Moving Illegal Proceeds: Challenges Exist in the Federal Government's Effort to Stem Cross-Border Currency Smuggling
Published: 2010-10-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. Customs and Border Protection (CBP) is the lead federal agency responsible for inspecting travelers who seek to smuggle large volumes of cash--called bulk cash--when leaving the country through land ports of entry. It is estimated that criminals smuggle $18 billion to $39 billion a year in bulk cash across the southwest border. The Financial Crimes Enforcement Network (FinCEN) is responsible for reducing the risk of cross-border smuggling of funds through the use of devices called stored value, such as prepaid cards. GAO was asked to examine (1) the extent of actions taken by CBP to stem the flow of bulk cash leaving the country and any challenges that remain, (2) the regulatory gaps, if any, of cross-border reporting and other anti-money laundering requirements of stored value, and (3) if gaps exist, the extent to which FinCEN has addressed them. To conduct its work, GAO observed outbound operations at five land ports of entry. GAO also reviewed statutes, rules, and other information for stored value. This is a public version of a law enforcement sensitive report that GAO issued in September 2010. Information CBP deemed sensitive has been redacted.
section_title: What GAO Found
paragraphs: In March 2009, CBP created an Outbound Enforcement Program aimed at stemming the flow of bulk cash leaving the country, but further actions could be taken to address program challenges. Under the program, CBP inspects travelers leaving the country at all 25 land ports of entry along the southwest border. On the Northern border, inspections are conducted at the discretion of the Port Director. From March 2009 through June 2010, CBP seized about $41 million in illicit bulk cash leaving the country at land ports of entry. Stemming the flow of bulk cash, however, is a difficult and challenging task. For example, CBP is unable to inspect every traveler leaving the country at land ports of entry and smugglers of illicit goods have opportunities to circumvent the inspection process. Other challenges involve limited technology, infrastructure, and procedures to support outbound operations. CBP is in the early phases of this program and has not yet taken some actions to gain a better understanding of how well the program is working, such as gathering data for measuring program costs and benefits. By gathering data for measuring expected program costs and benefits, CBP could be in a better position to weigh the costs of any proposed expansion of the outbound inspection program against likely outcomes. Regulatory gaps of cross-border reporting and other anti-money laundering requirements exist with the use of stored value. For example, travelers must report transporting more than $10,000 in monetary instruments or currency at one time when leaving the country, but FinCEN does not have a similar requirement for travelers transporting stored value. Similarly, certain anti-money laundering regulations, such as reports on suspicious activities, do not apply to the entire stored value industry. The nature and extent of the use of stored value for cross-border currency smuggling and other illegal activities remains unknown, but federal law enforcement agencies are concerned about its use. FinCEN is developing regulations, as required by the Credit CARD Act of 2009, to address gaps in regulations related to the use of stored value for criminal purposes, but much work remains. FinCEN has not developed a management plan that includes, among other things, target dates for completing the regulations. Developing such a plan could help FinCEN better manage its rulemaking effort. When it issues the regulations, law enforcement agencies and FinCEN may be challenged in ensuring compliance by travelers and industry. For example, FinCEN will be responsible for numerous tasks including issuing guidance for compliance examiners, revising the way in which it tracks suspicious activities related to stored value, and addressing gaps in anti-money laundering regulations for off-shore entities that issue and sell stored value.
section_title: What GAO Recommends
paragraphs: GAO recommends that CBP, among other things, gather data on program costs and benefits and that FinCEN develop a plan, including target dates, to better manage its rulemaking process. CBP and FinCEN concurred with these recommendations.

section_title: Letter
paragraphs: Moving illegal proceeds across our nation’s borders presents a significant  threat to national security.  Mexican drug trafficking organizations,  terrorist organizations, and other groups with malevolent intent finance  their operations by moving funds into or out of the United States.  For  example, a common technique used for taking proceeds from drug sales in  the United States to Mexico is a method known as bulk cash smuggling.   Smuggling methods can involve taking bulk cash by private or commercial  vehicles through land ports of entry, by private plane or boat through air  and sea ports of entry, or through other means, including underground  tunnels, parcels sent by mail, or by foot between ports of entry.  Because  of its clandestine nature, the extent of bulk cash smuggling is difficult to  quantify with any certainty.  The National Drug Intelligence Center (NDIC)  estimates that proceeds from drug trafficking generated in this country are  smuggled across the southwest border and the proceeds total between $18  billion and $39 billion a year.  NDIC also estimates that Canadian drug  trafficking organizations smuggle significant amounts of cash across the  Northern border from proceeds of drugs sold in the United States.  In the  largest known case of bulk cash smuggling, over two tons of currency,  mostly in $100 banknotes, totaling $205 million was seized in Mexico City  in 2007.  In addition to bulk cash smuggling, 21st century methods and  technologies of laundering money have emerged.  In 2009, the NDIC stated  that new financial products and technologies present unique opportunities  for money launderers as well as unprecedented challenges to the  intelligence, law enforcement, and regulatory communities.  Among other  money laundering techniques, NDIC and others cited the use of prepaid  cards or gift cards that are loaded with currency or value—also called  stored value—as presenting a compact and easily transportable method  that has been used to move money into and out of the United States.  U.S.  law enforcement officials agree that stored value is an emerging cash  alternative for legitimate consumers and criminals alike.
U.S. Customs and Border Protection (CBP)—a major component in the  Department of Homeland Security (DHS)—is the lead federal agency in  charge of securing our nation’s borders.  CBP carries out its responsibility  by, among other things, inspecting travelers at land, air, and sea ports of  entry.  In March 2009, the Secretary of Homeland Security called on CBP  to help stem the flow of bulk cash and weapons moving south by  inspecting travelers leaving the United States for Mexico.  As a result of  this request, CBP increased its effort to stem the flow of bulk cash  smuggling.  This effort—called outbound operations—expanded CBP’s  primary mission of inspecting travelers who seek to enter the United  States.  In addition to addressing the threat of bulk cash and arms that  leave the country, CBP outbound operations may also, among other things,  identify and pursue criminals or fugitives attempting to flee the country  and travelers who attempt to take stolen vehicles across the border.   CBP’s responsibility for inspecting travelers who leave the country is a  difficult task because it must also facilitate the cross-border movement of  legitimate travelers and billions of dollars in international trade.
The Financial Crimes Enforcement Network (FinCEN)—a bureau in the  Department of the Treasury—seeks to deter and detect criminal activity  and safeguard the financial system from the risk that terrorists and other  criminals may fund their operations through financial institutions in the  United States.  Among other things, FinCEN is responsible for  administering certain laws aimed at preventing criminals from abusing  financial systems in the United States.
Given the important role that CBP and FinCEN play in national security,  you asked us to review the progress that they have made in stemming the  flow of bulk cash leaving the country and in ensuring financial entities  whose businesses involve stored value carry out anti-money laundering  practices, respectively.  In response, in September 2010, we issued a law  enforcement sensitive report to you that addressed the following  questions:      To what extent has CBP taken actions to stem the flow of bulk cash  leaving the country through land ports of entry and what challenges, if  any, remain?
What regulatory gaps, if any, exist for cross-border reporting and other  anti-money laundering requirements involving the use of stored value?
If any regulatory gaps exist for cross-border reporting and other anti- money laundering requirements involving the use of stored value, to  what extent has FinCEN taken action to address them?
This report is a public version of the prior sensitive report that we  provided to you.  DHS deemed some of the information in the prior report  as law enforcement sensitive, which must be protected from public  disclosure.  Therefore, this report omits sensitive information about CBP’s  outbound inspection efforts, including techniques used to carry out  inspections and data on staffing, infrastructure, and technology that  support outbound inspections.  In addition, at DHS’s request, we have  redacted data on the specific ports of entry where bulk cash has been  seized.  Although the information provided in this report is more limited in  scope, it addresses the same questions as the sensitive report.  Also, the  overall methodology used for both reports is the same.
To address the question on CBP efforts to stem the flow of bulk cash  leaving the country at land ports of entry, we conducted site visits,  reviewed CBP data, and interviewed CBP officials.  We visited and  observed outbound operations at five ports of entry (Blaine, Washington;  Buffalo, New York; El Paso, Texas; Laredo, Texas; and San Ysidro,  California).  We selected these ports of entry to provide us with examples  of outbound operations at land ports of entry on the Northern and  southwest border that have high volumes of traffic.  At each location, we  interviewed managers and CBP officers knowledgeable about outbound  operations to determine actions that have been taken to stem the flow of  bulk cash as well as ways to strengthen the program.  While we cannot  generalize our work from our site visits to all ports of entry, the results  from this work provided us with valuable insights about outbound  operations.  Among other things, we reviewed and analyzed data on the  amount of bulk cash seized from March 2009 through June 2010.  We  assessed the reliability of these data by interviewing staff responsible for  the data and reviewing relevant documentation.  We concluded that these  data were sufficiently reliable for the purposes of our review.  We  reviewed data on the number of license plate readers installed on  outbound lanes as of July 2010.  We interviewed CBP staff responsible for  collecting these data and determined that the data were sufficient for our  review.  We also reviewed CBP’s policies and procedures and strategic  plan for its outbound operations.  We interviewed staff at CBP  headquarters involved in (1) implementing the outbound program and (2)  assessing staffing, technology, and equipment for outbound operations.   We also reviewed documents on the budget for outbound operations,  policy guidance, and relevant statutes related to bulk cash smuggling.  We  reviewed assessments of bulk cash smuggling, including the 2009 and 2010  National Drug Threat Assessments issued by the National Drug  Intelligence Center, a National Drug Intelligence Center report on bulk  cash smuggling, and a Mexican Bulk Currency study issued by U.S.  Immigration and Customs Enforcement (ICE).  We found these  assessments to be acceptable for use in our report.  We also reviewed  January 2010 data from the Texas Center for Border Economic and  Enterprise Development and interviewed center staff members to  determine the reliability of the data.  We concluded that the data were  sufficiently reliable for our review.  In addition, our investigators tested  outbound operations at three ports of entry on the southwest border.  Our  investigators did their work in accordance with quality standards for  investigations established by the Council of the Inspectors General on  Quality and Efficiency.  While we cannot generalize the work of our  investigators to all ports of entry, the results from this work provided us  with valuable insights about outbound operations.  We reviewed  Standards for Internal Control in the Federal Government and compared  the standards for monitoring and controls with CBP’s policies and  procedures and performance measures for its Outbound Enforcement  Program. Our scope did not include an examination of outbound  operations at air or sea ports of entry.
To address the questions on regulatory gaps, if any, of cross-border  reporting and anti-money laundering requirements involving the use of  stored value and the status of FinCEN efforts to address any identified  gaps, we reviewed and analyzed information on the ways in which stored  value has been used to smuggle currency across the nation’s borders and  to launder money.  We also reviewed current regulations and statutes that  govern issuers, sellers, and redeemers of stored value.  To obtain further  information on vulnerabilities related to stored value, we interviewed  officials or obtained information from federal law enforcement agencies  that are involved in efforts to interdict or investigate the illicit use of  stored value, including ICE, the U.S. Secret Service, and CBP— components in DHS, the Federal Bureau of Investigation (FBI) and the  Drug Enforcement Administration (DEA)—components in the Department  of Justice (DOJ), and Criminal Investigation of the Internal Revenue  Service (IRS)—a component in the Department of the Treasury  (Treasury).   In addition, we reviewed a random, probability sample of 400  reports on suspicious activities submitted by depository institutions and  money services businesses (MSB) from October 2008 through April 2010 to  identify examples of suspicious activities related to stored value.  To  obtain information on the status of Treasury’s efforts to address identified  vulnerabilities (on stored value), we interviewed officials from Treasury’s  Office of Terrorism and Financial Intelligence, FinCEN, and the Office of  Fraud/Bank Secrecy Act, within IRS’ Small Business/Self Employed  Division (SB/SE).  We reviewed relevant legislation, such as the Credit  Card Accountability Responsibility and Disclosure Act of 2009 (Credit  CARD Act) and the Notice of Proposed Rulemaking related to stored  value issued by Treasury in June 2010.  We also reviewed OMB’s  guidelines and requirements for the rulemaking process.  Finally, we  reviewed Standards for Internal Control in the Federal Government and  compared the standards for monitoring with FinCEN’s policies and  procedures for monitoring MSBs.
We conducted this performance audit from June 2009 through September  2010 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: CBP Is the Lead Federal Agency Responsible for Stemming the Flow of Bulk Cash Leaving the U.S. at Land Ports of Entry
paragraphs: CBP is the lead federal agency charged with securing our nation’s borders  while facilitating legitimate travel and commerce.  To meet the  Secretary’s March 2009 mandate that CBP conduct inspections of traffic  leaving the U.S. for Mexico at all 25 land ports of entry on the southwest  border, CBP expanded or initiated inspections of outbound travelers,  including those leaving by foot, private vehicle (see fig. 1), or commercial  trucks.  CBP’s effort to stem the flow of bulk cash is part of a larger  counternarcotics strategy to secure the southwest border.
CBP has three main components that have border security responsibilities.  First, CBP’s Office of Field Operations is responsible for inspecting the  flow of people and goods that enter and leave the country through air,  land, and sea ports of entry.  Second, CBP’s Border Patrol works to  prevent the illegal entry of persons and merchandise, including  contraband, into and out of the United States between the ports of entry  and at checkpoints located in major traffic routes away from the border.   In doing so, the Border Patrol is responsible for controlling nearly 7,000  miles of the nation’s land borders between ports of entry and 95,000 miles  of maritime border in partnership with the United States Coast Guard.  Third, CBP’s Office of Air and Marine helps to protect the nation’s people  and critical infrastructure through the coordinated use of an integrated  force of air and marine resources and provides mission support to the  other CBP components. For fiscal year 2010, CBP had a $11.4 billion  budget, of which $2.7 billion was for border security and trade facilitation  at ports of entry.  For outbound operations, CBP’s budget was about $109  million in fiscal year 2009 and is an estimated $145 million for fiscal year  2010.
In carrying out its responsibilities, CBP operates 327 ports of entry,  composed of airports, seaports, and designated land ports of entry along  the Northern and southwest border.  While CBP does not know the  number of travelers that leave the United States through land ports of  entry, it estimates that it inspected over 360 million travelers who entered  the country in fiscal year 2009 through land, air, and sea ports of entry.  In  total, the number of travelers who entered the country through land ports  of entry represented over 70 percent of all travelers entering the country.
section_title: CBP’s Process for Inspecting Travelers Leaving the Country
paragraphs: The process used by CBP to inspect travelers leaving the country differs  from the inspection process for those entering the United States at land  ports of entry.  CBP centers attention, among other things, on the  citizenship and admissibility of the travelers for those who seek to enter or  reenter the country through land ports of entry.  In contrast, CBP officers  ask a different set of questions of travelers leaving the country.   To  determine whether travelers are in compliance with the reporting  requirements for the international transport of currency and monetary  instruments, officers may ask travelers whether they (1) intend to leave  the country by asking where they are going (i.e., Mexico on the southwest  border and Canada on the Northern border), (2) are carrying more than  $10,000 in currency, checks, money orders, or any other type of monetary  instrument, and (3) are transporting any weapons or ammunition into  Mexico or Canada. While carrying more than $10,000 in currency or other  type of monetary instrument across the border is legal, failure to report  the currency or monetary instrument with the intent to evade the reporting  requirement is illegal.  Further, it is illegal for an individual to knowingly  conceal more than $10,000 in currency or other monetary instruments and  transport or attempt to transport such currency or monetary instruments  into or out of the United States with the intent of evading the reporting  requirements.   In addition to the interview process, CBP officers may  also inspect, among other things, the content of car trunks, vehicle  compartments, and packages in the vehicle.  Figure 2 shows CBP officers  querying outbound travelers at a land port of entry.
When conducting outbound operations, CBP officers may refer travelers  for a more detailed inspection—called secondary inspection.  Secondary  inspections generally involve inspections of vehicles in a separate area  from the primary inspection.  They can include more in-depth interviewing  of travelers, checking the traveler’s identifying information against law  enforcement databases, or inspecting containers and boxes (see fig. 3).
section_title: FinCEN Plays a Key Role in Regulating Money Services Businesses
paragraphs: While smuggling cash is one method of taking illegal proceeds out of the  country, criminals have also begun using other means to move proceeds  from illegal activities across U.S. borders.  One such method is the use of  electronic media called stored value.  This method can involve a broad  range of technologies, including the use of prepaid cards, prepaid  telephone cards, and financial transactions carried out through a cell  phone.  Money services businesses play a key role in issuing, selling, and  redeeming stored value.
FinCEN, a bureau within the Department of the Treasury, is responsible  for the administration of the Bank Secrecy Act (BSA)—a statute that  authorizes FinCEN to require MSBs and other financial institutions as well  as nonfinancial trades or businesses and many individuals to maintain  records and file reports that have a high degree of usefulness in criminal,  tax, regulatory investigations or procedures, or certain types of  counterterrorism investigations.  FinCEN carries out this responsibility  as part of its broad mission of enhancing U.S. national security, deterring  and detecting criminal activity, and safeguarding financial systems from  abuse by among other things, requiring financial institutions to establish  anti-money laundering programs as well as file reports on large currency  transactions.  FinCEN has about 300 staff to carry out its analytical,  administrative, and regulatory responsibilities.  Within FinCEN, the  Regulatory Policy and Programs Division is responsible for, among other  things, BSA compliance in the financial industry and for issuing  regulations for U.S. financial institutions.
To carry out its mission, FinCEN supports and networks with law  enforcement agencies across the federal government that may be involved  in investigating money laundering and terrorism financing.  For example,  FinCEN works with agencies in DHS, such as CBP, ICE, and Secret  Service; agencies in DOJ, including the DEA, Bureau of Alcohol, Tobacco,  Firearms, and Explosives, and the FBI; and the Criminal Investigation  Division within the IRS.  In addition, FinCEN coordinates its efforts with  another IRS unit called the Small Business/Self Employed Division which  conducts BSA compliance examinations of certain nonfederally regulated  non-bank financial institutions, such as MSBs and casinos.
section_title: MSBs Play a Key Role in Offering Stored Value Products to Consumers
paragraphs: Among the businesses that FinCEN has defined as MSBs are those that  issue, sell, or redeem stored value.  In some cases, such businesses may  provide a variety of services in addition to offering stored value products,  including check cashing, money orders, and money transmitting services.   In other cases, such businesses may only issue, sell, or redeem stored  value.  These businesses play a key role in providing financial services to a  segment of the population that may not maintain checking or savings  accounts.  Such businesses are common and are located in large and small  communities across the country.  Examples of MSBs can range from  national companies with a large number of agents and branches, such as  Western Union and MoneyGram, to small “mom and pop” money services  businesses that may offer check cashing, money orders, and other   financial services.  The volume of transactions for MSBs nationwide is not  known.
One type of product offered by MSBs that falls under the definition of  stored value are stored value cards, which include gift cards or prepaid  cards.  In this report, we will refer to such cards as stored value cards, the  same term that FinCEN currently uses for such products.  Stored value  cards are a growing alterative to cash transactions and they offer  individuals without bank accounts an alternative to cash and money  orders.  They have many legitimate uses that help consumers in a variety  of ways.  For example, retail establishments sell gift cards to customers as  an easy and convenient way to purchase goods or services.  Employers  may issue cards in lieu of checks when paying salaries to employees.
Consumers can also purchase cards and use them to purchase goods or  services at retail stores across the country or to, in some cases, withdraw  cash at automated teller machines overseas.  For example, rather than  paying for groceries using cash, a consumer could use a prepaid card.   Also, the federal government uses prepaid cards in conjunction with its  food stamp program.
The two main types of stored value cards are the following.
Closed system cards (see fig. 4)—These are the most common form of  stored value cards and are often called gift cards.  These cards are  issued by major merchants and retailers, such as department stores,  electronics stores, and coffee shops.  They can be bought at many  different types of retailers, including drugstores, grocery stores, and  other businesses.  Other examples include cards that students may use  to purchase food on college campuses or that passengers use on  subway systems or phone cards.  Generally, closed system cards are  limited in use in that they can only be used to purchase goods or  services from a single merchant.  These cards may be limited to the  initial value posted to the card or may allow the card holder to add  value.  A study conducted for the Federal Reserve estimated that in  2006, the value of transactions for closed system cards amounted to  $36.6 billion.
Open system cards—These cards have greater use as a cash alternative  since a single card may be used at a myriad of stores, merchants, or  automated teller machines (ATM) within and across U.S. borders.   Such cards are easy to buy and can be bought on-line or in person.   Open system cards may not require a bank account or face-to-face  verification of the card holder’s identity.  Domestically, companies may  voluntarily place a dollar limit on the cards.  Such cards may be used  to access cash from ATMs in and out of the United States and can be  reloaded to add value on the card.  In certain countries outside of the  United States, open system cards can be purchased and can be used to  withdraw cash at ATMs across the world.  A study conducted for the  Federal Reserve estimated that in 2006, the value of transactions for  open system cards in the United States totaled $13.2 billion.
Hybrid forms of closed system and open system cards are also available.   One form of a semi-closed system card can be used at more than one store  rather than a single store.  For example, a shopper may be able to use a  card at a group of stores located in the same shopping mall.  Another  example of a hybrid card is one that can be used at any merchant that  accepts debit or credit cards, but the card cannot be used to withdraw  cash at ATMs.
The Departments of Treasury, Justice, and Homeland Security recognized  stored value as a potential threat for cross-border currency smuggling and  money laundering as early as 2005.  For example, law enforcement  agencies from these three departments stated that “stored value cards  provide a compact, easily transportable, and potentially anonymous way  to store and access cash value” and that “federal law enforcement  agencies have reported  used as alternatives  to smuggling physical cash.” Further, they stated that “the volume of dirty  money circulating through the United States is undeniably vast and  criminals are enjoying new advantages with globalization and the advent  of new financial services such as stored value cards.” A year later, in 2006,  a Treasury official stated that while stored value cards serve legitimate  markets, without adequate controls, such payment innovations pose  significant risks for money laundering and terrorist financing.  This official  noted that the risks involved access to bank payment networks without  requiring a bank account or verifying customer identification.
Beyond cards, new forms of stored value have surfaced in recent years.  In  2008, the World Bank issued a report that identified the risk of  international smuggling and money laundering of illegal proceeds through  the use of financial transactions initiated from a mobile phone, also called  mobile financial services.  That report describes how technology is now  available in countries such as South Korea, the Philippines, and Malaysia  that allows individuals to make transactions from an account in one  country to an account in another country through a mobile phone.  This  technology has begun to penetrate the market in the United States and will  become more readily available to consumers in the next several years.   According to the report, the risks of money laundering with the use of  such devices include (1) user identity may not be known, (2) “smurfing,”  or splitting large financial transactions into smaller transactions, can be  carried out to evade scrutiny and reporting by the financial institution, and  (3) mobile financial services fall outside of anti-money laundering  regulations.
section_title: CBP Has Established an Outbound Enforcement Program, but Further Actions Are Needed to Address Program Challenges
subsections: section_title: CBP Has Created an Outbound Enforcement Program and Seized about $41 Million in Bulk Cash Leaving the Country Since March 2009
paragraphs: In March 2009, CBP reestablished an Outbound Enforcement Program  within its Office of Field Operations (OFO).  The immediate goal of the  program was to increase outbound enforcement activities along the  southwest border in order to obstruct the illegal flow of firearms and  currency being smuggled from the United States to the Mexican Drug  Trafficking Organizations.  The program is staffed by a Director and 6   other officials.  Since March 2009, CBP officers conducting outbound  operations have conducted more than 3 million inspections.
In addition to increasing outbound inspections, CBP has taken further  action to support its efforts to seize bulk cash and other items.  For  example, CBP has developed a training curriculum that provides officer  training in outbound enforcement operations for all port environments,  including land, air, and sea.  The training curriculum includes a 6-part,  Web-based, training series, an 8-day classroom session, and on-the-job  training.  During the classroom session, officers complete modules on  legal authority, targeting, inspecting, and processing, and participate in  scenario-based activities.  As of July 2010, 131 officers had completed the  training in fiscal year 2010.  In addition to developing outbound training,  the Outbound Enforcement Division integrates the work of outbound  operations with other CBP components.  For example, the Division  coordinates with the Tactical Operations Division and the Office of  Intelligence and Operations Coordination to develop tactical and strategic  operations based on a review of intelligence information and seizure  activity.  Further, the Division coordinates its efforts with staff involved in  carrying out the Western Hemisphere Travel Initiative as well as with the  Office of Border Patrol.  For example, outbound enforcement efforts are  augmented by 116 Border Patrol agents.
OFO also coordinates its efforts with other law enforcement entities  working to combat bulk cash smuggling, such as DEA and ICE.  For  example, CBP coordinates with DEA by providing staff and intelligence to  the El Paso Intelligence Center (EPIC), a national tactical intelligence  center led by DEA and designed to support law enforcement efforts, with a  significant emphasis on the southwest border.  Among other functions,  EPIC analyzes bulk cash seizure data and develops various reports on bulk  cash smuggling methods, which are provided to various law enforcement  agencies.  EPIC also responds to requests for bulk currency seizure data  from officers in the field.  Additionally, CBP participates with ICE in  Operation Firewall and the Border Enforcement Security Task Force  (BEST) initiative.  Operation Firewall, started in 2005, targets criminal  organizations involved in outbound currency smuggling, while the BEST  initiative focuses on increasing information sharing and collaboration  among agencies involved in disrupting and dismantling criminal  organizations that pose a significant threat to border security.
As a result of its outbound enforcement activities, CBP seized about $41  million in illicit bulk cash leaving the country at land ports of entry from  March 2009 through June 2010.  The vast majority of this currency, 97  percent, was seized along the southwest border.  While CBP seized more  than twice the amount of bulk cash during the first year of the outbound  program as compared to the year prior, total seizures account for a small  percentage of the estimated $18 billion to $39 billion in illicit proceeds  being smuggled across the southwest border and out of the United States  annually.
CBP was most successful in seizing bulk cash during the first 6 months of  the Outbound Enforcement Program.  As shown in table 1 below, CBP  seized nearly $21 million from March 2009 through August 2009, averaging  about $3.5 million each month.  Despite the number of seizures increasing  by 17 percent during the second 6 months of the outbound program, the  total amount of cash seized decreased by 37 percent when compared to  the first 6-month period.
The amount of cash seized in any given month varied.  As shown in figure  5 below, since the start of the Outbound Enforcement Program, total  seizures spiked in March, April, and September 2009.  The spikes in March  and April 2009, totaling $6.4 million and $8.2 million respectively, were  each driven by a single incident in which CBP seized a large amount of  currency.  For example, of the $6.4 million CBP seized in March 2009  across all ports of entry, CBP seized more than $3 million during a single  incident at a port of entry.  In contrast, the $6.3 million spike in September  is comprised of multiple seizures of smaller amounts of currency, with no  single seizure larger than $803,000.
From March 2009 through June 2010, CBP had at least one bulk cash  seizure at 21 of the 25 land ports of entry along the southwest border while  conducting outbound operations; however, the total amount seized  varied significantly by port.  Along the southwest border, the total cash  seized at each port during this time period ranged from about $11,000 to  about $11 million, with more than 80 percent of the cash seized at 5 land  ports.  Two ports represent about half of all seizures.  CBP officials stated  that the concentration of seizures in these 5 land ports may be the result of  high-traffic volumes and proximity to major drug trafficking routes.
In addition to bulk cash seizures, CBP’s Outbound Enforcement Program  has carried out other enforcement actions, such as firearm seizures, drug  seizures, stolen vehicle recoveries, and enforcement of immigration  violations.  Examples include the following:  In April 2010, officers conducting outbound operations at the San  Ysidro port of entry in California apprehended a male subject wanted  in Mexico for a triple homicide, trafficking of cocaine,  methamphetamines, firearms, and ammunitions.
In June 2010, officers conducting outbound operations at the San Luis,  Arizona port of entry seized a large sports utility vehicle, 114 grenades,  and over 2,500 rounds of various types of ammunition.
section_title: Stemming the Flow of Bulk Cash Is a Challenging Task
paragraphs: CBP has succeeded in establishing an Outbound Enforcement Program,  but the program is in its early phases and there is a general recognition by  CBP managers and officers that the agency’s ability to stem the flow of  bulk cash is limited because of the difficulty in detecting bulk cash.   Beyond the inherent difficulty in identifying travelers who attempt to  smuggle cash, three main factors limit CBP’s success in this area.
First, CBP currently does not conduct outbound operations on a full-time  basis, providing smugglers opportunities to circumvent detection by  crossing the border when CBP officers are not conducting operations.  Second, officers have limited equipment, technology, and infrastructure  for conducting outbound operations. CBP officers and managers report  that additional resources would improve officer effectiveness at  discovering bulk cash and enhance officer safety. CBP began a $23 million  project to determine how to deploy additional technology to outbound  lanes in 2009 and expect cost estimates to be ready in September 2010.   CBP also plans to spend approximately $10 million in funds from the  Fiscal Year 2009 Supplemental Appropriations Act for temporary  infrastructure improvements and to install additional infrastructure at up  to 21 crossings on the southwest border starting in February 2011.  Third,  long wait times impact CBP’s ability to inspect all outbound travelers  given CBP’s need to balance its mission of facilitating the cross-border  movement of legitimate travelers and billions of dollars in international  trade with its mission of inspecting travelers.  Additional data and  information on the challenges CBP faces in stemming the flow of bulk  cash smuggling is law enforcement sensitive and not included in this  report.
While factors such as staffing, infrastructure, and technology limit CBP’s  ability to detect large amounts of cash, the fact that CBP conducts  outbound inspections does not guarantee that the agency will identify  attempts to smuggle bulk cash.  For example, our investigators tested  outbound operations at three ports of entry on the southwest border.  Our  investigators observed that CBP officers and Border Patrol agents were  interviewing travelers, inspecting vehicles, and performing secondary  inspections at each port.  At each of these locations, our investigators  bypassed opportunities to turn around and proceeded on a traffic lane at  the entrance to the port of entry marked as the route to Mexico, signaling  their intent to leave the country.  They entered a designated outbound  inspection area with shredded cash hidden in the trunk of their car.  At  two of the three ports of entry our investigators claimed that they only  wanted to see the border and would like to turn around when approached  by CBP officers and Border Patrol agents conducting outbound  inspections.  At both of these ports of entry, officers and agents allowed  the investigators to turn around without searching the vehicle, asking for  identification, or probing further to determine whether our investigators  posed a risk of smuggling.  In addition, the officers and agents did not  question our investigators on why they did not turn around earlier when  they had an opportunity to do so.  At the third port of entry, CBP officers  did not interview our investigators or physically inspect the vehicle that  contained the shredded cash.  However, CBP officers used an X-ray  detector on the vehicle.
section_title: Program Data, Policies and Procedures, and Performance Measures Could Be Strengthened to Improve the Outbound Program
paragraphs: Addressing the limitations described above could require substantial  capital investments at all ports of entry.  However, the extent that such  investments could result in greater seizures of bulk cash, weapons and  ammunition is not known, in part because CBP lacks data on benefits and  costs of an expanded program.  CBP will likely need more time to gain a  clearer understanding of how well the program is working and what  factors will contribute most to improved results.  Data on the expected  costs and benefits of the program are a basic building block for informing  decisions on whether to expand the program, continue the program at  current levels, or to reduce the size of the program.  In addition, policies  and procedures to ensure the safety of officers are not in place.  CBP has  developed strategic goals for its outbound program, but it lacks  performance measures that assess the effectiveness of the program.
subsections: section_title: Limited Data on Expected Program Costs and Benefits Hinders CBP’s Ability to Inform Decisions on the Budget and Outbound Program
paragraphs: As the outbound program matures, developing additional cost data in four  key areas—staffing, technology, infrastructure, and wait times created by  outbound operations—could help inform decisionmakers on program and  budget decisions.  OMB provides guidance on how agencies can evaluate  the costs and benefits of a program, such as the Outbound Enforcement  Program, to inform policymakers on budget and program decisions.  In  addition, DHS calls on its components to carry out analyses of costs and  benefits to assist in planning a project and in managing costs and risks.    The Southwest Border Counternarcotics Strategy states that law  enforcement agencies should analyze the effectiveness of outbound  inspections and, if warranted, consider expanding the number of  inspections in search of bulk currency.
Data for Determining Staffing Costs for Expanded Operations Has  Limits  While CBP has data on the current cost of the Outbound Enforcement  Program, it faces challenges in developing cost data to estimate the future  size of the program.  From fiscal years 2008 through 2010, the cost of  CBP’s outbound program increased from about $89 million to an estimated  $145 million.  Costs for the outbound program involved primarily the cost  of headquarters and mission support staff as well as salaries, benefits,  overtime and premium pay for officers.  Together these items represent  more than 98 percent of the total cost for each fiscal year.  Appendix I  provides a more detailed breakdown of costs for the outbound program.
CBP plans to improve its data for estimating the cost of staff involved in  inspecting outbound traffic for its current level of effort.  For example,  CBP plans to refine the data by calling on CBP managers at ports of entry  to estimate the total number of hours officers worked during an outbound  shift rather than simply counting the number of officers who worked that  day.
While CBP has cost data for staffing the current level of effort, challenges  remain for estimating costs of staffing the program in the future.  CBP has  developed an Outbound Workload Staffing Model to assist managers in  determining future staffing levels.  However, the model has data  limitations, in part, because data on outbound operations is limited or  missing because the program is new.  For example, the model does not  identify the number of CBP canine handlers that are needed to support  outbound operations.  Having such data would inform future iterations of  the model in estimating the number of currency canine handlers that may  be needed.  Also, the model assumes that outbound traffic volumes are the  same as inbound traffic volumes because CBP does not have data on the  number of travelers and vehicles that leave the country through land ports  of entry.  According to these staff, having such data would be helpful in  determining staffing needs.
CBP is Making Progress in Developing Cost Estimates of  Equipment Needed by CBP Officers to Carry Out Outbound  Operations at Land Ports of Entry  CBP managers stated that they are developing a list of equipment officers  need to conduct outbound operations at land ports of entry.  Such a list  would include equipment, such as mirrors, fiber-optic scopes, and density  readers that CBP officers need to inspect vehicles leaving the country.   Managers stated that they plan to develop the initial list by the end of 2010  and they would submit the list to managers at ports of entry for comment  in 2011.  Once comments have been received, CBP plans to develop a cost  estimate for outbound equipment later in 2011.
One source of funding for purchasing equipment by CBP is the  Department of the Treasury’s Forfeiture Fund.  In fiscal year 2009, CBP  deposited more than $25 million into the fund from currency forfeitures.   CBP is permitted by the Department of the Treasury’s Executive Office of  Asset Forfeiture to use money from the fund to purchase equipment and  infrastructure such as canopies, signage and lighting to support outbound  operations.  However, CBP has expressed concern about using the funds  for a one-time purchase of equipment and infrastructure because funding  is not available for maintenance and repair of the equipment in the CBP  Office of Field Operations budget. For fiscal year 2010, CBP requested $7.5  million so that the agency could pay overtime to state and local law  enforcement officers who work outbound operations with CBP at ports of  entry and $500 thousand for equipment, such as currency counters, digital  cameras, and contraband detection kits.  In total, CBP requested about  $102 million from the Treasury Forfeiture Fund for fiscal year 2010.  As of  June 2010, CBP had received almost $55 million from the fund, however,  none of this money was for the outbound program.
CBP is Making Progress in Developing Cost Estimates of  Technology Improvements  CBP has a project underway to determine how to upgrade and install  license plate readers and to enable computer connectivity, but the agency  has not yet determined how much this would cost at each port.  According  to CBP, license plate readers are available at 48 of 118 outbound lanes on  the southwest border and none of the 179 outbound lanes on the northern  border.  Additionally, CBP officials estimated that there are a limited  number of outbound lanes networked to support computer stations or  wireless computing, both necessary for document readers that we  discussed earlier in this report.  CBP officials in charge of the project  stated that they plan to determine the costs involved in deploying license  plate readers and computer connectivity and that a cost estimate will be  available in September 2010.  Such estimates could provide important  information for CBP outbound program managers as they assess scenarios  for outbound operations at each port of entry.
Cost Estimates of Infrastructure Improvements Are Limited  Although CBP has plans to consider outbound infrastructure needs, it has  not yet conducted an analysis of outbound infrastructure needs at ports of  entry and the related costs for improving infrastructure for its outbound  operations.  The strategic plan for the Outbound Enforcement Program  states that the program will request the necessary budgetary funding to  conduct facility assessments at ports of entry and articulate the  operational needs for outbound facilities.  CBP has completed a  preliminary assessment of Southwestern ports of entry in which it  determined the readiness of each site to accommodate outbound  infrastructure.  However, this preliminary assessment did not estimate the  costs of infrastructure improvements at each port of entry.  Building on  this effort, CBP plans to conduct a site survey that would consider needed  infrastructure at each port of entry and stakeholders that would be  involved in construction such as local governments and private  landholders.  However, Outbound Enforcement Division officials told us in  July 2010, that they will not begin to conduct site surveys until they receive  funds for construction.  They have not requested this funding because  DHS has not yet determined whether to expand the program.  Without cost  estimates, it will be difficult for CBP to inform program managers and  policymakers about costs involved in improving infrastructure for the  Outbound Enforcement Program.
Developing Data on the Costs Created by Wait Times Is a Difficult  Task  In its Circular A-94 guidance, OMB states that agencies should consider all  costs of a program when conducting a cost-benefit analysis, such as the  costs resulting from waiting at the border.  CBP officials told us that they  have not yet collected data on wait times for outbound inspections  because they have been initially focused on establishing the program.   Furthermore, they said that developing cost data on wait times for  outbound inspections would be difficult based on CBP’s experiences in  collecting similar wait time data for inbound inspections.
In July 2010, we reported that CBP’s wait times data for personal and  commercial vehicles in inbound inspections are collected using  inconsistent methods and the data are unreliable.  CBP acknowledged  problems with its wait times data and has initiated a pilot project to  automate wait times measurement, and to improve the accuracy and  consistency of the data collected.  The objectives of the project are to  measure wait times in both directions—inbound and outbound—for cars  and trucks, determine real-time and predictive capabilities, replace the  manual process for calculating wait times, and explore long-term  operations.  Understanding what kinds of delays might result from  outbound inspections and how expanding the program might affect such  delays could better position CBP in determining the program’s costs.
Analyzing Seizure Data and Other Benefits of Outbound  Operations Is Challenging  While seizure data are useful for determining many of the benefits of  outbound operations, some benefits are more difficult to quantify.  For  example, it is difficult to quantify the degree to which outbound  operations deter drug trafficking organizations from attempting to smuggle  bulk cash.  Another benefit that is difficult to quantify is the intelligence  information that officers may obtain by conducting outbound operations,  including information that may help in discovering smuggled cash,  weapons and drugs. To address this type of difficulty, OMB encourages  agencies to enumerate any other benefits beyond those that can be  quantified.  For example, agencies that have conducted such analyses  have used subject matter experts to offer a qualitative evaluation of  benefits.
In analyzing the costs and benefits of the outbound inspections program, it  is important to recognize that CBP is part of a larger effort by federal,  state, and local agencies to disrupt and dismantle drug trafficking  organizations, in part by denying them the profits of their drug sales. How  much CBP spends to combat such activities could be indirectly affected by  the efforts of other agencies involved in interdiction activities.  For  example, if local police officers were to increase enforcement on highways  leading to the border, they may intercept bulk cash before it gets to the  border, potentially changing the results of CBP’s efforts.  Additionally, if  CBP increases its outbound operations, criminals may respond to the  increased difficulty of smuggling bulk cash by changing tactics to use  other means of moving currency out of the country, such as using stored  value.  We discuss the use of stored value later in this report.
section_title: CBP’s Outbound Policies and Procedures Do Not Address Weaknesses Related to Officer Safety
paragraphs: CBP has not yet developed policies and procedures to help ensure officer  safety in conducting outbound operations.  At all five ports of entry we  visited, CBP officers and managers cited safety concerns related to  conducting outbound inspections.  In addition, at each of these ports, we  observed that officers used the side of the highway to conduct secondary  inspections, while other vehicles moved past, potentially endangering  officers.  Also, at the Blaine port of entry, the officers conducted  inspections of the underside of vehicles in the traffic by lying on the  ground with their legs exposed while traffic moved by in neighboring lanes  at speeds up to approximately 25 miles per hour.
CBP program managers noted that one way to improve the safety of  officers is to improve infrastructure, such as developing designated areas  for secondary inspections and installing speed bumps and barriers.  We  agree that improved infrastructure could enhance officer safety, however,  whether CBP will receive funds to improve infrastructure remains an open  question.  Until such improvements are made, CBP will be faced with the  important issue of how to ensure officer safety.
At two of the five ports of entry we visited, CBP was using guidance for  outbound operations that was developed prior to the reestablishment of  the Outbound Enforcement Program and it does not specify how CBP  officers should inspect travelers in a way that ensures the officers’ safety.   This guidance states that the safety of teams conducting outbound  operations is an important consideration, but otherwise does not provide  safety guidance for officers. At two other ports of entry we visited, CBP  officials stated that the ports began conducting outbound operations after  the Outbound Enforcement Program was reestablished but did not  reference any specific guidance for officers to use.  At the Laredo port of  entry, officials provided us with locally developed guidance for officers  that details specific actions that the officers should take to help ensure  their safety. For example, the officer should always face the traffic, use  loud commands to vehicles when escorting a vehicle to secondary  screening, and remain aware of traffic passing him or her.
At the time of this report, CBP had not yet issued an outbound directive to  ports of entry that provides guidance for ensuring officer safety.  In July  2010, a CBP outbound program manager told us that a directive for the  program was under review by CBP management; however the official  could not provide estimates on when the directive is to be approved and  issued.  The manager agreed that policies and procedures on officer safety  are important.  However, the manager said that developing such policies  and procedures should be done at the local level because each port of  entry is unique.  For example, traffic volumes vary for each port of entry.   The manager stated that the draft directive does not include guidance that  directs managers at land ports of entry to develop policies and procedures  for ensuring officer safety. GAO’s Standards for Internal Control in the  Federal Government state that policies and procedures enforce  management directives and help ensure that actions are taken to address  risks.  In addition, the standards state that such control activities are an  integral part of an entity’s planning, implementing, reviewing, and  accountability for stewardship of government resources and achieving  effective results. Directing and ensuring that managers at ports of entry  develop policies and procedures for officer safety could help protect  officers from danger when they are conducting outbound operations.
section_title: CBP Has Developed Strategic Goals for Its Outbound Enforcement Program, but Challenges Remain in Developing Measures Related to Program Effectiveness
paragraphs: In October 2009, CBP issued a strategic plan for fiscal years 2010 through  2014 that represented a first step toward developing performance  measures for outbound efforts, but challenges remain in developing the  measures. The plan states that the immediate goal of the program was to  obstruct the illegal flow of firearms and currency being smuggled from the  United States to drug trafficking organizations in Mexico.  According to  the plan, a key objective of CBP’s outbound efforts is to detect and remove  people and goods that pose a threat from the legitimate annual flow of  millions of people, cargo and conveyances departing from the United  States.  To help achieve this objective, the Outbound Enforcement  Program plans to carry out 11 initiatives, such as conducting an outbound  threat assessment and tracking and reporting on outbound activities.
The strategic plan for the outbound program also recognizes that  developing or obtaining better data on the threat of bulk cash smuggling  and other illegal activities is one key to understanding the effectiveness of  its operations.  For example, the outbound program recognizes the value  of assessments that identify major trafficking routes and methods for  illegal export activities.  However, CBP has yet to develop a performance  measure that shows the degree to which its efforts are stemming the flow  of bulk cash leaving the country.  While we recognize that doing so is a  difficult task, we reported in September 2005 that agencies can use  performance information to inform decisions on future strategies,  planning and budgeting, and allocating resources.  In addition, Standards  for Internal Control in the Federal Government state that control  activities, such as establishing and reviewing performance measures, are  an integral part of an entity’s planning, implementing, reviewing and  accountability for stewardship of government resources and achieving  effective results.  Such activities could call for comparisons and  assessments relating different sets of data to one another so that analyses  of the relationships can be made and appropriate actions can be taken.
Using information and data from other agencies that evaluate drug  trafficking organizations provides one way to measure the effectiveness of  CBP’s outbound operations.  Two examples of how such information  could inform managers and policymakers of CBP’s efforts involve studies  by NDIC and ICE.  In March 2008, NDIC estimated that while current bulk  cash interdiction efforts successfully disrupt the transport of tens of  millions of dollars in drug proceeds en route to or at the southwest border  every year, the interdicted currency is less than 1 percent of the total  amount of illicit bulk cash destined for Mexico.  In addition, a November  2009 study issued by ICE stated that gross revenue generated by Mexican  drug trafficking organizations, and subsequently smuggled into Mexico, is  substantial.  CBP officials stated that while it may not be possible to  know the extent to which its officers are intercepting cash, they believe  such information is useful.  For example, they cited analyses by ICE’s Bulk  Cash Smuggling Center as another data source that could help in  developing performance measures. In July 2010, CBP officials stated that  they plan to develop draft performance measures comparing program  costs to outcomes such as the amount of bulk cash seized by the end of  fiscal year 2011.  While this is a good first step, without data to show the  degree to which CBP efforts are stemming bulk cash smuggling and other  criminal activities, it will be difficult for managers and policymakers to  assess the effectiveness of CBP’s outbound program.
section_title: Regulatory Gaps Involving Cross- Border Reporting and Other Anti-Money Laundering Requirements Exist for Stored Value
paragraphs: Regardless of the success of efforts to stem the flow of bulk cash,  criminals can use other methods of transporting proceeds from illegal  activities across the nation’s borders. Stored value is one such method.   Regulatory exemptions heighten the risk that criminals may use stored  value to finance their operations.  For example, unlike cash, FinCEN does  not require travelers to report stored value in excess of $10,000 to CBP  when crossing the border. FinCEN has initiated actions to address these  exemptions, but much work remains before the regulatory gaps are closed  and anti-money laundering practices are fully implemented.
subsections: section_title: Unlike with Cash, Travelers Are Not Required to Report More than $10,000 in Stored Value When Crossing the U.S. Border
paragraphs: The Bank Secrecy Act (BSA) is a key federal statute that seeks to  safeguard the U.S. financial system from criminal activity and to combat  the exploitation of the U.S. financial system by criminals and terrorists.  Among other things, the BSA authorizes the Secretary of the Treasury to  require financial institutions, as well as non-financial trades or businesses  and many individuals, to make reports and maintain records that have a  high degree of usefulness in criminal, tax, or regulatory investigations or  proceedings, or in the conduct of intelligence or counterintelligence  activities, including analysis, to protect against international terrorism.   Among other things, the BSA and its current implementing regulations  require an individual who physically transports, mails, or ships more than  $10,000 in currency or monetary instruments, such as traveler’s checks,  across the U.S. border to file a Report of International Transportation of  Currency or Monetary Instrument (CMIR).
Unlike this reporting requirement for currency and monetary instruments,  there is no similar requirement for stored value.  According to Treasury,  no requirement exists because stored value is not defined as a monetary  instrument under the BSA or its implementing regulations. Instead,  according to FinCEN, stored value is a device that provides access to  monetary value, rather than being a monetary instrument itself.
section_title: MSBs That Issue, Sell, or Redeem Stored Value Are Exempt from Three Key Anti-Money Laundering Provisions of the BSA
paragraphs: Many of the anti-money laundering requirements contained in the BSA  regulations do not apply to MSBs that offer stored value products.  The  BSA and its regulatory framework focus on financial institutions’ record  keeping and reporting requirements that create a paper trail of financial  transactions that federal agencies can use to deter criminal activity and  apprehend criminals.  Some BSA regulations apply to MSBs that offer  stored value products.  For example, financial institutions, including MSBs  that provide stored value products, are required to report currency  transactions made by the same customer that exceed $10,000 during the  course of any one day.
However, FinCEN exempted MSBs that offer stored value products from  many other anti-money laundering provisions of the BSA regulations.   According to FinCEN, they provided these exemptions in their 1999  rulemaking due to the “complexity of the industry and the desire to avoid  unintended consequences with respect to an industry then in its infancy.”   In 2008, FinCEN recognized that these exemptions created a situation  whereby issuers, sellers, and redeemers of stored value are subject to a  less comprehensive Bank Secrecy Act/Anti-Money Laundering regime than  are other actors falling within the scope of FinCEN’s regulations.  FinCEN  later stated that “if these  gaps are not addressed, there is  increased potential for the use of  as a means for furthering  money laundering, terrorist financing, and other illicit transactions  through the financial system.”  Below is a discussion of three key  exemptions related to stored value activity by MSBs.  We discuss FinCEN’s  efforts to address these exemptions later in the report.
subsections: section_title: FinCEN Does Not Require MSBs That Are Sole Issuers, Sellers, or Redeemers of Stored Value to Register
paragraphs: Under the BSA and its implementing regulations, certain MSBs must  register with Treasury by filing information with FinCEN.  The purpose  of registration is to assist supervisory and law enforcement agencies in th enforcement of criminal, tax, and regulatory laws and to prevent MSBs    While most types of MSBs are required  from engaging in illegal activities. to register, there are exemptions for certain types of MSBs. For example, a  MSB that solely issues, sells, or redeems stored value is not required to  register under current BSA regulations.  The total number of MSBs that  are solely issuers, sellers, or redeemers of stored value, and thus exempt  from registration, is unknown.
A MSB that issues, sells, or redeems stored value is generally required to  register with FinCEN if that MSB also provides another financial service  which is subject to registration, such as check cashing.  However, in 2007,  the Secretaries of the Treasury and Homeland Security, and the Attorney  General, stated that the majority of MSBs that are required to register  continue to operate without doing so.  According to FinCEN officials,  roughly 25,000 MSBs were registered in May 2007. Through an outreach  program to unregistered MSBs, FinCEN increased the number of  registered MSBs to 43,041, as of June 15, 2010.  However, the total number  of MSBs operating nationwide is unknown.,78  FinCEN officials stated  that MSBs may not register because of language barriers, cost, training  issues, or a lack of awareness as to the requirements.
section_title: FinCEN Does Not Specifically Require MSBs to Develop and Implement a Customer Identification Program
paragraphs: Under BSA regulations, some financial institutions, such as banks, are  required to have customer identification programs that include, among  other things, procedures for verifying customer identity and determining  whether a customer appears on specified government watch lists.   However, current BSA regulations do not specifically require MSBs to  have a customer identification program. Despite this, MSBs may choose to  implement customer identification protocols voluntarily or in order to  satisfy other requirements. For example, MSBs are required to maintain  anti-money laundering programs. These programs are designed to prevent  the MSB from being used to facilitate money laundering and the financing  of terrorist activities. As part of this requirement, MSBs are required to  develop and implement policies, procedures, and internal controls which  include, to the extent applicable to the MSBs under BSA regulations,  requirements for verifying customer identification.  We discuss FinCEN’s  efforts to monitor MSB compliance with these requirements later in this  report.
A 2005 study by KPMG attempted to estimate the total number of MSBs operating  nationwide. The study estimated the number to be approximately 203,000. This estimate  excludes the U.S Postal Service, an entity that falls under the definition of MSB because it  offers money order services.  However, because the survey obtained an 8 percent response  rate, the large percentage of non-responses may have affected the survey results. See  KPMG, LLP Economic and Valuation Services, 2005 Money Services Business Industry  Survey Study, (Washington D.C.: September 2005). activity.  For example, a threat assessment of stored value cards by  Treasury stated the following:  “The 9/11 hijackers opened U.S. bank accounts, had face-to-face  dealings with bank employees, signed signature cards and received  wire transfers, all of which left financial footprints.  Law enforcement  was able to follow the trail, identify the hijackers and trace them back  to their terror cells and confederates abroad. Had the 9/11 terrorists  used prepaid  cards to cover their expenses, none of  these financial footprints would have been available.”
section_title: FinCEN Does Not Require MSBs to Report Suspicious Transactions Involving Stored Value
paragraphs: While depository institutions are required to file suspicious activity reports  (SAR) for stored value transactions, FinCEN does not require MSBs to do  so.82,,83 84  Although some MSBs may file SARs related to stored value as part  of their anti-money laundering programs or on a voluntary basis, the fact  that suspicious activity involving stored value does not have to be reported  by all financial institutions heightens the risk that cross-border currency  smuggling or the illegal use of stored value may go undetected or  unreported.
The USA PATRIOT Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (Oct. 26, 2001), expanded  SAR reporting requirements to include nondepository institutions. However, under 31  C.F.R. § 103.20(a)(5), money services businesses are not required to file suspicious activity  reports for transactions that involve solely the issuance, or facilitation of the transfer of  stored value, or the issuance, sale, or redemption of stored value.
Under 31 C.F.R. § 103.18, which discusses the filing of suspicious activity reports by  banks, there is no exemption for stored value transactions.
For transactions other than stored value, MSBs are generally required to file a suspicious  activity report when a transaction is conducted or attempted by, at, or through a MSB,  involves or aggregates funds or other assets of at least $2,000, and the MSB knows,  suspects, or has reason to suspect that the transactions or pattern of transactions: involves  funds derived from illegal activities or is intended or conducted in order to hide or disguise  funds or assets derived from illegal activity as part of a plan to violate or evade any federal  law, regulation or reporting requirement under federal law or regulation; are designed to  evade BSA requirements or other financial reporting requirements; have no business or  apparent lawful purpose; or involve the use of the MSB to facilitate criminal activity. criminals.  For example, in February 2009, we reported that law  enforcement agencies in the Department of Justice and DHS use SARs in  their investigations of money laundering, terrorist financing, and other  financial crimes. In one example, a bank-filed SAR began an investigation  that resulted in the discovery of a predatory certificate of deposit fraud  scheme.  The SAR narrative described critical elements of the crime in  detail and law enforcement and prosecutors in this case noted that the  SAR proved instrumental in ending the scheme.
FinCEN has determined that suspicious activities related to stored value  have been reported by depository institutions and voluntarily reported by  MSBs. For example, in 2006, FinCEN conducted an analysis of SARs that  identified stored value cards as the nexus of the suspicious activity in  order to highlight trends and patterns associated with the  questionable/criminal use of stored value cards.  FinCEN found that  between January 1, 2004, and February 15, 2006, 471 SARs were filed that  were associated with stored value activity.  Of these, 341 SARs (72  percent), generally described activities associated with structuring and/or  money laundering.
section_title: Law Enforcement Case Examples and Reported Suspicious Activities Demonstrate the Use of Stored Value for Cross- Border Currency Smuggling and Other Illicit Activities
paragraphs: In its 2010 report on bi-national criminal proceeds led by the Office of  Counternarcotics Enforcement and ICE, DHS reported that little is known  about whether Mexican criminal enterprises are making use of stored  value technologies. Further, it reported that intelligence gaps center  around a lack of data on emerging technologies like stored value cards,  especially those that are offshore based. However, in a March 2010  testimony before the House Appropriations Committee, the FBI Director  stated that recent money laundering investigations demonstrate that  criminals are able to exploit existing vulnerabilities in the reporting  requirements in order to move criminal proceeds using stored value  devices, such as prepaid cards.
While the extent to which stored value is used for illicit purposes is  unknown, law enforcement case examples and reported suspicious  activities demonstrate that stored value has been used for cross-border  currency smuggling and other illicit activities.At least two mechanisms  that can be used to move currency out of the country using stored value  devices have been documented by law enforcement and reported  suspicious activities. First, illegal proceeds can be loaded on stored value  devices and physically carried across the border. Two examples of the  physical transport of stored value across the U.S. border are described  below.
CBP officers at a Washington state port of entry stopped a commercial  shipping truck and discovered $7.2 million worth of prepaid phone  cards. CBP officers report that they were unable to detain or seize  these phone cards because there is no requirement that such cards be  reported at the border. Later analysis revealed the manufacturer had  sent five other shipments of phone cards across the border in a 3- month period, totaling more than $25 million.
ICE agents assisting with outbound inspections at the San Ysidro port  of entry encountered an individual attempting to leave the country in  possession of a laptop computer, several merchandise gift cards, credit  cards, and cell phones. Upon further investigation, the agents  uncovered that the passenger had over 1,000 stolen credit card  numbers and was working as part of a credit card fraud operation. The  passenger explained that for his work, he was paid with prepaid gift  cards. The man used these gift cards to purchase prepaid phone cards,  which he smuggled into Mexico and sold for a profit.
The second method involves moving illicit proceeds out of the country by  shipping stored value cards out of the country, where co-conspirators can  use the cards to make purchases or to withdraw cash from local ATMs.  Many cards can also be reloaded with additional value remotely via the  Internet. For example, in 2008, DEA agents in Connecticut were  investigating a narcotics and money laundering organization allegedly  using stored value cards to launder narcotics proceeds. The investigation  revealed that illicit proceeds were loaded onto stored value cards, which  were then shipped to Colombia, South America. In Colombia, co- conspirators withdrew the money from local ATMs. The investigation  revealed that in a 5-month period, conspirators withdrew more than $7  million from the stored value cards at a single location in Medellin,  Colombia.
As discussed above, stored value devices are not subject to cross-border  reporting requirements. As a result, individuals are not required to file any  report if they physically transport, mail, or ship more than $10,000 in value  in the form of stored value products.  Four of six law enforcement  agencies with whom we spoke expressed concern about the lack of a  cross-border transport reporting requirement for stored value. For  example, CBP senior officials report that because stored value is not  subject to CMIR requirements, they lack the authority to seize stored value  devices at the border without establishing probable cause or linking the  stored value devices to a specified unlawful activity. In contrast, an IRS  special agent told us that a cross-border reporting requirement would not  entirely address the illicit use of stored value because there are other  mechanisms by which stored value can be used to transport funds  internationally. For example, smugglers could physically carry or ship  stored value cards with no value out of the country and then add value to  the cards remotely.
Beyond the use of stored value for cross-border currency smuggling, law  enforcement examples and reported suspicious activities demonstrate that  stored value can be used for other illicit purposes, such as money  laundering, tax fraud, and identity theft. Below are two examples:   In a recent law enforcement case, stored value cards were used to  conceal proceeds of a $15 million tax fraud scheme. In this example,  suspects filed more than 540 fraudulent tax returns. On some  occasions, the suspects routed electronic transfers of tax refunds  directly to prepaid cards obtained anonymously through an Internet  application process.
A depository institution filed a suspicious activity report describing a  customer who loaded $73,405 on one prepaid card and $9,987 on a  second prepaid card over the course of about a year and a half. All  transactions were made in cash, mostly $20 bills, and reporting  officials noted that the cash had an odor similar to marijuana. Of the  $73,405 loaded on the card, $72,212 was withdrawn in cash. While the  deposits took place in Washington state, the transactions on the card  occurred in Southern California and Mexico.
section_title: Efforts Are Under Way to Address Regulatory Gaps Related to Stored Value, but Much Work Remains
subsections: section_title: FinCEN Is in the Process of Developing and Issuing Regulations that Require Anti-Money Laundering Practices for Stored Value
paragraphs: At the time of our review, FinCEN was in the process of developing and  issuing regulations, as required by the Credit CARD Act, to address the  risk associated with the illicit use of stored value.  On May 22, 2009, the  Credit CARD Act was enacted which, among other things, required the  Secretary of the Treasury, in consultation with the Secretary of Homeland  Security, to do the following:    Issue regulations in final form implementing the BSA, regarding the  sale, issuance, redemption, or international transport of stored value,  including stored value cards.  In doing so, the Credit CARD Act stated  that Treasury may issue regulations regarding the international  transport of stored value to include reporting requirements pursuant to  31 U.S.C. § 5316 which applies to the transport of monetary  instruments.
Take into consideration current and future needs and methodologies  for transmitting and storing value in electronic form in developing the  regulations.
The Credit CARD Act also called on Treasury to issue final regulations  implementing the above requirements by February 2010.  FinCEN is in  the early phases of issuing the related regulations and much work remains  before it addresses the risk of cross-border currency smuggling and money  laundering through the use of stored value.  For significant regulatory  action, such as the proposed rule that FinCEN developed on stored value,  OMB prescribes an 11-step process.  This process involves steps that  range from drafting a Notice of Proposed Rulemaking (NPRM) to  publication of the final rule at least 60 days before its effective date.  In  June 2010, FinCEN issued a NPRM.  FinCEN proposes to revise the BSA  regulations applicable to MSBs with regard to stored value by, among  other things, renaming “stored value” as “prepaid access” and defining that  term; imposing suspicious activity reporting requirements, customer  information and transaction recordkeeping requirements on providers and  sellers of prepaid access; and imposing a registration requirement on  providers of prepaid access.
In preparing the NPRM, FinCEN carried out several actions.  For example,  FinCEN consulted with Treasury components, such as IRS SB/SE and IRS- Criminal Investigations Divisions.  In addition, it obtained input from  external stakeholders including industry, law enforcement, and federal  agencies and departments.  In doing so, FinCEN officials told us they  consulted with and obtained input from DHS agencies, such as ICE and  CBP, before and after writing versions of the draft rule.  In addition,  FinCEN received comments from OMB prior to issuing the NPRM.
Treasury and FinCEN officials told us that they accelerated their efforts  toward developing and issuing a new rule on stored value due in part to  the requirements under the Credit CARD Act.  They acknowledged that the  existing regulations for stored value—issued in 1999—have not kept pace  with developments in the stored value industry and that the regulations  were now outdated.  However, agency officials said they believe that their  efforts prior to the Credit CARD Act, such as leading an interagency effort  to develop and issue the 2007 Money Laundering Strategy Report,  establishing a Stored Value Subcommittee of the Bank Secrecy Act  Advisory Group in May 2008, and posing questions related to stored value  to the public as part of proposed revisions to MSB definitions in May  2009, placed them in a better position to establish a regulatory  framework for stored value in response to the Credit CARD Act.
We describe in more detail below how FinCEN plans to address several of  the regulatory gaps that apply to MSBs involved in stored value.  However,  FinCEN has not established an end date for the regulations, which is  discussed later in this report.
subsections: section_title: FinCEN Proposes Addressing Three Regulatory Gaps Related to MSBs Involved in Stored Value
paragraphs: Recognizing that stored value products are vulnerable to money  laundering, FinCEN’s June 2010 NPRM proposes to address regulatory  gaps related to MSBs involved in stored value or “prepaid access” in the  following three areas:      Registration with FinCEN.  The NPRM proposes that providers of  prepaid access must (1) register with FinCEN as a MSB, (2) identify  each prepaid program for which it is the provider of prepaid access,  and (3) maintain a list of its agents.  However, sellers, such as grocery  stores or drug stores, of prepaid access would not have to register.   According to FinCEN, it is proposing to exempt the seller from  registering with FinCEN because the seller’s role is complementary  with, but not equal to, the authority and primacy of the provider of  prepaid access, and the seller is generally acting as an agent on behalf  of the provider.  As stated in the NPRM, providing an exemption would  be consistent with the treatment of other agents under the MSB rules.
Customer identification program.  The NPRM proposes that  providers and sellers of prepaid access must establish procedures to  verify the identity of a person who obtains prepaid access under a  prepaid program; obtain identifying information concerning such a  person, including name, date of birth, address, and identification  number; and retain such identifying information for 5 years after the  termination of the relationship.
Submitting reports on suspicious activities.  The NPRM proposes  that MSBs must file reports on suspicious activities related to prepaid  access.
The next steps that FinCEN plans to follow include (1) summarizing and  analyzing the comments, (2) revising the regulation as proposed in the  NPRM, if appropriate, (3) consulting with law enforcement and regulatory  stakeholders and clearance within Treasury, (4) preparing a final rule for  OMB to review, and (5) addressing any further comments from OMB.
section_title: FinCEN Has Not Yet Decided How Best to Address the International Transport of Stored Value
paragraphs: At the time of our review, FinCEN was considering several options to  address the international transport of stored value; however, the agency  has not yet decided on what course of action it will take or when.  In the  June 2010 NPRM, FinCEN stated that it plans to regulate the cross-border  transport of stored value in a future rulemaking proposal in part because  of issues identified with respect to financial transparency while  performing its regulatory research of the stored value industry.  According  to FinCEN officials, they have not addressed the cross-border transport of  stored value in the June 2010 NPRM because addressing regulatory gaps in  (1) registration with FinCEN, (2) customer identification programs, and  (3) reporting on suspicious activities had a higher priority.
While FinCEN may ultimately call upon individuals to report stored value  at the borders, FinCEN officials indicated that cross-border transparency  and monitoring may be achieved through other means.  According to  FinCEN, one option it may use to achieve cross-border transparency is to  call upon entities in the stored value industry to report suspicious  activities related to the use of stored value that cuts across the nation’s  borders.  In addition, FinCEN is proposing in the June 2010 NPRM that  providers of prepaid access maintain records that may include information  on the type and amount of the transaction and the date, time, and location  where the transaction occurred.  For example, such information could  identify the purchase and use of stored value in and outside of the United  States.  FinCEN’s success in using this approach depends, in part, on (1)  the degree to which entities report such instances in a complete and  accurate fashion and (2) the timeliness of such reporting and the degree to  which the information is shared with law enforcement agencies.  The  challenges FinCEN faces in using this approach are discussed later in this  report.
section_title: FinCEN Has Developed Initial Plans for Issuing the Final Rule on Stored Value, but Its Plans Do Not Assess Ways to Mitigate Risks for Completing Rules on Stored Value
paragraphs: FinCEN has developed initial plans for issuing the final rules for stored  value; however, its plans are missing key elements that are consistent with  best practices for project management.  Best practices for project  management established by the Project Management Institute state that  managing a project involves project risk management, which serves to  increase the probability and impact of positive events, and decrease the  probability and impact of events adverse to the project. Project risk  management entails determining which risks might affect a project,  prioritizing risks for further analysis by assessing their probability of  occurrence, and developing actions to reduce threats to the project. Other  practices include (1) establishing clear and achievable objectives, (2)  balancing the competing demands for quality, scope, time, and cost, (3)  adapting the specifications, plans, and approach to the different concerns  and expectations of the various stakeholders involved in the project, and  (4) developing milestone dates to identify points throughout the project to  reassess efforts under way to determine whether project changes are  necessary.
In an effort to meet the statutory deadline of February 2010, FinCEN  developed preliminary plans and milestones for issuing the final rule on  stored value.  For example, the agency identified certain steps in the  rulemaking process, such as summarizing comments and making  recommendations to management before finalizing the rule.  However,  FinCEN’s plans did not assess which risks might affect the project,  prioritize risks for further analysis by assessing their probability of  occurrence, or develop actions to reduce threats to the project as  suggested by best practices for project management.  While FinCEN  officials acknowledge risks exist, such as not knowing whether the nature  of these comments may cause FinCEN to change its policy path with  respect to the NPRM, they have not produced a plan that identifies actions  to reduce threats to the project nor does their plan (1) consider alternative  approaches that the agency may need to take based on comments  received, or (2) include the time it may take to produce a series of rules,  including a rule that addresses the cross-border transport of stored value.   Assessing ways to mitigate risks associated with issuing rules on stored  value and the cross-border transport of stored value could better position  FinCEN to provide reasonable assurance that it can produce a set of rules  that (1) fulfills the requirements of the Credit CARD Act and (2) informs  decisions related to improving anti-money laundering practices among the  stored value industry.
In general, federal rulemaking can be a lengthy process for significant  regulatory action.  In April 2009, we reported that the average time needed  to complete a significant rulemaking across 16 case-study rules at four  federal agencies was about 4 years—having a range from about 1 year to  nearly 14 years with considerable variation among the federal agencies  and rules.  However, as called for by best practices for project  management, all four of the federal agencies examined in the report set  milestones for their regulatory development.  Additionally, during the  course of our review one of the four agencies provided data showing it  routinely tracked these milestones, and two federal agencies subsequently  provided some documentation and data to show likewise, when  commenting on our draft report.  Our report concluded that monitoring  actual versus estimated performance enables agency managers to identify  steps in the rulemaking process that account for substantial development  time and provides information necessary to further evaluate whether the  time was well spent.
A project management plan that is consistent with best practices could  help FinCEN better manage its rulemaking effort.  The Credit CARD Act  required FinCEN’s effort in issuing regulations in final form implementing  the BSA regarding the sale, issuance, redemption, or international  transport of stored value to be completed within the prescribed time frame  of 270 days from the date of enactment.  However, FinCEN was unable to  meet the statutory deadline of February 2010 to develop and issue these  regulations and has much work to do to carry out the requirements of the  Credit CARD Act.  In addition to identifying and mitigating risks  associated with the regulatory process, a project management plan could  also help FinCEN (1) track and measure progress on tasks associated with  completing mandated requirements, and (2) identify points throughout the  project to reassess efforts under way to determine whether goals and  milestones are achievable or project changes are necessary.  If such plans  call for changes to time lines, then FinCEN could request for legislation to  extend the statutory deadline.  Until the rule is finalized and implemented,  vulnerabilities could continue to exist in the stored value industry with  respect to the cross-border transport of stored value and money  laundering for the purpose of supporting illegal activities.
section_title: More Work Remains to Ensure Agencies Enforce Cross-Border Currency Smuggling and Industry Complies with the Final Rule
paragraphs: While issuing the final rule on stored value will be a major step toward  addressing regulatory gaps, much work remains to ensure enforcement by  law enforcement agencies to identify cross-border currency smuggling  with the use of stored value and to ensure issuers, sellers, and redeemers  of such devices implement anti-money laundering requirements after the  final rule is issued.  For example, FinCEN faces the task of conducting  awareness programs about the new rule for officials in law enforcement  and industry, as well as determining whether the new rule will address the  Credit CARD Act requirements or if additional rules will need to be  developed.  Beyond these tasks, federal law enforcement agencies and  FinCEN face other challenges as well.  These are described in more detail  below.
subsections: section_title: Enforcing the Cross-Border Requirements Related to Stored Value Will Be a Challenge
paragraphs: If FinCEN requires individuals to declare stored value at the border when  leaving the country, law enforcement officials we spoke to report that they  would encounter the following challenges.
Detecting illegitimate stored value cards. According to the law  enforcement officials we spoke with, it may be difficult to detect  illegitimate stored value for three reasons. First, stored value cards  loaded with large amounts of currency can be easily concealed in a  wallet, letter, or package given the minimal amount of physical space a  stored value product occupies, particularly when compared to bulk  cash. Second, stored value cards do not contain any features that  distinguish them from traditional credit or debit cards. Third, there is  no mechanism by which to distinguish stored value cards that an  individual possesses for legitimate reasons and those possessed for  illegitimate reasons.
Obtaining proper traveler declarations. The public would have to be  made aware of any new declaration requirement for the international  transport of stored value. Further, it may be difficult for the traveler to  recall the value on a stored value card and for law enforcement to  verify the value on a card. Unlike cash which can be counted, the value  of a stored value card can only be determined using a card reader or by  accessing the account information.
Seizing the funds. Unlike cash, which can be physically seized, the  process of seizing funds from a stored value card is much more  difficult. Law enforcement first has to identify where the funds are  held, which could be at any financial institution worldwide. Second,  law enforcement would need to obtain the right to freeze the funds and  to seize the funds through obtaining a warrant. However, in the time it  takes to obtain a warrant, it is possible that a suspect and any co- conspirators could transfer the funds off of the stored value card to  another account.
section_title: FinCEN Faces Challenges in Ensuring Industry Compliance With the New Rules
paragraphs: FinCEN’s approach for addressing vulnerabilities with cross-border  currency smuggling and other illicit use of stored value depends, in part,  on ensuring that industry complies with the new rules.  Among other  things, FinCEN faces challenges in areas such as monitoring MSBs,  addressing gaps in anti-money laundering practices of off-shore issuers  and sellers of stored value, and educating industry about the new anti- money laundering requirements.
Current Guidance for Monitoring MSB Compliance With Anti- Money Laundering Requirements Is Silent on Stored Value   As administrator of the BSA, FinCEN is responsible for, among others  things, developing regulatory policies for agencies that examine financial  institutions and businesses for compliance with the BSA regulations.   FinCEN is also responsible for overseeing agency compliance examination  activities and provides these agencies with assistance to ensure they are  able to carry out their compliance exams.  Treasury, through FinCEN, has  delegated the authority to conduct compliance examinations of certain  nonfederally regulated nonbank financial institutions (NBFI), including  MSBs, to the Office of Fraud/BSA, within IRS’ Small Business/Self- Employed Division.  IRS Fraud/BSA carries out this function with  approximately 385 field examiners nationwide.
FinCEN’s guidance for these examiners lacks specific information to  follow when assessing MSB compliance by issuers, sellers, and redeemers  of stored value.  To provide guidance for performing MSB examinations to  these examiners, in December 2008, FinCEN issued, jointly with IRS, the  Bank Secrecy Act/Anti-Money Laundering Examination Manual For  Money Services Businesses. FinCEN’s goal was to ensure consistency in  the application of the anti-money laundering requirements called for by  BSA.  The manual includes general procedures that are applicable to all  MSBs, such as procedures for reviewing an anti-money laundering  program, but it does not specifically address transaction testing  procedures for examining issuers, sellers and redeemers of stored value.   Standards for Internal Controls in the Federal Government state that an  effective control environment is a key method to help agency managers  achieve program objectives.The standards state, among other things,  that agencies should have policies and procedures that enforce  management’s directives.  The standards also state that such control  activities are an integral part of an entity’s planning, implementing,  reviewing, and accountability for stewardship of government resources  and achieving effective results.  Developing policies and procedures for  monitoring entities that issue, sell, and redeem stored value could help  ensure that such entities carry out current and future anti-money  laundering requirements.  IRS Fraud/BSA officials acknowledged that  there are no specific transaction testing procedures in the manual for  examiners to follow at a MSB that issues, sells, and redeems stored value.   They told us that at the time the manual was developed, FinCEN did not  have sufficient information on the stored value industry and it wanted to  get a better understanding of the industry before including examination  procedures in the manual.  In July 2010, FinCEN told us that it intends to  update the manual to reflect final rules on MSB re-definitions and prepaid  access.  However, it is uncertain when it will do so because the manual  update is contingent on completion of the final rules.
FinCEN Faces Challenges in Tracking Reports on Suspicious  Activities Related to Stored Value  FinCEN faces challenges regarding the ease in which it can analyze the  SAR database for reports related to stored value. We sought to identify  the types of reported suspicious activities involving stored value or  prepaid products by analyzing the SAR database; however, we  experienced significant data challenges that limited our efforts. Currently,  SAR forms do not contain a mechanism to indicate that stored value was  the financial service involved in the suspicious activity, aside from  including this information in the narrative portion of the form. Therefore,  to identify SARs potentially involving stored value products, the narrative  portion of the form must be searched using key terms, such as “stored  value,” “prepaid card,” or “gift card,” that might indicate this activity.
We reviewed a random, probability sample of 400 SARs that were  identified by using narrative search terms believed to identify SARs filed  due to stored value. However, for an estimated 39 percent of the reports,  the suspicious activity described did not involve the use of stored value,  even though one of the key search terms appeared in the narrative. For  example, the search term identified in the narrative did not describe the  type of suspicious activity that occurred, but rather, was included in a  description of the type of services the reporting entity offered. In another  example, the SAR was filed for suspicion of credit card fraud or  structuring but the report also described the type of transactions the  customer completed, one of which might have been the purchase of gift  cards.
Due to these database limitations, it is difficult to track and monitor  suspicious activity and the risks related to the use of stored value.  Standards for Internal Controls in the Federal Government state that  internal controls should include an assessment of the risks the agency  faces from both external and internal sources. This guidance defines risk  assessment as the identification and analysis of relevant risks associated  with achieving the agency’s objectives and forming a basis for determining  how risks should be managed. In addition, internal control standards state  that once risks have been identified, they should be analyzed for their  possible effect. Risk analysis includes estimating the risk’s significance,  assessing the likelihood of its occurrence, and deciding how to manage the  risk and what actions should be taken.
To address the difficulty in tracking suspicious activities related to stored  value, FinCEN has discussed SAR form revisions with the Data  Management Council that include check boxes for the types of items  involved in the suspicious activity, including prepaid products. FinCEN  plans to implement a revised SAR form with these changes in fiscal year  2012. Making such changes could better position FinCEN to fully evaluate  the potential impact of the stored value industry on their ability to carry  out the agency’s broad mission of enhancing U.S. national security,  deterring and detecting criminal activity, and safeguarding financial  systems from abuse.
FinCEN Faces Challenges in Developing a More Complete  Database of MSBs    FinCEN does not have a complete database on MSBs, including those that  issue, sell, and redeem stored value.  The lack of a comprehensive  database complicates FinCEN’s ability to educate all MSBs and other  entities about the new rule and its anti-money laundering requirements  since the agency does not have full knowledge of the MSB population or  other entities involved with stored value such as the telecommunications  industry (mobile devices—cellular phones and other wireless  communication devices).  These entities may not be as familiar with BSA  anti-money laundering requirements and need more time and orientation  to understand and meet the new requirements.
Historically, identifying the population of MSBs subject to BSA  requirements has been a challenge for FinCEN and IRS Fraud/BSA.  This  challenge has been well-documented over the years by, among others,  Treasury’s Inspector General, us,and, more recently in the 2007  National Money Laundering Strategy Report.  To illustrate this problem,  IRS Fraud/BSA uses its Web-based Currency and Banking Retrieval  System, public and commercial databases, Internet searches, and the  yellow pages to identify MSBs to monitor because a complete database of  MSBs does not exist.  FinCEN performed searches of past BSA reports and  got referrals from other law enforcement officials about potential MSBs to  monitor.  However, not all of the businesses identified were actually  subject to BSA requirements.  FinCEN officials told us they plan to use the  Bank Secrecy Act Advisory Group and its Subcommittees, including the  Stored Value Subcommittee, to identify ways to perform appropriate  outreach to applicable MSBs, in part, to develop a more complete  database.  FinCEN has not set a date for completion of this effort as its  plans have not been finalized.
FinCEN officials told us that under the new rule, monitoring and  compliance may be performed by its Office of Compliance, Office of  Enforcement, and IRS’ Fraud/BSA.  However, even if it is able to develop a  more complete database of MSBs, the degree to which IRS will monitor  MSBs involved in issuing, selling, and redeeming stored value is an open  question.  For example, in March 2010, IRS told us that MSBs which  provide stored value services generally have not been the target of  compliance exams in recent years.  IRS Fraud/BSA officials told us that  most MSBs they examined for fiscal years 2007 through 2009 provided  some other financial service (e.g. money transmission, check cashing, and  issuing and selling traveler’s checks) as their primary financial service, and  may have conducted stored value transactions as an auxiliary financial  service.  IRS Fraud/BSA work plans during this period as well as for the current fiscal year (2010) excluded examination of MSBs whose primary  financial service is stored value for the following two reasons:  (1) most  MSBs that were examined provided multiple financial services of which  stored value may have been only one of them, and (2) the existing  statutory requirements for entities that offer stored value products are  minimal and IRS resource expenditures would be more beneficial in  focusing on other MSBs.
FinCEN’s Efforts to Close Gaps in Anti-Money Laundering  Regulations for Off-Shore Entities Has Made Progress, but More  Work Remains  Combating the use of stored value by criminals involves not only efforts to  implement anti-money laundering practices domestically, but also involves  extending these efforts to international financial markets.  Stored value  issuers outside of the United States are generally not subject to FinCEN’s  anti-money laundering regulations, even though the stored value products  they issue may be used in the United States or elsewhere in the world.   Such devices can be used to load money from this country and download  money in foreign countries through ATMs.
Prior to enactment of the Credit CARD Act, FinCEN had begun the  process of proposing a new rule to address, among other things, off-shore  MSBs that market their stored value products in the United States but the  final rule is being delayed. As of April 2010, agency officials told us its  final rule related to off-shore MSBs will be delayed and issued at the time  FinCEN issues the final rule addressing the requirements under the Credit  CARD Act.  This would allow for the provisions in both rules to be  synchronized along with appropriate references because the two rules are  closely related to one another.
Meanwhile, one way Treasury and FinCEN are addressing off-shore  providers of stored value is through an intergovernmental entity called the  Financial Action Task Force (FATF).  FATF’s purpose is to establish  international standards and to develop and promote policies for combating  money laundering and terrorist financing.  In 2006, FATF issued a study  concluding that providers of new payment methods, such as stored value  and mobile payments that are outside the jurisdiction of a given country,  may pose additional risks of money laundering when (1) the distribution  channel being used is the Internet, (2) there is no face-to-face contact with  the customer, and (3) the new payment network operates through an open  network that can be accessed in a high number of jurisdictions (e.g. ATMs  worldwide).  More recently, in its Strategic Plan (2008-2012) FinCEN  recognized that to address the risk of cross-border transport and money  laundering through the use of such devices calls for an approach that  involves international cooperation with regulatory and law enforcement  agencies outside of the United States.  The degree to which FinCEN will  succeed in gaining the cooperation of agencies outside of the United  States in regulating stored value remains an open question.  Officials at  three of six law enforcement agencies we spoke with expressed concern  about the risk of money laundering from off-shore MSBs.
According to Treasury officials we interviewed, the agency led the 2006  effort to disclose risks of money laundering related to off-shore MSBs that  sell and issue stored value products and informed us that a new effort is  currently under way to update the conditions and findings to see what  more needs to be done to deter the use of such products for money  laundering and terrorist financing activities.  Treasury officials told us the  updated report is being co-chaired by FATF representatives from Germany  and the Netherlands with Treasury as a participating member.  Although  originally scheduled for June 2010, the revised issuance date for the  updated report on new payment methods is October 2010.
FinCEN May Need to Evaluate Alternative Approaches to the  Proposed Rule   In the NPRM, FinCEN has included a request for comments on the  proposed rule, as well as 15 questions it asks stakeholders to comment on.   For example, FinCEN’s proposed rule exempts certain types of prepaid  devices from anti-money laundering requirements.  Specifically, the  proposed rule exempts those devices that are (1) used to distribute payroll  or benefits; (2) used to distribute government benefits; or (3) used for  pre-tax flexible spending accounts for health care and dependent care  expenses.  The proposed rule also exempts programs offering closed  system products that can only be used domestically as well as products  that limit the maximum value and transactions to $1,000 or less at any  given time.  As stated in the NPRM, FinCEN recognizes that some  members of the law enforcement community have expressed concern  about exempting prepaid access payroll programs from anti-money  laundering requirements.  To address concerns such as these, FinCEN has  requested comments on methods for ensuring that the company and its  employees are legitimate, and that the program is valid.  FinCEN has also  asked for comments on the $1,000 a day threshold as it may apply to  transactions involving multiple MSBs.  According to FinCEN, it will  consider this matter and any comments that it receives.  In doing so, when  FinCEN reviews the comments it receives, it may need to evaluate  alternatives to exempting such prepaid programs to address the risk of  money laundering and the transport of such devices across the nation’s  borders to finance illegal activities.  OMB Circular A-4 and Executive  Order 12866, as amended, indicate that analysis of alternatives is a key  component in assessing proposed rules.
FinCEN Acknowledges that Outreach Will Help Ensure Industry  Compliance With the New Rules   While the June 2010 NPRM proposes regulations that would require each  “provider of prepaid access” to register with FinCEN and carry out anti- money laundering requirements related to prepaid access, the degree to  which providers will register with FinCEN and carry out the proposed  requirements remains an open question.  FinCEN may face two challenges  in this regard.  First, while the proposed rule describes characteristics of  MSBs that may qualify as a provider, entities in the prepaid access industry  may not immediately know whether they are a provider without further  clarification from FinCEN.  This condition could lead to entities not  registering as a provider when FinCEN intends that they follow the anti- money laundering requirements for such entities.  Second, while sellers  are exempt from registration requirements under the proposed rule, they  are required to comply with certain anti-money laundering requirements.   Not knowing whether the universe of providers and sellers is complete  and accurate may hinder compliance efforts.  As a result, FinCEN may  face a higher risk of noncompliance without a program to educate industry  about the rule and how to apply it.
In July 2010, FinCEN officials told us that they typically develop and  conduct industry outreach, as resources allow, supporting the  implementation of major new rulemakings.  FinCEN officials explained  that these outreach activities greatly assist covered industries in better  understanding the new rules and how the new rules are to be applied.   Because the prepaid access rulemaking is ongoing and FinCEN is awaiting  feedback on its proposed regulations, preparations and planning for  outreach to providers of prepaid access and other affected industry  participants are in the initial phases, according to agency officials.   Officials told us that FinCEN will continue its discussions with the Bank  Secrecy Act Advisory Group and its Subcommittees to gain insight on how  best to reach those affected by any final regulations.  According to  FinCEN, the level of effort associated with a major industry outreach  effort of this kind will be significant.
section_title: Conclusions
paragraphs: Moving illegal proceeds across the border, whether in the form of bulk  cash or stored value, represents a significant threat to national security.   While CBP’s outbound inspection effort has shown some early results,  particularly in terms of bulk cash seized, the program’s future is uncertain.   If DHS continues to conduct outbound inspections, CBP faces important  decisions regarding resources and processes for outbound inspections,  and without all the necessary information, CBP may be unable to most  effectively inform decisions on where scarce resources need to be applied.   In addition, CBP could also improve its Outbound Enforcement Program  by directing and ensuring ports of entry develop guidance that addresses  officer safety.  Also, by establishing performance measures related to  program effectiveness, CBP could be better positioned to show the degree  to which its efforts are stemming the flow of cash, weapons, and other  goods that stem from criminal activities.  While we recognize that this is a  new program, without data and information to inform resource decisions,  help ensure that officers are safe, and measure program effectiveness,  CBP risks that the program could result in an inefficient use of resources,  that officers will be endangered, and that Congress could not have the  information it needs for its oversight efforts.
Even if efforts to reduce the flow of bulk cash into Mexico are successful,  drug trafficking organizations and other criminal elements may shift their  tactics and use other methods to smuggle illegal proceeds out of the  United States, such as through the use of stored value. FinCEN is in the  process of developing and issuing regulations related to the issuance of  stored value, as required by the Credit CARD Act, but work remains and it  is unclear when the agency will issue the final regulation. By developing a  management plan with timelines for issuing final rules, FinCEN could be  better positioned to manage its rulemaking efforts and to reduce the risk  of cross-border smuggling and other illicit uses of stored value by drug  trafficking organizations and others.  Developing policies and procedures,  such as for transaction testing for monitoring MSBs that issue, sell, and  redeem stored value could help ensure that such MSBs carry out current  and future anti-money laundering requirements.
section_title: Recommendations for Executive Action
paragraphs: To strengthen CBP’s implementation of the Outbound Enforcement  Program as well as its planning efforts related to the program, we  recommend that the Secretary of Homeland Security direct the  Commissioner of Customs and Border Protection to take the following  three actions:    Collect cost and benefit data that would enable a cost/benefit analysis  of the Outbound Enforcement Program to better inform decisions on  where scarce resources should be applied.  These data could include  cost data on training and using currency canine for outbound  operations as part of the Outbound Workload Staffing Model, cost  estimates for equipping officers, installing technology to support  outbound operations, assessments of infrastructure needs at port of  entry outbound lanes, an estimate of the costs resulting from travelers  waiting to be inspected, and information on quantifiable benefits, such  as seizures, as well as non-quantifiable benefits resulting from  outbound inspections.
Direct and ensure that managers at land ports of entry develop policies  and procedures that address officer safety, such as detailing how  officers should conduct outbound inspections on a busy highway  environment.
Develop a performance measure that informs CBP management,  Congress, and other stakeholders about the extent to which the  Outbound Enforcement Program is effectively stemming the flow of  bulk cash, weapons, and other goods that stem from criminal activities  by working with other federal law enforcement agencies involved in  developing assessments on bulk cash and other illegal goods leaving  the country.
To strengthen FinCEN’s rulemaking process and to ensure IRS compliance  examiners consistently apply the anti-money laundering requirements  under the Credit CARD Act, we recommend that the Director of FinCEN  take the following two actions:    Update its written plan by describing, at a minimum, target dates for  implementing all of the requirements under the Credit CARD Act to  include FinCEN’s overall strategy and risk mitigation plans and target  dates for issuing notices of proposed rulemaking and final rules.
Revise its guidance manual to include specific examination policies  and procedures, including for transaction testing, for IRS examiners to  follow at a MSB that issues, sells, and/or redeems stored value.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of the sensitive version of this report to DHS, the  Department of the Treasury, and DOJ for comment.  In commenting on our  draft report, DHS, including CBP, concurred with our recommendations.   Specifically, DHS stated that it is taking action or plans to take action to  address each recommendation.  For example, DHS stated that it is  collecting cost data as well as identifying quantifiable and non-quantifiable  benefits of the outbound program to conduct cost/benefit analysis.  In  addition, DHS stated that it will update its National Outbound Operations  Policy Directive to ensure each Port Director establishes a standard  operating procedure for officer safety.  DHS also stated that it will work to  develop effective performance measures that accurately assess its surge- type outbound operations.  CBP stated that it will coordinate with other  law enforcement entities, including other DHS components and DOJ as  well as the White House Office of National Drug Control Policy to enhance  CBP interdiction efforts.  DHS also stated that it is investigating the  implementation of a random sampling process in the outbound  environment that would provide statistically valid compliance results for  outbound operations.  If effectively implemented, these actions would  address the intent of our recommendations.
In commenting on our draft report, Treasury, including FinCEN, stated  that they agree with our recommendations.  Specifically, Treasury stated  that it anticipates issuing additional rulemaking to address all areas of  potential vulnerability in the prepaid access sector.  Treasury stated that  although identifying target dates is particularly challenging when taking a  phased approach to rulemaking, it agrees that the existing plan should be  updated accordingly.  Additionally, Treasury stated that when the initial  rulemaking is finalized, it will proceed with its plan to update the Money  Services Business examination manual and other related outreach efforts.   If effectively implemented, these actions would address the intent of our  recommendations.
DOJ did not have formal comments on our report.  DHS, Treasury, and  DOJ provided technical comments, which we incorporated as appropriate.   Appendix III contains written comments from DHS.   Appendix IV contains  written comments from Treasury.
As arranged with your offices, we plan no further distribution of this  report until 30 days after the issue date. At that time, we will send copies  of this report to the Secretary of Homeland Security, the Attorney General  of the United States, the Secretary of the Treasury, the Director of the  Office of Management and Budget, and the appropriate congressional  committees. In addition, the report will be available at no charge on the  GAO Website at http://www.gao.gov.
If your offices or staff have any questions concerning this report, please  contact me at (202) 512-8777 or by e-mail at stanar@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Key contributors to this report are  listed in appendix V.
section_title: Appendix I: Costs for Outbound Enforcement Program (Fiscal Years 2008-2010)
paragraphs: Appendix I: Costs for Outbound Enforcement  Program (Fiscal Years 2008-2010)
Fiscal year 2009   Fiscal year 2010 (projected)
Miscellaneous expenses.
section_title: Appendix II: General Overview of the Federal Rulemaking Process
paragraphs: This appendix provides an overview of the steps in the rulemaking process  for a significant regulatory action under Executive Order 12866, as  amended, and the potential time involved for some of the steps.
Step 1: Agency (or agencies, if a joint rule) completes development of the  notice of proposed rule making (NPRM), which includes the proposed rule  and supplemental information.
Step 2: Agency submits the draft NPRM and supporting materials,  including any required cost-benefit analysis, to the Office of Management  and Budget (OMB) for review.
Step 3: OMB reviews the draft NPRM and supporting materials and  coordinates review of the proposed rule by any other agencies that may  have an interest in it.
Step 4: OMB notifies the agency in writing of the results of its review,  including any provisions requiring further consideration by the agency,  within 90 calendar days after the date of submission to OMB.
Step 5: OMB resolves disagreements or conflicts, if any, between or among  agency heads or between OMB and any agency; if it cannot do so, such  disagreements or conflicts are resolved by the President or by the Vice  President acting at the request of the President.
Step 6: Once OMB notifies the agency that it has completed its review  without any requests for further consideration, the agency reviews the  NPRM and publishes it for public comment in the Federal Register.
Step 7: Agency is to give the public a meaningful opportunity to comment  on the proposed rule, which generally means a comment period of not less  than 60 days.
Step 8: Once the comment period has closed, the agency reviews the  comments received, makes appropriate revisions to the proposed rule, and  prepares a notice of the final rule, including supplemental information  with responses to comments received.
Step 9: Agency submits draft notice and final rule, including updated  supporting materials or cost-benefit analysis, to OMB for review.
Step 10: OMB reviews the draft notice, final rule, and supporting materials;  coordinates review by any other agencies that may have an interest in the  rule; and notifies the agency of the results within 90 calendar days after  the date of submission to OMB.
Step 11: Once OMB notifies the agency that it has completed its review  without any requests for further consideration, the agency reviews the rule  one more time and generally publishes the final rule and supplemental  information in the Federal Register at least 60 days before the new rule  takes effect.
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: Comments from the Department of the Treasury
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, David Alexander, Neil Asaba, Chuck  Bausell, Willie Commons III, Kevin Copping, Mike Dino, Ron La Due Lake,  Jan Montgomery, Jessica Orr, Susan Quinlan, Jerome Sandau, Wesley  Sholtes, Jonathan Smith, Katherine Trenholme, and Clarence Tull were  key contributors to this report.