Money laundering is the disguising or concealing of illicit income in order to make it appear legitimate. Over the past two decades, federal law enforcement efforts to detect money laundering have evolved into a strategy that is heavily dependent upon the reporting of large currency transactions and tactical and strategic intelligence analysis of the collected data. In 1988 the Department of the Treasury began to encourage banks and other financial institutions to supplement reports of large currency transactions with reports of suspicious transactions of any amount. Since then, the suspicious transaction reports have taken on a number of different formats that are filed with various law enforcement and regulatory agencies at both the state and federal levels. This report describes how these reports are made and how they are being used. Federal law enforcement officials estimate that between $100 billion and $300 billion in U.S. currency is laundered each year. While narcotics traffickers are the largest single block of users of money laundering schemes, numerous other types of activities typical of organized crime—for example, illegal gambling or prostitution—create an appreciable demand. In addition, violations of tax laws often accompany laundering schemes that conceal the existence of an illegal source of income. Money laundering is also a factor in many cases of tax fraud involving income from a legitimate source. Although the process of money laundering has been broken down into a number of steps, it is generally agreed by law enforcement and regulatory officials that the point at which criminals are most vulnerable to detection is “placement.” Placement is the concealing of illicit proceeds by converting the cash to another medium that is more convenient or less suspicious for purposes of exchange, such as property, cashier’s checks, or money orders; or depositing the funds into a financial institution account for subsequent disbursement. Because of the problems associated with converting and concealing large amounts of cash, placement is perhaps the most difficult part of money laundering and is currently the primary focus of U.S. law enforcement, legislative, and regulatory efforts to attack money laundering. Federal efforts to detect large cash deposits were significantly enhanced with the passage of the Bank Secrecy Act in 1970. The act requires individuals as well as banks and other financial institutions to report large foreign and domestic financial transactions to the Department of the Treasury. The act has been amended to provide substantial criminal and civil penalties for institutions who fail to file the required reports and for individuals who deliberately evade certain reporting requirements. Although the implementing regulations of the act require four types of reports, the report filed most frequently is the Currency Transaction Report (CTR). Financial institutions are required to file a CTR for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to such institutions that involves a transaction in currency of more than $10,000. CTRs are filed on an Internal Revenue Service (IRS) form 4789, which is to be sent to the IRS Detroit Computing Center in Michigan. The volume of CTRs being filed has increased substantially in the past several years. In May 1993 we testified before the House Banking Committee that since 1987 the annual filings of CTRs had increased at an average rate of 12.7 percent. Increased efforts by federal regulatory and law enforcement agencies, as well as enhanced cooperation by the banks themselves, have significantly improved bank compliance with the reporting requirements. The substantial increase in the volume of currency transaction reports being filed has increased the importance of identifying those transactions thought to be suspicious. Although U.S. financial institutions have been reporting suspected money laundering for a number of years, specific criteria for determining whether a transaction is suspicious have never been developed. Consequently, institutions generally have a wide degree of latitude in deciding what constitutes suspicious activity. Financial institutions have developed a number of means designed to help ensure that they are not being used to launder illicit proceeds. Chief among these is a policy commonly referred to as “know your customer.” Among other things, the policy calls for financial institutions to verify the identity of individuals and businesses that are account holders and to be familiar enough with their banking practices so that transactions that are outside the norm can be readily identified. Officials from the Department of the Treasury and the American Bankers Association told us that most, if not all, financial institutions have implemented a know your customer policy and treat any transaction not typically associated with an account as suspicious. Moreover, guidance from regulatory agencies generally encourages institutions to use the policy in this manner. Although suspicious activity generally depends upon the customer, certain types of transactions are suspicious in and of themselves. A common type of suspicious transaction is structuring. Structuring occurs when a person conducts currency transactions in amounts of $10,000 or less for the purpose of evading the reporting requirements of the Bank Secrecy Act. In September 1992 the Association of Reserve City Bankers (now known as the Bankers Roundtable) published the results of a survey of suspicious transaction reporting by the nation’s major banking institutions. The report included more than 200 profiles of suspicious transactions that had been reported by 60 of the nation’s largest banking institutions. The majority of the transactions that were reported as suspicious (85 percent) involved structuring. The report found that the most common method of structuring involved cash deposits but also included check cashing, cash withdrawals, and the purchase of monetary instruments. Other transactions that were reported as suspicious included customers changing the dollar amount of the transaction or cancelling the transaction when informed of the reporting requirement, unusually large purchases of money orders and cashier’s checks, unusually large cash deposits, and wire transfers of funds to a foreign country. The Department of the Treasury has identified 8 countries in addition to the United States that, as of July 1993, require the reporting of currency transactions that exceed a specified amount. However, many other countries require the recording of transactions over some specified threshold. These records can then be made available to law enforcement under the terms of that country’s bank secrecy laws. Many countries also either require or encourage financial institutions to report those transactions considered to be suspicious. In the United States, financial institutions have been encouraged for some time to report suspicious account activity that might be indicative of criminal activity. However, certain provisions in the Right to Financial Privacy Act (P.L. 95-630) of 1978 generated questions in the banking community about the type of customer information that could be disclosed in reporting a suspicious transaction, as well as concerns of potential liability for such disclosure. Subsequent legislation addressed these issues by, among other things, providing certain protections against civil liability for institutions reporting suspicious transactions. The Money Laundering Control Act of 1986 (P.L. 99-570) amended the Right to Financial Privacy Act to explicitly define the specific types of account information that financial institutions could disclose without customer permission, subpoena, summons, or search warrant. The intent was to strike a balance between the privacy rights of customers while allowing financial institutions to give government investigators enough information about the nature of possible violations in order for such investigators to determine whether there was a basis to proceed with a summons, subpoena, or search warrant for additional information. The 1986 amendments also established a limited “good faith” defense whereby financial institutions and their employees, when making a disclosure of certain specified information, would be shielded from civil liability to the customer for such disclosure or for any failure to notify the customer of such disclosure. Despite this provision, many banks were concerned that they might still be liable under the Right to Financial Privacy Act for disclosures made on a voluntary basis. Nothing in the statutory language required a financial institution to initiate a disclosure to a government agency of a suspected transaction, and some questioned whether the government would intervene on their behalf should a civil action be initiated against them. This situation was remedied, to some extent, by the promulgation of regulations by the Comptroller of the Currency and other federal agencies charged with the responsibility to monitor U.S. financial institutions. Comptroller of the Currency Regulation 12 C.F.R. Section 21.11 and corresponding regulations issued by the other bank regulatory agencies now require financial institutions to report suspected money laundering. Nonetheless, there was still concern over the possibility of civil suits because of reporting suspicious transactions. In 1992, under the Annunzio-Wylie Anti-Money Laundering Act (P.L. 102-550), financial institutions and their employees reporting suspicious transactions were given broadened immunity from civil liability under any state or federal law or regulation, such as the Right to Financial Privacy Act. The act also prohibits financial institutions from notifying persons involved in a suspicious transaction that the transaction has been reported. We were requested by the then Chairman of the Permanent Subcommittee on Investigations, Senate Governmental Affairs Committee, to review the manner in which suspicious activities that relate to possible money laundering are reported by determining how banks and other financial institutions report suspicious transactions, to whom the transactions are reported, the volume of reports made, how the reports are used, and whether the process can be improved. To respond to the request, we reviewed pertinent laws and regulations and published material such as academic and periodical literature. We also reviewed reports prepared by federal and state agencies, private research associations, and other experts. We interviewed officials at the Internal Revenue Service, the Department of the Treasury, the Federal Reserve Board, and the American Bankers Association. We also used the results of our previous reports dealing with money laundering that are cited in the text. In order to determine the volume and characteristics of suspicious transaction reports filed on Currency Transaction Reports, we used data from the computer database at the IRS Detroit Computing Center and relied upon IRS for the necessary computer programming. At our request, IRS identified the 20 institutions that filed the largest volume of Currency Transaction Reports that had been marked suspicious in calendar year 1993. In order to determine what factors might influence some institutions to mark a high percentage of CTRs as suspicious, we contacted the seven institutions of these 20 that had marked more than 8 percent of the CTRs filed as suspicious. This percentage was arbitrarily selected and has no statistical basis.