEO, and the new 

regulator if it is created to make sure that this happens. It is a 

very important problem that we are aware of and it needs to be 

addressed. 

Chairwoman KELLY. Good. I am glad to here that. Mr. Cleaver, 

you have a question now. 

Mr. CLEAVER. Director Fox, I apologize for coming in late. I am 

a new Member and still trying to find my way around, and I ended 

up at the Spy Museum. So excuse me. 

28

Is EDS now under contract to build BSA Direct? 

Mr. FOX. Yes, sir. 

Mr. CLEAVER. Now, is there any concern over the cost? The IG found that Treasury’s HR Connect is up and running at $173 million, and I mean the cost is Herculean compared to the work they 

have done for the Coast Guard and Agriculture. Is there a reason 

for this? 

Mr. FOX. Well, sir, I can’t comment on the HR Connect issue. I 

am vaguely aware of it, being a Treasury official and being a user 

of the HR Connect system. It actually works pretty well now, gladly. I am not sure that EDS was the contractor for HR Connect, it 

may have been, I don’t know whether they were or not. 

Mr. CLEAVER. Does anybody? 

Mr. FOX. We can get back to you certainly with that and let you 

know that. 

I will tell you that we are pleased so far with the progress on 

our BSA Direct project, and we believe that we are building this 

system at a very reasonable price. I think to build the heart of this 

system, just to build the heart of it is less than $10 million. That 

is still, to me, an awful lot of money but I think when you compare 

it with other systems, it is a pretty reasonable deal and we are on 

target, sir. 

So I think the system as a whole over 5 years, including maintenance and operations, I think is a little over $18 million. I think 

we all agree, in fact we have gotten a lot of push back from folks 

saying you are trying to do this too cheaply, and I think we can 

do it well and do it keeping in mind that we are stewards of the 

taxpayers’ money here. 

Mr. CLEAVER. Well, is there anyone from your staff here—I 

mean, maybe you will have to get back with me to find out further—to talk about the HR Connect. 

Mr. FOX. What I can do, sir, is we can certainly—we don’t actually own that system but I think the Treasury’s Chief Information 

Officer, Ira Hobbs, is the owner of that system. I am more than 

happy to let Mr. Hobbs know you are interested in this and maybe 

they could come up and provide you a briefing. I am more than 

happy to convey your question. 

Chairwoman KELLY. Mr. Cleaver, we will follow up on that and 

get the appropriate person to respond to that question. 

Mr. CLEAVER. Thank you. 

Chairwoman KELLY. Mr. Scott, you have another question? 

Mr. SCOTT. Yes, I do, Chairwoman. Thank you. 

I want to talk for a moment, Mr. Fox, about the situation over 

at Treasury. First of all, you are doing a great job. 

Mr. FOX. Thank you, sir. 

Mr. SCOTT. But there has been a failure to make some key personnel appointments over there. I think you have an Assistant Secretary Zarate, I believe is his name, who is leaving soon. There is 

an Assistant Secretary under the Under Secretary that has not 

been appointed. I am wondering what impact is this having on 

your being able to do your job and is help on the way here? 

Mr. FOX. Without knowing, sir, because it is a process that I am 

not intimately involved in or even familiar with, but I will tell you 

that it is my understanding that help is on the way, and it will be 

29

welcome help. It is a big loss for the Treasury Department to lose 

Assistant Secretary Zarate. He has been a leader on issues relating 

to terrorist financing and financial crime. 

I worked shoulder-to-shoulder with Juan after September 11th, 

and I think actually the country will be served well by him as Deputy National Security Adviser. I think he is really a significant talent. 

Having said that, I know that Under Secretary Levey, who is the 

leader for terrorism and financial intelligence and we report to, he 

is doing an outstanding job of keeping everything together, even 

given the vacancies. I believe Janice Gardner, who is the current 

Deputy Assistant Secretary in charge of intelligence has been nominated for the position of Assistant Secretary for Intelligence. Janice is wonderful and we are working very closely with her and coordinating her office’s work with our office’s work. So, actually, 

from our little corner of the Treasury Department things are going 

well. 

I used to be at Treasury and I know that there are vacancies, 

and those vacancies do cause concern, but I think the Secretary is 

doing everything he can to get them filled as quickly as possible, 

and I know he is working very hard to move that process forward. 

Mr. SCOTT. I think you are, too, and I want to take a moment, 

before I finish my last part of my question, to compliment our 

chairwoman here, Mrs. Kelly, for taking the leadership. I think 

that we are at the front line on this fight on terror because the only 

way we are going to end this war is to get our hands around the 

financing of it, and so Chairlady, I certainly want to compliment 

you for the excellent job we are doing on this committee. 

Let me go back to you, Mr. Morehart. I left off with the last part 

of my question on the hawalas, and since I have been on this committee I have been trying to follow that. I have been trying to illuminate more information because I believe that therein with the 

hawalas and that sort of cultural way for many years of many of 

the Arab speaking people who are here and other parts of the 

world are transporting funds back, they have been doing it sort of 

for their families, but tell us how serious that is. We know there 

is a serious element to it. It appears to me that there is some sensitivity to handling it because there is some legitimacy to the Arabs’ 

argument that that is used as a way of getting moneys back to the 

families, and as a matter of fact, many of their leading spokespersons are saying that this is harassment against us. 

Wherein lies the truth here? How serious is the hawala problem, 

and as much as you can share with us—we don’t want you to give 

too much information. We are not the only ones paying attention 

here, but do we have a handle on it? Is it the threat that it is and 

what is the FBI doing about it? And in that line, what kind of cooperation are we getting from the Arab world? 

Mr. MOREHART. Well, I think the first thing that needs to be recognized is that a hawala is not necessarily an illegal thing. A 

hawala is simply a method to informally transfer value; i.e., money, 

and those have been in existence under different names and different regions of the world for hundreds if not thousands of years 

to conduct that business. 

30

Now I think the issue, of course, here, sir, is what threat does 

that represent to us in terms of terrorism, if I might characterize 

it that way. That is difficult to answer candidly. I think there are 

a lot of issues that we are attempting to resolve, and one of those 

issues we brought up a little while ago was in terms of MSBs and 

you might consider an hawala an MSB, is it registered or not. 

A lot of times I think that people would assume those type of activities are illegal and, as I mentioned, they are not necessarily illegal. Those things have been established for many, many years and 

have worked very well for those particular cultures that use them. 

Now are they of concern? Certainly they are of concern. Any type 

of value transfer system that might be used by terrorists or their 

facilitators is of concern to us. They can be used for laundering perhaps. They can be used to transfer money if they are not registered. 

Mr. SCOTT. Let me just ask this point because we have a vote 

to get to. You are using words like might, maybe, they are. Do we 

have any concrete evidence that any hawalas are being used to finance terrorist operations? 

Mr. MOREHART. Sir, I hesitate to answer the questions in open 

forum because I probably would have to give examples. I will say 

this. I don’t know the characterization that they are being used to 

finance is accurate. Being used to move money to facilitate is probably a more apt description. I know it is somewhat semantics, but 

it is important because typically these are middleman who move 

money or middlewomen who move money depending upon the circumstances. 

As in any other situation, I think the key here is, one, are they 

registered in accordance with our laws? If not, they should be. We 

are concerned if there are methods of moving money out there obviously that we have not detected, and I think that is the more important issue for us to discover, whether it is through hawala or 

through cash couriers or through some other method. That is the 

primary issue we are concerned about. 

Are we working towards identifying those things? Certainly. 

Every single day. We have a number of projects underway where 

we are trying to identify those things, and I will emphasize again, 

as I mentioned earlier, the Bank Secrecy Act data which we are 

given allows us to do that analysis, allows us to do that 

patterndetection which might then identify that type of activity 

which then might either wittingly or unwittingly be utilized to 

move money to terrorists. 

Mr. SCOTT. Thank you. 

Chairwoman KELLY. Thank you. We have been called for a vote. 

I want to remind this panel that, without objection, your full written statements will be made part of the record and the Chair notes 

that some members may have additional questions for the panel 

which they may wish to submit in writing. So, without objection, 

the hearing record will remain open for 30 days for members to 

submit written questions to these witnesses and to place their responses in the record. 

I appreciate very much your time, your patience here, gentlemen. 

I hope that the financial industry has an ear into what you have 

said. It appears to me that this is beginning to be effective, and I 

31

appreciate the hard work on the part of both of you but also the 

people in your agencies. We are all safer because of it, I believe. 

With that, this panel is excused, and I am going to recess this 

committee until we are able—we have two votes. It will possibly be 

20 to 30 minutes before we will reconvene for the second panel. 

[Recess.] 

Chairwoman KELLY. Our second panel this afternoon consists of 

Superintendent Diana Taylor of the New York Banking Department, John Byrne of the ABA, Scott McClain of the Financial Service Centers of America, and Joseph Cachey of Western Union. 

Chairwoman KELLY. Ms. Taylor, I am delighted to have you here. 

You represent my State of New York, and you have served as Superintendent of Banks for New York since 2003. 

Ms. Taylor has more than 20 years of experience serving in both 

the public and private sectors. She most recently held the position 

of Deputy Secretary for Finance and Housing to Governor Pataki. 

Prior to that she served as Chief Financial Officer for the Long Island Power Authority, a company with annual revenues of $2.4 billion and assets of approximately $8 billion. 

I think we will start with you. I can’t find the rest of what I have 

here. I am just going to go ahead and say we will start with you, 

Ms. Taylor. 

Without objection, your written statements will be made part of 

the record. You each will have 5 minutes in which to make a summary of your testimony. Let us start with you, Ms. Taylor. 

STATEMENT OF DIANA TAYLOR, SUPERINTENDENT OF BANKS, 

NEW YORK STATE BANKING DEPARTMENT 

Ms. TAYLOR. Thank you, Madam Chairwoman. Good morning, 

Chairwoman Kelly and other members of the committee. Thank 

you for holding this hearing on an issue that is of great interest 

to us, those who oversee the financial services industry at the State 

level. 

It is interesting being on a panel with some of those we oversee 

as opposed to being on a government panel. We are all very concerned about the sometimes conflicting priorities of regulation, law 

enforcement and the ability of necessary businesses to operate. I 

would like to address the three points you mentioned in your letter. 

First, as you heard earlier this morning, FinCEN and the Federal banking servicers have received crucial guidance on BSA/AML 

compliance for banks doing business such as MSBs, such as check 

cashers and money transmitters. This welcome development promises a strong step in the direction of clarifying for the banks their 

BSA/AML requirements with respect to money service customers. 

One very important issue that was made clear in the guidance 

is that banks are not expected to become or act as MSB regulators. 

At the same time, separate guidance was issued by FinCEN to 

MSBs clarifying their BSA/AML requirements. 

Significant progress has been made toward a plan to achieve a 

coordinated approach among the regulators. Over the winter, the 

Conference of State Banking Supervisors worked diligently with all 

of the States, our Federal bank regulatory counterparts, FinCEN 

and the IRS to produce two model memoranda of understanding 

setting forth procedures for the exchange of certain BSA informaVerDate 0ct 09 2002 16:23 Aug 23, 2006 Jkt 029454 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 F:\DOCS\29454.XY HFIN PsN: TERRIE
32

tion between the States and FinCEN and the IRS concerning bank 

and MSB examination and information respectively. This is great 

progress. 

New York was the first State to sign on. On June 1st, more than 

30 States plan to take part in an MOU signing ceremony at the 

CSBS annual meeting. 

A very important aspect of our agreement is that 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, as it acknowledges that State regulators are an important 

part of the solution. We have all recognized that no one of us can 

be effective in this area without the others. 

Both FinCEN and the IRS have been exceptionally cooperative in 

this endeavor, and I will be happy to keep you and your committee 

informed on how this cooperation continues. 

With regard to the second issue you highlighted in your letter—

challenges we are facing with regard to BSA/AML compliance in 

the MSB area—you are, of course, already aware of the fact that 

many banks have decided not to do business with MSBs as a result 

of the BSA compliance issues. The guidance and MOUs I just referred to will hopefully ameliorate this issue. We will keep you informed on this also. 

But there are other challenges. One that is particularly worrisome to us is the issue of who, if anyone, should regulate the 

agents that the MSBs employ to do their business; and if so, what 

should that regulation entail? Mr. Fox touched on this a little bit 

in his answer to Mr. Royce’s question earlier this morning. 

In New York State, there are approximately 73 money transmitters, but there are 29,000 agents. Clearly, regulating them would 

be an enormous task, not to mention what to do about the hundreds of thousands of nonbank ATM machines in the State. 

Then there is the issue of SARs. In the current environment, financial institutions are worried that they will be punished severely 

for seemingly minor infractions, even when they have a history of 

operating responsibly and have or are developing state-of-the-art 

compliance systems. We need to realize now that there is no system in the world that is going to catch every single instance of illegal activity. The only way to do that is to shut down the whole system. 

For regulators, the goal is to prevent and detect criminal activity, 

not to close down financial institutions. We regulators have a long 

way to go in coordinating and communicating with law enforcement. We need to make sure that everyone understands the standards to which we are being held and that those standards make 

sense. 

We are all united in our concern over choking off the supply of 

money to terrorists and other criminal elements. This is a critical 

task. 

We need to work together to make sure that the laws are having 

the intended consequences, which are to stop and punish criminal 

33

and terrorist activities but at the same time to allow our financial 

system to operate efficiently and effectively. 

The third issue that you mentioned was interaction with the IRS 

when monitoring MSBs. We are looking forward to building our relationship with the IRS with regard to MSB supervision. As we are 

just now beginning this cooperative arrangement, I cannot give a 

progress report at this point, except to say, so far so good. However, I am looking forward to giving you a progress report of our 

accomplishments and mutual achievements when we have developed a track record. 

The lesson that is learned is that to have a real and lasting effect 

on illegal activity it is essential that the agencies involved in the 

regulatory, investigative and enforcement framework for banks 

proactively cooperate with each other. 

Just as we have forged an MOU between the States, the Federal 

banking agencies, FinCEN and the IRS, I think we need to come 

to an understanding, perhaps an MOU, with the Department of 

Justice so that its actions and those of the U.S. attorneys are not 

at cross purposes to those of the regulators. We must brainstorm 

together to find a way to allow our financial system to operate efficiently and effectively while also preventing its use for criminal 

purposes. To achieve this crucial goal we must all work together. 

Thank you. 

[The prepared statement of Ms. Taylor can be found on page 83 

of the appendix.] 

Chairwoman KELLY. Thank you, Ms. Taylor. I in particular want 

to applaud your working with FinCEN in a very forward thinking 

manner. 

We turn to you, Mr. Byrne. 

STATEMENT OF JOHN J. BYRNE, DIRECTOR, CENTER FOR 

COMPLIANCE, AMERICAN BANKERS ASSOCIATION 

Mr. BYRNE. Subcommittee Chairwoman Kelly, members of the 

subcommittee, ABA appreciates this opportunity to discuss how the 

financial industry is addressing many of the compliance issues with 

suspicious activity reporting and the challenges of providing bank 

services to money services businesses. As we told this subcommittee on May 4th, there has been clear movement and commitment for further action from the highest levels of the Federal 

banking agencies for a uniform approach to BSA compliance. 

However, ABA would again remind the subcommittee that the 

industry remains concerned about the quality of communication 

that exists between these same agencies and the field examiners. 

In fact, we will highlight one particular issue that occurred after 

the May 4th hearing to emphasize our concern. We do, however, remain optimistic that the commitment mentioned above is real and 

will resolve the issues quickly. 

Your May 20th letter of invitation asks us to address three 

issues, an update on what is being done to standardize BSA compliance challenges, why the industry is engaged in defensive filing 

of suspicious activity reports and what BSA compliance concerns 

are associated with MSBs. 

I will take the three issues together. The pending interagency 

exam procedures will provide an opportunity for both the industry 

34

and the Federal banking agencies to work together to prevent confusion and second guessing. We urge Congress to seek an update 

on the practical effect of these procedures in early 2006. 

As we told the subcommittee earlier this month, it is counterproductive to label an entity high risk without also issuing guidance on how to mitigate that risk. The agencies finally agreed with 

us and produced an interagency guidance on working with MSBs. 

I must take issue with my friend, Mr. Fox, who said it was a 

misperception on the part of the banking industry. It was no 

misperception, it was comments from field examiners who told us 

to eliminate these accounts because they were in fact high risk. 

The good news is we have the interagency guidance. While it is 

early for a complete assessment, the direction of the guidance is a 

strong first step for clarity. 

Defense of SAR filings are the result of the dearth of useful guidance and the lack of a balanced approach to examiner oversight. 

The Federal banking agencies must insist that their field examiners not second guess SAR decisions made by the financial sector 

or the volume of SARs will continue to skyrocket. 

Madam Chairwoman, the uniform exam procedures scheduled for 

a June 30th release date will assist the industry concerns about 

exam inconsistency and the continued threat of zero tolerance by 

these same errant examiners. We strongly urge Congress to ensure 

that all banking agencies engage in industry outreach when the 

procedures are made public. The agencies appear committed to this 

outreach, and we believe that a nationwide series of town hall 

meeting events will ensure that both sides will know what to expect in this complicated compliance area. 

A major challenge facing the banking industry has been how to 

fulfill our obligations regarding appropriate relationships with 

MSBs. We understand and appreciate the need to analyze the level 

of risk involved with maintaining these relationships. We know the 

importance of providing services to all segments of society. 

For some, the remittance services that MSBs frequently provide 

are an essential financial product. Remittance flows are an important and stable source of funds for many countries and constitute 

a substantial part of financial inflows for countries that have a 

large migrant labor force working abroad. 

The problem, however, is how much analysis is sufficient. At 

times banks appropriately exit relationships due to the risks inherent with the particular MSB. At other times we want to continue 

those valued relationships. The agencies again did issue an interagency policy statement on March 30th and sorely needed guidance 

on April 26th. The guidance now must be clearly communicated to 

the examiners. 

I would like to report that at least one large southwestern bank 

reported to ABA that its current BSA exam showed that that oversight agency was well versed in the MSBs guidance. This is indeed 

a positive sign. 

Finally, with the increased number of entities required to file 

SARs as well as a heightened scrutiny on SARs regulators and programs, it is essential for the regulatory’s law enforcement and 

FinCEN to assist filers with issues as they arise. 

35

As stated above, there are several problems affecting banks and 

the AML process related to SARs. ABA has previously mentioned 

the many examples of examiner criticisms received by our members 

during reviews of their SARs programs. Whether it has been criticized for the number of SARs filed or the second guessing by examiners as to why a SARs was not filed, we remind Congress that this 

situation demands immediate attention. 

Regulatory scrutiny of SARs filings has caused many institutions 

to file defensively to stave off unwarranted criticism or second 

guessing. In fact, The American Banker reported that in March of 

2005 the industry filed 43,000 SARs, a 40 percent increase from a 

year earlier. That is not because there is more criminal activity. 

We would like to commend Director Fox for addressing our previous recommendations made in 2004 by creating a Bank Secrecy 

Act subcommittee to look at SARs issues. I would note that we 

have already held the first meeting, and the defensive issue of filings is a top priority. Our members continue to express their concern on the rampant second guessing that continues. 

For example, just last week a bank told us that it had extensive 

documentation on why it had not filed a SAR, only to be told by 

the examiner that it must file. This example—which is not isolated—is a major reason why banks feel they have no other option 

but to err on the side of filing. Our hope continues to be that the 

exam procedures and additional interpretation on SAR issues will 

result in returning SARs to their original place, forms filed only 

after careful analysis and investigation with no second guessing by 

regulators. 

We commend the Treasury Department, the banking agencies 

and FinCEN for their recent efforts to ensure a workable and efficient process. We will continue to support those efforts, and we 

would be happy to answer any questions. 

[The prepared statement of Mr. Byrne can be found on page 46 

of the appendix.] 

Mr. PAUL. [presiding] Thank you, Mr. Byrne. 

We will move next to Mr. Joseph Cachey, Compliance Chief, 

Western Union Financial Services, for your statement. 

STATEMENT OF JOSEPH CACHEY, III, COMPLIANCE CHIEF, 

WESTERN UNION FINANCIAL SERVICES, INC. 

Mr. CACHEY. Thank you. Good morning, I would like to thank 

this subcommittee on behalf of Western Union for the opportunity 

to address this important topic. Since the use of suspicious activity 

reporting regulations took effect for money services businesses just 

3 years ago in January of 2002, Western Union has created an industry leading compliance program in a relatively short period of 

time. 

Today I would like to discuss an important part of that anti-laundering compliance program, suspicious activity reporting and our 

dealings with law enforcement based on those reports which we 

filed. 

Western Union files tens of thousands of Suspicious Activity Reports, or SARs, each year, representing a small fraction of our total 

number of transactions. We know that SARs lead to investigations, 

because there is direct follow-up from law enforcement for a numVerDate 0ct 09 2002 16:23 Aug 23, 2006 Jkt 029454 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 F:\DOCS\29454.XY HFIN PsN: TERRIE
36

ber of these reports that we file. The filings may lead to a number 

of actions taken in conjunction with law enforcement. I would just 

like to cite a few examples. 

Last year, Western Union, based on our internal suspicious activity filing criteria, filed six SARs on four customers who were receiving transaction in what most of us would consider higher risk countries. These SARs resulted in the opening of an expansive investigation, now being conducted by two Federal agencies. 

Western Union continues to support these investigative efforts by 

responding to subpoenas targeting the identified customer transactions, and in addition we share emerging insights on these customers’ money transfer patterns involving the investigation subjects. 

Western Union also cooperates with Federal law enforcement efforts through agreements that assure certain agent locations are 

kept open during an ongoing investigation. For example, the owner 

of a Western Union agent location in the Midwest was indicted this 

past April on 43 counts of money laundering after a 5-year investigation. It was Western Union’s agreement to keep that location 

open and not terminate our relationship with that agent, which 

would have been our typical business practice that allowed law enforcement to gather sufficient evidence to come forward with these 

indictments. 

As is typical though with money laundering schemes, risks—and 

these are all risk-based programs, as Director Fox mentioned earlier this morning—may shift as we all obtain more information and 

analyze that information. 

For the industry to better focus its resources, the regulator in 

this case, FinCEN, must provide ongoing communication to industry about emerging risks and money laundering patterns so that 

we can direct our compliance efforts towards the most critical areas 

of risk. 

By not giving us the guidance, we do tend to overfile on things 

that may not be helpful with law enforcement and create a lot of 

‘‘noise in the system’’. 

One primary example of this potential noise is the reporting of 

simple structuring. The majority of SARs Western Union files report low-level structuring activity, that is individuals that come 

in—and we suspect—are trying to avoid information at the $3,000 

transaction level which is required by the Bank Secrecy Act. 

Frankly speaking, we believe that most of this activity does not 

result from an evil intent, but from the average American’s unwillingness to share their Social Security number and other sensitive 

personal information with a third party. Together, we need to question whether financial institutions reporting activity at this low 

level is helpful to law enforcement. 

A word on defensive filing of SARs. As we discussed, a big issue 

for MSBs is the filing of a SAR to report low-level structuring. 

Such filing is not defensive because structuring for any reason is 

technically a crime. 

But while such a reporting is not defensive, it may not be all that 

helpful to law enforcement. There has to be a better approach. 

Much of the guidance given on filing SARs is too broad in today’s 

regulatory environment. Creating gray areas leads to more SARs 

37

filings. One example of this is what we call high-volume customers, 

individuals that send significant portions of money through our 

system. Western Union strives to identify and learn more about 

these customers, typically telephonically. 

But what do we do if a customer doesn’t return our phone call. 

Should we file a SAR not knowing anything else about that customer activity? Many State examiners’ position appears to be if you 

can’t prove that the consumer is wholly innocent, then they are 

guilty, file the SAR. This attitude leads to excessive SAR filings because it follows the more equals better approach. 

Western Union is attempting to build a more surgical approach 

in its SAR filings to provide quality information, not more information. We hope that law enforcement and the regulatory community 

would support that approach. Thank you very much. 

[The prepared statement of Mr. Cachey can be found on page 54 

of the appendix.] 

Mr. PAUL. Thank you, Mr. Cachey. 

We will move to the next panelist, Mr. Scott McClain from Financial Service Centers of America. 

You can go ahead with your statement. 

STATEMENT OF SCOTT K. McCLAIN, WINNE, BANTA, 

HETHERINGTON BASRALIAN, P.C., REPRESENTING THE FINANCIAL CENTERS OF AMERICA, INC. 

Mr. MCCLAIN. Thank you very much. Members of the subcommittee, I am very grateful for the opportunity to be here today 

to discuss BSA compliance issues involving the community financial services and check cashing industry. 

FiSCA is a national trade association representing over 5,000 

neighborhood financial service providers throughout the United 

States. We provide a range of services and products to our customers, including check cashing, money order sales, money transfers and utility bill payments. 

Our members are classified under the Bank Secrecy Act as 

money services businesses. U.S. Treasury Secretary John Snow acknowledged in a recent address to the Florida Bankers Association 

that MSBs are key components of a healthy financial sector, and 

it is very important that they have access to banking services. 

In short we serve the local communities of the United States, we 

serve the working man and woman, and we are very much a part 

of the mainstream of a healthy financial industry. We are committed to the fight against money laundering, and our industry has 

committed significant resources in this regard. 

In 1993, we issued the first compliance manuals for its nonbank 

financial services industry. Following passage of the USA PATRIOT Act, FiSCA issued an anti-money laundering complaints 

program to assist the industry in meeting new requirements under 

the PATRIOT Act. Most recently in 2004, FiSCA launched an 

Internet-based compliance training and examination program 

which includes courses for both MSB tellers and compliance officers. To date, approximately 6,000 MSB employees in more than a 

dozen States have sat for the online courses and examination. We 

hope to double the program’s performance in 2005. 

38

The check cashing and MSB industry suffers greatly from the 

perception that we are inordinately high-risk as compared with 

other financial institutions or businesses. It would appear that this 

conclusion has been reached by Federal bank examiners and adopted unfortunately by banks with little attention to the actual compliance record. This has resulted in a staggering number of banks 

terminating services to the entire industry and has caused thousands of check cashers to scramble to find new banks among an already limited number. As we had witnessed time and again, when 

banks have terminated their check cashing customers due to compliance problems, it is more likely that the compliance problem is 

with the bank than with the MSB customers. 

This point was underscored by the recent enforcement actions 

against AmSouth and Beach Bank in Florida. In each case, the 

bank was cited for substantial regulatory violations unrelated to 

the activities of its check cashing customers. Yet in each case the 

bank responded by terminating all of their check casher accounts. 

The fact is check cashers are simply not good vehicles for money 

laundering. They do not take deposits and the dollar amount of the 

transactions are typically low. They are subject to stringent and 

far-reaching controls. 

In our experience the current BSA reporting system has been 

largely effective. Certain reporting issues should be addressed, and 

we are happy to work with the committee in this regard. 

First with regard to suspicious activity reporting requirements, 

we recognize that reliable MSB SAR data is key in the battle 

against money laundering and financial crime. We are concerned 

that the current SAR form may be unduly complicated for the typical business. Better guidance is also required for the SAR narrative section in order to maximize the data collection. As well, the 

SAR reporting thresholds should be reconsidered. 

Office of Foreign Assets Compliance continues to be a confusing 

problem. There is need for OFAC guidance concerning risk assessments in regards to this industry. Although IRS has greatly improved the level of education of its agents relating to MSB examinations, there is clearly a need for consistency in the examination 

process. Most importantly, there must be a process for communication between the community financial services industry and the 

banking industry. 

They are subject to many of the same AML requirements yet 

seem to be operating in separate tracks. Although the FinCEN 

guidelines concern services to MSB, MSBs are a step in the right 

direction. We know of no banks which have reconsidered or are 

willing to entertain the service industry. We attempted to bridge 

the gap in this regard. Obviously, it is in our best interest to cause 

the banking industry to be reassured that servicing check cashers 

is both safe and profitable. 

Additionally, it is critical that the recent FinCEN guidelines be 

evaluated. FiSCA will be hosting on September 26th the forum to 

discuss the guidelines and to determine whether they have 

stanched the flow of banks leaving the industry and hopefully reassured the others to return. 

We intend to invite not only MSBs but also the banks, key banking regulators and decisionmakers, who will ultimately determine 

39

whether the guidelines have achieved their purpose. We ask for 

your support in this process. 

In conclusion, it is critically important that we protect the integrity and legitimacy of our industry. It is equally critical, however, 

that our industry be recognized as being part of a healthy financial 

industry and a partner in the war on financial crime. We again 

thank you for your time today, and I am happy to answer any 

questions you may have. 

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

73 of the appendix.] 

Mr. PAUL. Thank you very much for your statement. Before I 

make a brief statement and ask a brief question, I would like to 

ask unanimous consent enter into the record a statement for the 

Center for Financial Privacy and Human Rights. 

From what I hear from the testimony, this is not exactly cost 

free. There is a cost for what we are doing, a burden placed on the 

financial industry. I also hear that there is a bit of inefficiency in 

doing what we do, too many reports being filed and overburdening 

law enforcement. Then we do talk about, sometimes, the question 

of law enforcement benefit that we get from this, assuming—it is 

generally assumed when we talk about the law enforcement benefits that we would not have those if we didn’t have this burden and 

that this is a permissible cause. 

The one issue that I think that we are careless about—and I 

want to get your opinion about this—is the concern for privacy, 

true privacy. You know, there was a time in this country when we 

could go to a bank and open up an account and fully assume that 

this was a private account, that they were like our personal papers 

held in our household and that we deserved it and our Constitution 

protects this privacy. I don’t think anybody believes that any more, 

because these are broad nets placed out, all these reports put out. 

It seems to me like too often it is sort of a bureaucratic overkill 

in what we are trying to do. 

My question is whether or not you think we have gone too far 

and what would happen if we followed what I consider the rules 

very strictly. When law enforcement agents suspect there is a problem any place, especially before the PATRIOT Act—you know, one 

of the things we did was we went to a judge and we asked him permission, and there had to be reasonable cause, and then we went 

and looked for the evidence that we might need. Today that isn’t 

even considered. It means that we have to look at everybody, everything they do, hoping that we will put it together and catch some 

criminals, and we sacrifice a bit of our personal liberty. 

Is that something that anybody on the panel thinks about, or do 

you think that—what would happen if we did approach these problems this way? Does anybody care to comment? 

Ms. TAYLOR. Yes. Thank you very much for asking that question. 

I think that, as in all things, there is a balance between the reality 

of the situation and personal privacy. I totally agree with you that 

people’s financial records ought to be kept as private as possible. 

That is one reason that SARs are incredibly sensitive, confidential 

documents. We are not even allowed to say publicly that we are 

looking at a SAR from a particular institution. 

40

So one of the pillars, if you will, that regulatory oversight is 

based on is confidentiality. That is one of the reasons why these 

agreements that we have put together with the Federal agencies 

have been so painstakingly constructed. Privacy has been at the 

absolute forefront of everybody’s minds, and we need to make sure 

that private information remains private and that only under circumstances when there is probable cause or some reason to suspect 

wrongdoing do we actually look into those particular records. Thus, 

that is something that we are very, very concerned about. 

On the other hand, there are terrorists out there, there is money 

laundering, and we need to have the tools to be able to ferret it 

out and prosecute it. 

Mr. PAUL. Thank you very much. I am a physician, and I think 

about the responsibilities—I have to keep records private. In some 

ways your argument would say to the physician, well, you know, 

there is an important reason—as a matter of fact, this is occurring 

these days—I can be a little bit careless because if I spread this 

information about disease we might do some good by doing more 

research, and we are moving into that direction where medical 

records aren’t very private any more. 

So I would suggest that sometimes I think we get rather careless. 

Anybody else care to make a comment? 

Mr. BYRNE. Congressman, the only point I would make is obviously the banks are somewhat caught in the middle. We obviously 

have a strong history, we believe, of protecting data. Obviously 

there are issues with that. We are working hard to address those 

issues. 

But the only point I would make regarding some of the forms, 

I certainly don’t think all of the information is valuable, although 

we have made that clear. But sometimes the reporting is done on 

behalf of the bank, so that it can protect itself and the shareholders 

from the fraud committed against the institution. So in some instances if you left it all to law enforcement, we would lose some of 

the ability to help our own account holders if they have been defrauded. 

There is a balance, but I certainly can recognize your point that 

the balance seems to have shifted to some degree. 

Mr. PAUL. Thank you very much. I now defer to the gentlelady 

from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. I would like to welcome all of the panelists today and thank you for your testimony 

very much, but in particular I welcome the superintendent, Diana 

Taylor, from the great State of New York. 

As the financial center of the Nation, New York has been on the 

leading edge of regulation and enforcement in this area. So your insights and testimony are especially welcomed. Good to see you 

again, Diana. 

Ms. TAYLOR. Thank you. 

Mrs. MALONEY. I welcome all the members from the public and 

private sector in the financial services industry. 

I would like to express how pleased I am that the State Banking 

Department of New York has signed an information sharing agreement with FinCEN. I understand that FinCEN will try to forge 

41

similar agreements with the other States. They are trying hard to 

do in other States what we have done. 

In the meantime, will you work together to share information 

with the banks about matters such as the wide disparity between 

States on regulation of money service businesses, the MSBs. I understand that about half a dozen States do not regulate businesses 

at all, while other States like ours, Superintendent Taylor, have 

very stringent requirements. 

Does your agency directly regulate MSBs, and how do you communicate to banks whether an MSB is in good standing? 

Ms. TAYLOR. Thank you for asking that question. It is a very 

good one, actually. Yes, we do regulate MSBs. We regulate money 

transmitters and check cashers in the State of New York, among 

others. We also regulate the mortgage industry, budget planners, 

in addition to the banks. 

We have taken great pains over the last couple of years to beef 

up our regulation of those entities. We have come up with a new 

system of looking at them. We have gone from just licensing them 

and doing minimal examinations to actually looking at them from 

more of a safety and soundness point of view. Do they have a business plan? Are they financially sound? What are their IT systems 

like? Are they complying with all of the rules and regulations in 

the Bank Secrecy Act? What is their management like? 

We, through CSBS and through direct efforts with the other 

States, have worked with the other States on a lot of these things. 

Anybody who wants to partake of our knowledge of this, we are 

more than willing to work with them. 

We think it is very important that we have standards throughout 

the country for MSBs that are reasonably consistent, so that MSBs 

operating in one State don’t have advantages, shall we say, over 

those operating in other States. 

Mrs. MALONEY. Have you shared with other States what the 

standards are that you have for MSBs? Are you working with other 

States on this? How many other States have followed New York’s 

lead in regulating MSBs? 

Ms. TAYLOR. I don’t know the answer to that question, but I can 

certainly get it for you. 

Mrs. MALONEY. Thank you so much. It is so good to see you. 

Ms. TAYLOR. Thank you. 

Mrs. MALONEY. I would like to ask Scott McClain—but I would 

like to preface it by the fact that at one point I represented a very 

poor district. It was parts of the South Bronx and East Harlem. 

Many of the banks left the neighborhood. It is a free enterprise system, but in many cases did not even leave an ATM machine. 

I am very supportive to check cashers, really, and to credit 

unions and anyone who will provide financial service industries in 

needed neighborhoods. I think that as we work together we can 

make sure that these services are there for all people throughout 

our country. 

I wanted to ask you, Mr. McClain, in the financial services sector 

we need to be extremely careful that in the process of combating 

money laundering we don’t unduly burden any sectors of our financial services industry or unfairly advantage one sector over another. I know that your association has been a good citizen in this 

42

respect. You have worked with Treasury’s Financial Crimes Enforcement Network, FinCEN, to set up the registration system for 

the check cashers and the FinCEN website, and your members are 

registered. You have implemented a four-part anti-money laundering program for your programs that include policies and procedures such as customer verification procedures and the SAR and 

CTR reporting requirements. 

Second, a compliance officer, third, an employee compliance 

training program and, fourth, an independent audit function. Each 

of these steps demonstrates that the check cashers you represent 

are willing to make serious efforts to prevent your businesses from 

being knowingly used to facilitate money laundering and the financing of terrorism, and that is critical. 

In light of these efforts, I can understand your concern and frustration at the increasingly critical problem of banks discontinuing 

check cashers accounts. This issue came to a crisis point in the city 

that I represent, when J.P. Morgan Chase announced that it was 

terminating all check casher customers. This decision really threatened most of the check cashers in New York City to shift their 

businesses to the sole remaining bank that does business with 

check cashers, North Fork, or go out of business. 

I know that along with others I wrote a letter, you know, to 

FinCEN, and they have responded to that situation with new guidance. Has that had a positive effect, or what further steps are 

needed? 

I just wanted to add, we certainly want to combat terrorism. We 

want to combat money laundering. We want to crack down. But at 

the same time, we don’t want to cut off financial services. In some 

neighborhoods the check cashers are vital, in some cases the only 

source of financial services that are there. 

So could you respond to the new guidances that came out of 

FinCEN and what else needs to be done? 

Mr. MCCLAIN. Thank you very much, Congresswoman Maloney. 

I appreciate your perspective on the issue. 

Initially to respond, I would say that we are extremely, extremely grateful for the amount of attention and diligence that has 

been given this by FinCEN. They initially held on March 8th a 

fact-finding session on the problem. We had some 43 speakers from 

industry, both the MSB industry and also bankers, speak on the 

issue. We learned at that time, as we had known internally for 

quite a period, that the problem is truly critical, and to our not necessarily surprise, but to our satisfaction, we heard from the bankers who expressed a tremendous amount of frustration over the 

problem and the fact that in many cases they have been banking 

check cashers for decades and in some cases generations. It was 

with much dismay that they had to terminate their long-standing 

check cashing customers. It was largely due to some misguided 

pressure from some Federal banking examiners who essentially 

caused them to terminate their accounts. 

The guidance materials we think are certainly a step in the right 

direction. We feel at this point—they were just replaced April 

26th— it is too early to assess whether or not they are going to sort 

of stop the flow of banks exiting the industry and whether or not 

it is going to cause some to return. That is certainly our hope. 

43

But key for the guidelines to be effective, I think, is advocacy on 

the part of government, advocacy on the part of the same Federal 

agencies that in some part, maybe indirectly, caused the situation 

to develop. We need essentially the high risk assessment to be critically examined and the guidelines to do that in some measure. 

Additionally, in terms of the additional advocacy we would like 

to see some sort of an advisory board created, preferably some 

statutorily created body to essentially monitor the situation and 

create a forum for industry, both the check cashing MSB industry 

and also the banking industry, and also a forum for the Federal 

banking regulators to be heard as well. 

But as I said, it is too early to see whether or not the guidelines 

have been effective. But without that added attention from government, we are somewhat circumstance expect. 

As I mentioned in my presentation, we are going to be convening 

a forum on February 26th. Hopefully at that point in time we will 

have a better assessment as to the ultimate success of the guidelines. 

Mrs. MALONEY. My time is up. But if you will allow me for 2 seconds to be parochial—and since the superintendent is sitting 

here—I don’t think we want to close down services in neighborhoods. We have a wonderful Federal system where we can come up 

with new creative ideas. This might be a way that you could have 

some form of oversight that says that this is okay. Because we certainly don’t want to lose our financial services or the access to it. 

In some neighborhoods in New York, check cashers are the only 

form of financial services that are there, in some cases credit 

unions. 

So I thank you. It is great to see all of you. 

Mr. PAUL. I thank the gentlelady. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

I want to thank the panel, and the panel and the committee 

hearing is now adjourned. 

[Whereupon, at 12:32 p.m., the subcommittee was adjourned.] 

(45)

A P P E N D I X

May 26, 2005

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