[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS TO COUNTER
TERRORISM AND ILLICIT FINANCE
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
AND THE
SUBCOMMITTEE ON TERRORISM
AND ILLICIT FINANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 29, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-60
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
31-287 PDF WASHINGTON : 2018
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
Subcommittee on Terrorism and Illicit Finance
STEVAN PEARCE, New Mexico Chairman
ROBERT PITTENGER, North Carolina, ED PERLMUTTER, Colorado, Ranking
Vice Chairman Member
KEITH J. ROTHFUS, Pennsylvania CAROLYN B. MALONEY, New York
LUKE MESSER, Indiana JAMES A. HIMES, Connecticut
SCOTT TIPTON, Colorado BILL FOSTER, Illinois
ROGER WILLIAMS, Texas DANIEL T. KILDEE, Michigan
BRUCE POLIQUIN, Maine JOHN K. DELANEY, Maryland
MIA LOVE, Utah KYRSTEN SINEMA, Arizona
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York RUBEN KIHUEN, Nevada
WARREN DAVIDSON, Ohio STEPHEN F. LYNCH, Massachusetts
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
November 29, 2017............................................ 1
Appendix:
November 29, 2017............................................ 45
WITNESSES
Wednesday, November 29, 2017
Bley, Daniel H., Executive Vice President and Chief Risk Officer,
Webster Bank, on behalf of the Mid-Size Bank Coalition of
America........................................................ 6
Byrne, John J., President, Condor Consulting, LLC................ 7
Fox, William J., Managing Director, Global Head of Financial
Crimes Compliance, Bank of America, on behalf of The Clearing
House.......................................................... 9
Ostfeld, Stefanie, Deputy Head of U.S. Office, Global Witness.... 11
Poncy, Chip, President and Co-Founder, Financial Integrity
Network........................................................ 13
APPENDIX
Prepared statements:
Bley, Daniel H............................................... 46
Byrne, John J................................................ 50
Fox, William J............................................... 58
Ostfeld, Stefanie............................................ 69
Poncy, Chip.................................................. 88
Additional Material Submitted for the Record
Perlmutter, Hon. Ed:
Letter from Dr. Louise Shelley, Director, Terrorism,
Transnational Crime and Corruption Center.................. 118
Letter from Chuck Canterbury, National President, National
Fraternal Order of Police.................................. 121
Letter from John Cassara, former U.S. Intelligence Officer
and Treasury Special Agent................................. 123
Letter from Amanda Ballantine, National Director, Main Street
Alliance................................................... 125
Letter from Michael Freeman, President, National District
Attorneys Association...................................... 127
Letter from Abby Maxman, CEO, Oxfam America.................. 128
Letter from John Arensmeyer, Founder and CEO, Small Business
Majority................................................... 131
Letter from Gary Kalman, Executive Director, FACT Coalition.. 133
Letter from Eric LeCompte, Executive Director, Jubilee USA
Network.................................................... 137
Letter from Shruti Shah, Vice President of Programs and
Operations, Coalition for Integrity........................ 139
Letter from Ian Schwab, Director of Advocacy and Impact
Strategy, The Enough Project............................... 142
Letter from Amol Mehra, Executive Director, International
Corporate Accountability Roundtable........................ 144
Byrne, Hon. Bradley:
ACAMS report--The Way Forward................................ 147
LEGISLATIVE PROPOSALS TO COUNTER
TERRORISM AND ILLICIT FINANCE
----------
Wednesday, November 29, 2017
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit, and
Subcommittee on Terrorism and Illicit Finance,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:26 p.m., in
room 2128, Rayburn House Office Building, Hon. Stevan Pearce
[Chairman of the Subcommittee on Terrorism and Illicit Finance]
presiding.
Present: Representatives Pearce, Pittenger, Rothfus, Royce,
Tipton, Williams, Poliquin, Love, Hill, Zeldin, Trott,
Loudermilk, Davison, Budd, Kustoff, Tenney, Hensarling,
Perlmutter, Maloney, Velazquez, Lynch, Scott, Green, Himes,
Foster, Kildee, Delaney, Sinema, Heck, Vargas, Gottheimer, and
Waters.
Chairman Pearce. The subcommittees will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittees at any time. Members of the full
committee who are not members of the Subcommittees on Financial
Institutions and Consumer Credit, or Terrorism and Illicit
Finance may participate in today's hearing.
All members will have 5 legislative days within which to
submit extraneous materials to the Chair for inclusion in the
record.
This joint hearing is entitled ``Legislative Proposals to
Counter Terrorism and Illicit Finance.'' I now recognize myself
for 2-1/2 minutes to give an opening statement.
I want to thank everyone for joining us today. Today's
joint hearing will examine legislative proposals to combat
money laundering, terrorist financing, human trafficking, and
other illicit activities within our financial system.
Nearly 50 years old, the Bank Secrecy Act (BSA) was
designed and passed before the emergence of the common
technology we take advantage of today. From the very basic,
like how a currency transaction report (CTR) is filed, to the
extremely complex, including what information is most useful to
the U.S. Financial Intelligence Unit, the BSA framework needs
modernization.
The Office of National Drug Control Policy estimates that
Americans spend over $65 billion per year on illegal drugs, yet
seizures by law enforcement are less than $1 billion a year.
Overwhelmingly, the proceeds from drug trafficking escape
detection in the U.S. financial system.
To be clear, this issue is not created by a lack of effort
from law enforcement or financial institutions. In fact, we
spend billions of dollars annually on AML/CFT (anti-money
laundering/combating the financing of terrorism) efforts.
Illicit finance is ever changing and ever evolving, which
requires financial institutions and law enforcement to detect
new methods in a fluid environment where every action from law
enforcement is countered by criminals.
The solution is providing these entities with the tools
they need to better detect, report, and pursue illicit
activity. This includes modernizing the current framework to
ensure that emerging forms of financial technology can be
secure and accountable and that Treasury's Financial Crimes
Enforcement Network (FinCEN) can utilize the same technology to
streamline regulatory and intelligence work.
As it stands today, the current AML/CFT compliance regime
is a practice and procedures whose policy, goals, supervision,
and enforcement need more clarification and coordination to
prevent undue regulatory burden on financial institutions while
strengthening national security interests and enhancing law
enforcement investigations. Reporting under the BSA was meant
to provide information to law enforcement that is of a high
degree of usefulness. However, in 2016 alone, over 15 million
currency transaction reports and over 1.5 million suspicious
activity reports were filed with the Federal Government. This
influx of reports drowns out the actionable information with
white noise, allowing criminal activity to go undetected.
Without a serious review and modernization of anti-money
laundering, the AML/CFT, combatting the financing of terrorism
framework, the United States will continue to be deficient in
its ability to combat terrorism, terror, and illicit financing.
The Counter Terrorism and Illicit Finance Act is a
legislative proposal compiled after over 10 months of hearings,
briefings, and feedback from stakeholders, academics, and
Administration officials from two subcommittees of
jurisdiction. It identifies the current weaknesses in how the
AML system operates and includes reforms designed to promote
innovation and detection strategies, establish AML and
counterterrorism financing priorities, identify ownership of
shell companies, and streamline reporting requirements.
The consequences of money laundering are significant to
financial systems, economic development, and governments
worldwide. As criminals invent new methods of moving illicit
funds through our financial system, settling for the status quo
is unacceptable.
Delaying these reforms puts American lives at risk from
drug cartels, human traffickers, organized crime, and
terrorism. In today's hearing, I hope our witnesses can discuss
how we are currently combatting terrorism and illicit finance
and how the legislation before us will improve the existing
system.
I would also welcome any feedback on how to improve the
reforms proposed in Counter Terrorism and Illicit Finance Act.
Inhibiting criminal activity isn't a new problem, but I hope
that today we can help inform the subcommittees on the
importance of reforming the current law.
Again, I would like to thank our witnesses for being here
today, and I look forward to their expert testimony on this
important issue.
I now recognize the Ranking Member of the Terrorism and
Illicit Finance Committee, the gentleman from Colorado, Mr.
Perlmutter, for 2-1/2 minutes for an opening statement.
Mr. Perlmutter. Thanks, Mr. Chair, and thanks for having
this hearing.
And to our panelists, thanks for being here today.
This is a subject we have been studying pretty thoroughly.
I think we all understand that we need to make some changes and
to modernize some statutes that have been in place since the
'70s and the '80s. We don't want the financial institutions to
make work, go through certain routines that really don't help
us as a Nation stop crime, stop terrorism. There are benefits
to it, but we can be much more effective with a lot less
routine work. And that is really what this committee would like
to see done, and that is why we are going to be taking up the
bill at some point that Mr. Pearce just mentioned, Counter
Terrorism and Illicit Finance Act.
So I'm very interested in your testimony today. A belief by
both sides of the aisle that we have steps that need to be
taken. I would encourage the panel, and I ask you to take a
look at a couple of sections that I am going to want
information about, which is the expansion of the crimes for
which there would be information-sharing.
We have a letter from the Defense Bar, which I would ask to
enter into the record, complaining about--
Chairman Pearce. Without objection.
Mr. Perlmutter. --the pretty dramatic expansion of the
crimes covered, as well as the section that Mrs. Maloney has
been suggesting on beneficial ownership. And we have a couple
of letters that I would ask to be entered into the record: One
by Angel Capital Association, which is joined in by the
National Association of Manufacturers, NFIB, National Venture
Capital, and Real Estate Roundtable, and the Chamber of
Commerce as one of the letters. The other being the letter from
the Bar Association--
Chairman Pearce. Without objection.
Mr. Perlmutter. --complaining about what they believe are a
lot of limitations, a lot of confusion in terms of definitions,
and also changing the risks from the banking community to the
legal community.
But I appreciate all of you being here today; look forward
to your testimony.
And, with that, I would yield back to the Chair.
Chairman Pearce. The gentleman yields back.
The Chair now recognizes the Vice Chairman of the Financial
Institutions and Consumer Credit Subcommittee, the gentleman
from Pennsylvania, Mr. Rothfus, for 2-1/2 minutes, for an
opening statement.
Mr. Rothfus. Thank you, Chairman.
I want to commend my colleagues on this committee for their
efforts on the bills that we are going to discuss today.
Strengthening and modernizing our Bank Secrecy Act anti-
money laundering framework is essential if we want to counter
the very real security threats that we face and disrupt the
heartbreaking human trafficking and drug trades that destroy so
many lives.
Just before we went home to spend time with our families
this Thanksgiving, I traveled through Afghanistan and Iraq to
visit our troops and get a firsthand update on the challenges
we face in that part of the world. The flow of illicit cash,
whether generated through the sale of drugs or weapons, bogus
trade transactions, or through human trafficking, continues to
provide a lifeline for terrorist groups and rogue actors. This
fuels instability throughout the Middle East, and it makes the
jobs of the brave men and women of our military much harder.
Of course, as many of us know, this problem extends far
beyond that part of the world. Bad actors, like Hezbollah, are
involved in illicit finance and trafficking all over the world,
including in Africa and closer to home in Latin America. The
violence and corruption that they support in the countries in
which they operate is unacceptable. And the drugs they pump
into our communities, which ruin so many lives, need to be
stopped.
I am more convinced than ever that this committee's efforts
to interrupt the finances of these bad actors will ultimately
save lives. These bills, and especially the Counter Terrorism
and Illicit Finance Act, represent a promising start as we
begin this process.
I am looking forward to hearing from our witnesses today
about how we can build on a more potent BSA/AML regime that
makes the best use of scarce public and private sector
resources. It is clear to me that our existing framework puts
heavy burdens on financial institutions and appears to
emphasize compliance with rigid standards over efficacy. This
imposes a significant cost on financial institutions and takes
resources away from other important functions. We need to be
looking at how technology, innovation, and greater cooperation
can be employed to yield better results in this fight.
I thank the Chairman. I yield back.
Chairman Pearce. The gentleman yields back.
The Chair now turns to the introduction of our witnesses.
We welcome the testimony of, first of all, Mr. Daniel Bley.
Since 2010, Mr. Bley has been Executive Vice President and
Chief Risk Officer at Webster Bank Financial Corp. and Webster
Bank, based in Waterbury, Connecticut.
Prior to joining Webster, Mr. Bley worked at ABN AMRO and
the Royal Bank of Scotland from 1990 to 2010, having served as
managing director of financial institutions, credit risk, and
group senior vice president, head of financial institutions and
trading credit risk management.
Mr. Bley earned a B.A. from the University of Michigan in
Ann Arbor and an MBA from London Business School in London,
England. Mr. Bley also served on the board of directors of
Junior Achievement of Western Connecticut.
Mr. John Byrne. Mr. Byrne is the President of Condor
Consulting in Centreville, Virginia, the financial services
regulatory firm handling due diligence issues and training for
Government and the private sector in anti-money laundering,
financial crime, and regulatory oversight. From 2010 to October
2017, Mr. Byrne was the Executive Vice President of the
Association of Certified Anti-Money Laundering Specialists, the
largest and most prominent global AML Trade Association. Mr.
Byrne has also held several senior positions at Bank of America
in Washington, D.C., with responsibilities in AML strategies
and regulatory relations. Mr. Byrne earned a B.A. degree from
Marquette University in Milwaukee and his law degree from
George Mason University.
Mr. William J. Fox serves as Managing Director of Global
Financial Crimes, Corruption, and Sanctions at Bank of America
Corporation. Mr. Fox has served at Bank of America since 2006.
Mr. Fox joined Bank of America from Financial Crimes
Enforcement Network, FinCEN, where he served as the FinCEN
Director. Prior to his of appointment as FinCEN Director, he
served as the Treasury's associate deputy general counsel,
acting deputy general counsel. After September 11, 2001, he
also served as the principal assistant and senior advisor to
the Treasury's general counsel on issues relating to terrorist
financing and financial crime. He was recognized for his work
on those issues with a meritorious rank award in 2003. Mr. Fox
joined the Department of the Treasury in December 2000 as the
acting deputy assistant general counsel for enforcement. From
1988 to December 2000, he served at the Bureau of Alcohol,
Tobacco, and Firearms. Mr. Fox received his bachelor's degree
in history and a law degree from Creighton University in
Oklahoma.
Stephanie Ostfeld is the Deputy Head of the U.S. Office of
Global Witness. Global Witness is an international nonprofit
established in 1993 that examines corruption, poverty, and
human rights. During her time at Global Witness, Ms. Ostfeld
has focused on corporate transparency, anti-money laundering
law, and the effective enforcement of antibribery and AML law
in the oil, gas, and mining sectors. Ms. Ostfeld also served on
the executive committee of the Financial Accountability and
Corporate Transaction Coalition. Ms. Ostfeld has also served as
senior policy adviser at the Global AIDS Alliance and the
American Jewish World Service. Ms. Ostfeld earned a bachelor of
science degree in engineering from the University of
Pennsylvania and a master's degree in human rights from the
University of Denver.
Mr. Chip Poncy is the President and Cofounder of the
Financial Integrity Network. FIN is a strategic and technical
advisory firm dedicated to assisting its clients around the
world achieve and maintain the financial integrity needed to
succeed in today's global economy and security environment.
Chip Poncy also serves as senior adviser of the Center on
Sanctions and Illicit Finance, CSIF, at the Foundation for
Defense of Democracies. From 2002 to 2013, Mr. Poncy served as
the inaugural director of the Office of Strategic Policy for
Terrorist Financing and Financial Crimes, OSP, and a senior
adviser at the U.S. Department of the Treasury. As a senior
adviser from 2002 to 2006, Mr. Poncy assisted Treasury
leadership in developing the U.S. Government's post-9/11
strategy to combat terrorist financing.
Mr. Poncy graduated with honors from Harvard University and
Johns Hopkins School of Advanced International Studies, and he
holds a juris doctor from the Georgetown University Law Center.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony.
Without objection, each of your written statements will be
made a part of the record.
And, Mr. Bley, you are recognized for 5 minutes.
STATEMENT OF DANIEL H. BLEY
Mr. Bley. Chairmen Luetkemeyer and Pearce, and members of
the subcommittees, thank you for the opportunity to present
testimony on the need to modernize and improve the Bank Secrecy
Act. I am Daniel Bley, Chief Risk Officer of Webster Bank,
founded in 1935 and headquartered in Waterbury, Connecticut.
Webster has $26 billion in assets and serves communities
throughout New York and New England.
Today, I am representing the Mid-Size Bank Coalition of
America, the voice of 83 banks with headquarters in 34 States.
MBCA banks are primarily between $10 billion and $50 billion in
assets and support customers through more than 10,000 branches
in all 50 States. MBCA members maintain combined deposits in
excess of $1.2 trillion and are typically the largest local
banks serving the basic banking needs of communities.
The Bank Secrecy Act is amongst the most complicated and
costly requirements with which a bank must comply, and it is
one of the highest priorities for mid-size banks. MBCA banks
deeply appreciate the importance of this regulation and our
role in helping law enforcement identify and shut down illicit
financial activity.
We are committed to ensuring a successful program that
reduces financial crime and protects our customers and our
banks. To this end, MBCA banks have collectively invested well
over a half a billion dollars in technology and are on average
estimated to each spend upwards of $8 million annually on staff
and support.
Nearly all of the larger MBCA banks are using or are moving
into more sophisticated technology for detecting suspicious
activity well beyond the previous tools.
The high cost is particularly concerning for mid-size banks
that have significantly less scale than the large banks against
which to spread these costs. MBCA applauds the idea as
introduced with this bill and believes it will improve the
program, benefiting businesses, consumers, law enforcement, and
banks.
And I would like to share our perspectives on four key
components. Reporting thresholds, the proposed review of
efficiency and effectiveness; changes to beneficial ownership;
data collection; and the role of Treasury.
The proposed change in reporting thresholds would be
immediately and positively impactful for increasing information
usefulness and reducing burden.
We estimate, if implemented, the SAR (suspicious activity
report) filings at mid-size banks would reduce by 8 to 10
percent, and CTR filings by 50 to 80 percent. Together, this
translates to an estimated 8 to 10 percent of BSA's staffing
costs that are working solely on the half a million small
dollar reports that are estimated to be filed by mid-size banks
annually.
Section 3 focuses on improving the process. And we believe
all of the ideas included would achieve the objective. MBCA
members are happy to share other specific ideas as well.
One such idea is to establish a more structured or
automated template with limited free text format. This would
reduce complexity and could lower preparation time by
potentially half or more without sacrificing usefulness.
Another idea is to create a shorter form automated filing
approach for small dollar reports.
One concerning fact to be considered with this review is
that the false positive alert rate for mid-size banks is
estimated at over 90 percent, meaning detailed reviews of an
excessively high number of transactions that are ultimately
deemed to be unimportant. The proposed change to the beneficial
ownership data gathering model is necessary as the existing
regulation effective in May 2018 is suboptimal in many ways. It
allows for uneven application. It creates data integrity risks,
and it puts unnecessary burden on businesses to supply data to
multiple institutions. The proposed public-sector-led approach
efficiently solves for these challenges.
MBCA banks appreciate the introduction of the expanded role
of Treasury in steering supervision and support for innovation.
This could increase transparency and consistency, elements that
are critically needed. We hope this will also help reintroduce
the risk-based approach to supervision that has been missing in
recent years, even though it is captured in the existing act.
We believe better solutions can be built if there was more
coordination between Treasury, law enforcement, regulators, and
the financial institutions.
In summary, MBCA members appreciate and support this
thoughtful bill. It successfully addresses the most important
challenges in the current act, and it makes it better. It will
benefit individuals and businesses, will strengthen law
enforcement efforts with better information, and will reduce
burden for banks so we can better serve our customers.
Thank you again for the opportunity to testify, and I am
happy to address any questions or concerns of the committee's
interest.
[The prepared statement of Mr. Bley can be found on page 46
of the Appendix.]
Chairman Pearce. Thank you.
Mr. Byrne, you are recognized for 5 minutes.
STATEMENT OF JOHN J. BYRNE
Mr. Byrne. Chairman Pearce and members of the
subcommittees, I am John Byrne, and I have been part of the AML
community for over 30 years. It is clear to me that the private
and public professionals who have financial crime prevention
functions are all dedicated to stopping the flow of illicit
funds.
We may disagree with how to achieve this collective goal,
but no one can challenge the commitment of all of those
involved. It is, therefore, so important that, as improvements
are considered to what constitutes the AML infrastructure, all
participants be actively consulted.
I have seen all too often that the focus of the Bank
Secrecy Act appears to be mainly regulatory compliance and not
getting immediate access to law enforcement, information they
need for investigations and deterrence of criminal abuse of our
financial system. I have covered many of the provisions in
today's proposal in my testimony, but I will highlight only a
few.
Sections 2 and 3. CTRs have been part of the AML fabric
since 1972 and SARS since 1996. There was certainly value for
law enforcement in both reporting regimes, but I feel that SARS
are, without a doubt, more essential to successful
investigations, prosecutions, and overall detection of
financial crime. The subcommittee should be commended for
attempting to review and improve these requirements.
I would respectfully recommend, however, that there are
elements in both reporting regimes beyond the dollar thresholds
that should be considered for improvement, and they are
identified in my testimony.
While I respect Mr. Bley's views that he just espoused, in
discussing the ideas of raising the threshold on CTRs, I talked
to a number of institutions who said that, for them, it may
have little impact on burden because automated systems have
been implemented to assist in the identification of reportable
transactions.
I do not have enough data on all impacted filers to assess
the pros and cons of raising the thresholds. So, if the
subcommittees intend to propose such a plan, I would encourage
that all participants in the filing process, especially law
enforcement stakeholders, be included in discussions around any
potential change.
However, to both simplify and ensure law enforcement
utility, I would submit there is a need for a new call to
dramatically change cash reporting, and that is, eliminate all
CTRs and have impacted financial institutions report cash
activity directly to FinCEN. With this change, law enforcement
would get direct access to cash activity at the levels decided
by Congress with input, obviously, from law enforcement, and
they could develop metrics on what activities, types, and other
factors are important to the detection of all aspects of
financial crime. It is clear to me that a change this massive
couldn't be done overnight. So creating several pilot programs
may be the best option.
The subcommittees are also looking at suspicious activity
reporting thresholds and adjusting those. I will leave to
current members of the financial sector to comment, but I will
say this: Many banks file SARS in the hopes that law
enforcement will actually start an investigation. If the dollar
amounts are raised, will there be less consideration to lower
dollar frauds and financial crime? Also, as we know from our
law enforcement partners, terrorist financing models have often
occurred at extremely low dollar amounts, and so will we be
losing valuable financial intelligence?
Section 4. The subcommittees are also to be commended for
the inclusion of section 4 that fixes a long-held barrier to
enhancing information sharing. This is a welcome expansion and
should result in more effective reporting and eventual
detection of many forms of financial crime.
Sections 5 through 7, on the no-action process, I think
that will go a long way, if you create that, to prevent what I
would call ``policy as rule'' that I talk about in my
testimony. So that section, I think, deserves a lot of support.
Section 7 highlights the use of technology. And several
members have referenced that already today. One of the common
complaints I have heard is that, all too often, regulators make
it difficult for financial institutions to experiment with new
tools for the fear of regulatory criticism during transitionary
periods. This section may alleviate those problems.
Section 9. One of the major recent challenges to the
financial sector is the impending CDD (Customer Due Diligence)
Rule that is required to be implemented next May. With the
focus from FATF (Financial Action Task Force) and the media
outcry from the Panama and Paradise Papers, we know that there
is universal focus on the mechanisms used to obscure beneficial
ownership of corporate vehicles. A direct obligation to file
with FinCEN is indeed a welcome proposal.
And then, last, I would be remiss if I did not also
reference the collateral damage that can and does occur with
confusion regarding risks in today's AML regime. When the
financial sector receives limited advice and counsel regarding
how best to manage risk, the logical response by some
institutions is to exit or not onboard certain classes of
customers. This concept, ``derisking,'' impacts access to the
traditional banking sector and has harmed victims in conflict
zones from receiving funding for water, utilities, and other
resources.
These subcommittees can provide a valuable service to the
AML and global communities by adding to the studies and reports
in the bill an update to the challenges regarding financial
access.
In conclusion, I would thank the subcommittee for this
opportunity to offer my views on the need to change after 30
years of AML. The key to going forward is to, whatever changes
are made, ensure that improvements occur through private/public
partnerships.
Thank you for this opportunity, and I am also happy to
answer any questions.
[The prepared statement of Mr. Byrne can be found on page
50 of the Appendix.]
Chairman Pearce. Thank you.
Mr. Fox, you are recognized for 5 minutes.
STATEMENT OF WILLIAM J. FOX
Mr. Fox. Thank you, Mr. Chairman, and Ranking Member
Perlmutter, thank you very much, and distinguished members of
the subcommittee. I really am proud to be here today on behalf
of The Clearing House, where I serve as the Chair of its AML
Summit Committee. I have a few remarks that I would like to
make to the subcommittees this afternoon.
First of all, we would like to commend the House Financial
Services Committee and the subcommittees that you chair on your
leadership regarding our Nation's anti-money laundering and
counter financing of terrorism regime, a regime that we believe
is critical to our national security.
The enactment of the USA PATRIOT Act more than 16 years ago
was the last time that the Congress conducted a broad review or
adopted significant amendments to our national regime. The
current suspicious activity reporting regime remains largely
unchanged since it was developed in the mid 90s. Similarly,
large cash reporting regime remains largely unchanged, if not
unchanged at all, since the Bank Secrecy Act was originally
passed or enacted in 1970.
Just think of what's happened since that time. Today, most
banking business can be conducted from your mobile phone. Both
money and information move in nanoseconds.
It is very simple and common to move money across borders
in ways never seen before. Even the concept of what money is,
is changing. Today, anonymous cryptocurrencies are traded
outside the formal financial system in a way that makes it
increasingly difficult to know the source and purpose of the
funds that have been moved.
The Clearing House believes that the mechanisms through
which our member institutions discharge their responsibilities
under the regime are highly inefficient and outdated. We
believe it is time to take a fresh look. A core problem with
the current regime is that it is geared toward compliance
expectations that bear little relationship to the actual goal
of preventing or detecting financial crime. These activities
require different skill sets, tools, and work. All of this begs
a question: What is the ultimate desired outcome of our
Nation's AML/CFT regime in a post-September 11th-2017 world?
The Clearing House believes we should start by defining clear
and specific measurable outcomes or goals for each component of
our national regime, including the anti-money laundering
programs that exist in financial institutions.
Progress toward achievement of these goals should be
measured and reported. From these outcomes or goals, priorities
should be set for the components of the regime, similar to the
prioritization that occurs in our intelligence community. We
believe defining and measuring desired outcomes would change
the focus in financial institutions from one that is focused on
technical compliance to one that is focused on achieving
desired and measurable outcomes of the regime. In other words,
the programs will be effective.
To that end, in early 2017, The Clearing House issued a
report offering recommendations on redesigning our national
regime to make it more effective and efficient. Many of the
concepts found in the report are reflected in the Counter
Terrorism and Illicit Finance Act before the subcommittees
today.
I will quickly go through a couple of the recommendations
that The Clearing House is making.
First, relating to prioritization. The Clearing House
believes that the Treasury should take a preeminent role in
setting policy, measurable outcomes, coordinating and setting
priorities, as well as in examining institutions' compliance
with and enforcing our national regime.
Treasury is uniquely positioned to balance the sometimes
conflicting interests relating to national security, the
transparency and efficacy of our global financial system, the
provision of highly valuable financial intelligence to the
right authorities, financial privacy, financial inclusion, and
international development.
Second, regarding rationalization, The Clearing House
supports the draft legislation study of current BSA reporting
requirements. Enhancements to information sharing and
enterprise-wide suspicious activity information sharing, as
well as the exclusion of a Federal beneficial ownership
recordkeeping requirement.
Due to our size and geographic footprint, at Bank of
America, we are one of the largest filers of currency
transaction reports and suspicious activity reports in the
United States. Other than anecdotes about the usefulness of our
reporting, we do not receive direct feedback from the
Government on whether the bulk of our reporting is useful or
not. At Bank of America, in order to try to measure the
usefulness of our reporting, we have developed a metric
tracking when we get follow-up requests from law enforcement or
regulatory agencies for backup documentation relating to our
reports.
Today, we receive such requests in connection with roughly
7 percent of the suspicious activity reports that we file. From
my time in the Government, I know that these reports are used
in many different ways. Most of which do not require the backup
documentation that you can get through the SAR process.
Accordingly, I think our reporting is far more effective than
the metric would say. However, I do not know that for sure.
Measuring the usefulness of suspicious activity reporting
would also help the Government rationalize whether the
reporting, which may be technically required under the law, is
ultimately useful in achieving the goals of our AML/CFT regime.
We are pleased to see the draft legislation would require a
Treasury-led study to review the current reporting regimes
under our AML/CFT regime, and we believe that that is really
important.
The third area we would like to cover is innovation. The
Clearing House supports the language in the draft bill
encouraging innovation. We have some ideas in our testimony,
and we have covered that pretty well there.
With that, Mr. Chairman, we are ready to take questions.
[The prepared statement of Mr. Fox can be found on page 58
of the Appendix.]
Chairman Pearce. Thank you, Mr. Fox.
Ms. Ostfeld, you are recognized for 5 minutes.
STATEMENT OF STEFANIE OSTFELD
Ms. Ostfeld. Thank you. Good afternoon, Chairman Pearce,
Ranking Member Perlmutter, and the distinguished members of the
subcommittees. Thank you for holding this important hearing and
inviting Global Witness to testify.
We are an investigations and advocacy organization that
seeks to expose and break the links between natural resources
and corruption and conflict. For the last 6 years, with Global
Witness, I have been looking at how illicit funds flow through
the system. And there are three things that have really struck
me.
Now, the first is that, in basically every case of
corruption we have ever investigated, anonymously owned
companies have been used to move and hide money. The second
thing I have noticed is it is not just corruption. Anonymously
owned companies are what unite all crimes that generate money.
But perhaps what is most striking is how easy and common it is
to set up an anonymously owned company right here in the United
States. We are at the heart of this problem.
Global Witness is very encouraged that the committee is
interested in advancing beneficial ownership legislation and
strengthening U.S. anti-money laundering laws. A bill that is
fit for purpose needs to collect the right information, make it
accessible to the stakeholders who need it, and ensure that the
beneficial ownership information is kept up to date.
The discussion draft did some of this, but we have a number
of concerns. So my written testimony concerns 14 detailed
recommendations of how you could strengthen the proposed
legislation, but I am going to use the remainder of my time to
briefly discuss seven of them.
So, first, with respect to section 9, the discussion draft
favors bank's access to beneficial ownership information while
severely limiting domestic law enforcement's access, because it
only allows Federal law enforcement to access beneficial
ownership through a criminal subpoena. This means State and
local law enforcement do not have direct access to it, even
though the bulk of U.S. criminal investigations happen at the
State and local level. It also means that Federal agencies that
only have civil and administrative subpoenas aren't able to
access it either.
Law enforcement officers need to be able to acquire company
ownership information quickly and easily without alerting the
subjects of the investigation.
The bill needs to ensure domestic law enforcement has
access, and this includes Federal, State, and local, to
FinCEN's database of beneficial ownership information. At a
minimum, the language in the discussion draft needs to be
amended to allow civil, criminal, or administrative subpoenas
or summons or the equivalent at the State, local, and Federal
level.
Second, the discussion draft also severely limits foreign
governments access to beneficial ownership information. It
excludes cases that involve civil misconduct, like securities
violations, business misconduct, patent and copyright
violations, cybersecurity violations, but it also goes a step
further, that there is language in the discussion draft that
will severely limit its utility to foreign governments when
they are trying to access beneficial ownership information. It
means they can only access it for an intelligence purpose and
not for a law enforcement purpose. For it to serve the law
enforcement purposes of foreign governments, beneficial
ownership information needs to be able to be introduced in
court. This means it could be discoverable at a later date. As
written, it appears to prevent this. It has little utility to a
foreign prosecution.
Third, the discussion draft appears to favor foreign owners
over U.S. applicants. It must require foreign nationals to file
their beneficial ownership information with FinCEN, and this
needs to include submitting a scanned copy of the relevant
pages of their non-expired passport to FinCEN.
Fourth, an enforcement mechanism should be added to the
discussion draft to ensure that applicants file beneficial
ownership information with FinCEN. As written, it doesn't have
one.
Fifth, banks should implement the customer due diligence
rule on time in May 2018. There is a clearly identified need
for banks to be collecting beneficial ownership information for
their customers so that they can assess risk. If this proposed
legislation becomes law, regardless of how long Congress gives
FinCEN to set up the database, it is going to take a
significant amount of time to get it up and running and
populated with the required beneficial ownership information.
Adequate customer due diligence within banks, which is what the
regulation requires, cannot stop in the interim because the
banks need to know its customer does not stop.
Sixth, the CTR and SAR reporting threshold shouldn't be
raised as proposed in the legislation as it would create a
record-free zone for a much larger number of transactions. It
would lift the burden on wrongdoers, like drug traffickers and
terrorists, who must deal in cash, while doing very little or
nothing to relieve any burden on legitimate commerce.
And, seventh, finally, while banks play an important role
in keeping dirty money and terrorist finance from entering the
U.S. financial system, they shouldn't be alone in bearing that
responsibility. Those seeking to move suspect funds utilize the
services of a wide range of professional gatekeepers to the
financial system who handle large sums of money. Company
formation agents, the real estate sector, and transactional
lawyers should also be required to know with whom they are
doing business and engage in efforts to prevent their services
from being used to launder dirty money.
So thank you for inviting me to testify today and share my
views on this important issue. Global Witness looks forward to
working with you and your colleagues on the subcommittees to
strengthen U.S. anti-money laundering framework so we can stop
the U.S. from being a safe haven for illicit money and
terrorist financing from around the world. Thank you.
[The prepared statement of Ms. Ostfeld can be found on page
69 of the Appendix.]
Chairman Pearce. Thank you.
Mr. Poncy, you are recognized for 5 minutes.
STATEMENT OF CHIP PONCY
Mr. Poncy. Thank you, Chairman Pearce, Ranking Member
Perlmutter, and distinguished subcommittee members. I am
honored to testify before you today.
We are confronting a pivotal moment in our 48 years of
combatting illicit finance under the Bank Secrecy Act, more
commonly known as the BSA. As our counter illicit financing
efforts have become more important, they have also become
increasingly challenged. This is provoking fundamental
questions, including about effectiveness, efficiency, costs,
roles, and responsibilities. The combination of these
developments necessitate significant reform of the BSA and the
expanded AML/CFT regime it supports.
This hearing marks an important and welcome opportunity to
discuss how best to pursue such reform. I am grateful for the
leadership of these subcommittees in addressing these issues
for the reasons that my colleagues here have spoken.
The draft Counter Terrorism and Illicit Finance Act
proposes bold and necessary changes required to address many of
the urgent challenges we face, challenges in combatting all
forms of illicit financing, and in protecting the integrity of
our financial system and our national security. Such proposed
legislation also reflects the congressional leadership required
to take action to secure these vital interests.
However, Congress should amend this proposed legislation to
further strengthen the effectiveness and to further promote the
efficiency of our AML/CFT regime. My recommendations for such
amendments are explained at length in my written testimony and
may be summarized as follows.
One, incorporate into the proposed legislation a new
section expanding the objectives of the BSA to explicitly
include protecting the integrity of the financial system and
protecting our national security. Such clarification of purpose
will recognize the heightened importance of what we do through
our AML/CFT regime and will help guide our efforts moving
forward.
Two, incorporate into the proposed legislation a new
section, first, to restructure and enhance financial
investigative expertise at the Department of the Treasury and,
second, to provide protected resources to law enforcement, the
intelligence community, and counter illicit financing targeting
authorities. Such action is required to more effectively and
consistently pursue illicit financing networks. It is also
necessary to fully capitalize on the investments that our
financial institutions are taking to support these efforts.
Three, strengthen section 3 of the proposed legislation to
direct a more aggressive approach for Treasury to enhance
financial transparency. Such action is required to address
longstanding and substantial vulnerabilities in our financial
system. Such actions are also necessary to fully leverage new
technologies and providing more information at a lower cost to
our financial institutions.
Four, strengthen and expand the information-sharing
provisions in sections 4 and 7 of the proposed legislation.
This action will enable our best financial investigators from
the Government to work directly with our best analysts in the
industry to attack illicit financing networks.
Five, strengthen section 6 of the proposed legislation by
directing Treasury to develop and expand initiatives and
consultations with industry. Such initiatives and consultations
should inform priorities for U.S. policies across the full
spectrum of combatting illicit finance, money laundering,
terrorism financing, sanctions compliance, bribery, and
corruption.
Such consultation should also stimulate operational pilots
to capitalize on expanded information-sharing authorities and
capabilities.
Six, amend section 9 of the proposed legislation to support
urgent implementation of the Treasury CDD Rule while supporting
urgently the adoption of company information reform. Both of
these actions are essential to our national security. This has
been discussed at length through two decades of testimony,
including in front of this committee. It is not an option to
pursue company information reform or customer due diligence by
financial institutions. For reasons that have been elaborated
at length in my testimony and from testimony from others for
decades, both of those actions are necessary. I am very happy
to take questions on that issue.
I would like to close with a word of thanks to all of you,
to my friends, partners, colleagues across the AML/CFT
community, and to my family. My family has given me the freedom
to contribute to this mission, both in Government and in
private practice. Finally, I would like to recognize and
welcome Maddy Poncy, an 11-year old reporter from the Hunters
Wood Elementary School, and urge her to continue to educate the
next generation about the importance of public service.
Thank you.
[The prepared statement of Mr. Poncy can be found on page
88 of the Appendix.]
Chairman Pearce. Thank you. The Chair now recognizes the
Ranking Member of the full committee, the gentlelady from
California, for 2-1/2 minutes for comment, opening statement.
Ms. Waters. Thank you very much for convening today's
hearing and for the opportunity to discuss two proposals. One
that sharpens the Nation's focus in countering human
trafficking, and another that would make broad reforms in an
effort to modernize the Bank Secrecy Act. This latter proposal
aims to achieve two important objectives: One, strengthen the
efficacy of our current anti-money laundering framework and,
two, reduce any undue compliance burdens.
These are worthy objectives and are reflected in a number
of important provisions in the bill, including sections that
would address vulnerabilities associated with anonymous shell
companies and provide financial institutions with greater
feedback. Nonetheless, a number of other provisions in the
discussion draft fail to strike the appropriate balance and
warrant additional scrutiny.
In particular, while compliance issues that community banks
and credit unions face is an important consideration, we
should, for example, be careful not to lift SAR and CTR
reporting thresholds if doing so undermines law enforcement's
ability to stop bad actors. Similarly, while the no-action
letter concept and encouragement of the use of technology may
provide welcome clarity for institutions, these provisions need
to be more carefully scoped to minimize potential harm.
Additional care must also be given to address privacy and civil
liberties concerns before altering the information-sharing
powers under the PATRIOT Act. Finally, more must be done to
close other known vulnerabilities and our anti-money laundering
rules, especially in the real estate sector.
So I look forward to the opportunity to working
collaboratively to perfect these missions. And I thank you so
much, Mr. Chairman.
And I yield back my time.
Chairman Pearce. The gentlelady yields back.
We turn now to questions, and the Chair now recognizes
himself for 5 minutes for questions.
Mr. Byrne, in the testimony before the Senate Judiciary
Committee yesterday, the Assistant Attorney General Kenneth
Blanco stated that ``the pervasive use of front companies,
shell companies, nominees, and other means to conceal the true
beneficial owners of assets is one of the greatest loopholes in
this country's AML regime.'' The Financial Action Task Force in
its December 2016 evaluation of the United States anti-money
laundering efforts identified the lack of requirement for the
collection of beneficial ownership information as the most
critical vulnerability in our efforts to combat money
laundering and illicit finance. This law has allowed criminals
to hide their identities and abuse our financial system through
anonymous shell companies. So the rest of the world is
addressing the question far more thoroughly than we are. Is our
country, the United States, at risk of becoming the haven for
criminals?
Mr. Byrne. I don't think there is any question, Mr.
Chairman, that the lack of information gathering that currently
exists is more than problematic.
I think we have always talked about--and Chip alluded to
this in his testimony--we have talked about this in terms of
the CDD Rule being one part of this and beneficial ownership
part of that being separate. The fact that we have States in
this country where corporate formation information is so
limiting I think does make it much easier to create these shell
organizations and these front companies. So I do think--and I
think the FATF is focused on that as well. So I think the fact
that this subcommittee--these subcommittees are looking at
making those adjustments, that there is a rule that is pending,
will go a long way toward helping that, but it does, as an AML
professional, it does concern me about the ease in which
corporate formations issues can occur in the States to be
fronts for illegal activity. Absolutely.
Chairman Pearce. How is the information used by law
enforcement if this beneficial ownership information is
provided?
Mr. Byrne. How is?
Chairman Pearce. How is that information used by law
enforcement? What are the processes? What do they use it for?
Mr. Byrne. Well, for investigative purposes, to follow up.
I would certainly defer to some of my other panelists. But I
think there is a long history of law enforcement saying they
need that information. And I know that the FBI and other
organizations have come before this subcommittee and others to
say how important it is to get access, more access to that
information.
Chairman Pearce. All right.
Mr. Bley, in your testimony, you mentioned the CDD Rule
that goes into effect next May. And you comment that it is
going to place unnecessary burden on our businesses, would slow
the account-opening process, and would increase maintenance
costs.
Can you explain some of the negative impacts on businesses
from a CDD Rule and describe how our proposal would help
alleviate those burdens while still ensuring law enforcement
has the information they need?
Mr. Bley. Absolutely. There is an agreement amongst all the
mid-size banks that collection of this data could add value
from a law enforcement perspective. And the real question is
just what is the most efficient way in which that information
should be gathered, most efficient, not just for banks but also
for all the businesses throughout the country. And we believe
the public sector approach is the most efficient because it
allows for better data integrity, a more efficient process
where businesses only have to submit the information one time
in a consistent way, and it is not impacting their ability to
work with their various financial institutions.
And so the combination of all those affects means it is
just a more efficient and effective program. It also allows all
the information to be centrally captured in one way and
accessible by all those that need it in order to perform their
activities.
Chairman Pearce. Mr. Fox, as the Office of Comptroller of
the Currency releases on an annual basis its bank supervision
plan that sets forth the agency's supervision priorities and
objectives for the upcoming fiscal year, I am interested in how
this process helps financial institutions prepare for their
exams. And then, similarly, would a similar process work for
AML/CFT priorities if the Treasury Department released those
annually? Is that helpful for compliance obligations? Give us
some input on that.
Mr. Fox. Sure.
Mr. Chairman, actually, we study that quite closely because
knowing the priorities of our supervisor, our principal
supervisor in the United States, helps us plan and make sure
that we know what the agency is going to care about, and what
they are likely to come and examine and ask us about, right? So
it causes a focus in the institution and that prioritization
actually becomes, in many ways, the institution's
prioritizations. So that is, it is very helpful for planning.
I think it would be helpful in the AML space. As you know,
one of the OCC's (Office of the Comptroller of the Currency)
principal priorities for the last few years has been BSA AML
exams.
Chairman Pearce. Thank you all. My time has expired.
The Chair now recognizes the gentlelady from Arizona, Ms.
Sinema, for 5 minutes.
Ms. Sinema. Thank you, Mr. Chairman, and thank you to our
witnesses for being here today. Human trafficking is a growing
multibillion dollar problem that demands action by the Federal
Government and Congress. Terrorist organizations like ISIS
employ human trafficking as a means of funding their operations
while terrorizing and tormenting local communities. There have
also been over 36,000 reported cases of human trafficking in
the U.S. since 2007. And nearly 7 in 10 of those cases involve
sexual exploitation.
The rise of the Internet changed the human trafficking
landscape in the United States. Prostitution has expanded from
the streets to the online marketplace where victims, many of
whom are children, are traded to the world.
According to the Department of Justice, traffickers make on
average $150,000 to $200,000 dollars per child. I believe we
have a moral obligation to protect victims of human trafficking
and a national security responsibility to cut off the financial
means used by traffickers and terrorists.
I am grateful to Congressmen Royce and Keating,
Congresswomen Maloney and Love for introducing H.R. 2219, the
End Banking for Human Traffickers Act of 2017, and I am proud
to be a co-sponsor of this bipartisan legislation.
The bill includes the Secretary of the Treasury and the
President's interagency task force to monitor and combat
trafficking. It requires the task force to recommend revisions
to anti-money laundering programs to specifically target money
laundering linked to human trafficking. And I appreciate the
committee's work to improve and advance the bill.
My question for you, Mr. Byrne, and thank you again for
being here today, your testimony has cited the need for greater
private sector expertise and the President's interagency task
force to monitor and combat human trafficking. Can you expand
on some of the concerns you have about current practices and
tell us what Government might be missing?
Mr. Byrne. Sure. And we do appreciate the drafting of the
legislation.
I think, as I said in my testimony, one of the things that
perhaps the private sector hasn't done well is explained how
much has actually gone on proactively against human
trafficking. In my previous role with the ACAMS organization,
we began a relationship with Polaris, as I think the committee
is aware. It is a well-respected international anti-human
trafficking organization. And what we have been able to do with
Polaris--and just met with them 10 days ago--is sit down with a
number of bankers that do analytics and with Polaris' staff--
they have just recently come out with a study on new typologies
on human trafficking--and to try to put those two groups
together to create more red flag indicators, more examples
where banks could be--and financial institutions in general--
can be on the lookout to report human trafficking activity,
whether it is forced labor, sex trafficking, all the different
categories. So that relationship with Polaris occurs outside of
any regulatory requirements.
Previous to that, the number of large financial
institutions, including Mr. Fox's Bank of America, worked
closely with Homeland Security to do something similar 3 to 4
years ago. They created a number of, again, red flags and
indicators. And we published that--``we,'' meaning the trade
association--we published that to the broader AML community so
they could be better prepared to look for activity that could
be indicators and file suspicious activity reports.
So Homeland Security has done a tremendous amount of work
here. They have been with Operation Blue and all the other
things that--the Blue Campaign and everything else that they
have done--have been tremendous partners. But there is a lot of
private sector expertise that we are beginning to share with
the public sector that I think can enhance how we look for,
report, and detect this. And so there is a lot of information
out there.
What we are doing with Polaris will be available probably
early next year and certainly can make the committee--make that
information available. But you should feel somewhat comforted,
as horrific as this crime is and has challenged the world for
so long, that the private sector is working very diligently
with both the public sector and groups like Polaris to deal
with this.
I would only say this about the legislation. Whatever gets,
quote, ``required,'' if you consult with the private sector in
terms of training and other issues, I think it would make it a
better piece of legislation. But the theme makes a lot of sense
and I think would go a long way to continue to help in this
very challenging space.
Ms. Sinema. Thank you, Mr. Byrne.
Mr. Chairman, I yield back.
Chairman Pearce. The gentlelady yields back.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger, for 5 minutes.
Mr. Pittenger. Thank you, Mr. Chairman, and excuse my
voice.
I would like to thank each of you for being here today.
Your input, advice, is very important for this committee. I
would like to particularly thank Mr. Fox and Mr. Poncy for the
extraordinary role that you played in building a stronger
collaboration with our partners throughout the world, and over
60 countries have benefited from your input and your direction.
To that end, I would like to ask you, Mr. Fox, that, in
your opinion, what do financial institutions--what type of
difficulty do they have in sharing information with our law
enforcement and as it relates to similar investigations with
other countries around the world? Can you speak to those
challenges?
Mr. Fox. Sure. Congressman, thank you very much. And thank
you for your comments.
I think that the sharing of information, both vertically,
if I can call it that, from the Government to the private
sector, and then among the private sector themselves is one of
the most important ways that we can attack illicit finance. And
some of the really serious problems that Ms. Sinema--was
speaking about with human trafficking and things like that. I
think one of the challenges that we have is that we have
authority here in this country through the U.S. PATRIOT Act
provisions to be able to do that. It is done aboveboard. It is
done with care. But at the same time, it is done robustly.
And we, you are aware, Congressman, about our consortium of
banks that has really made a difference in some of these areas,
like human trafficking and other more sensitive areas.
So that is a great, great thing. The difficulty is sharing
with other governments, and that sort of thing. The U.K. itself
has developed a little bit different system. They are using a
committee format, something that they call the Joint Money
Laundering Investigations Task Force, the JMLIT. And that has
worked well in the U.K. We participate in the U.K. because we
are there. And we think that that works. And in fact, in some
ways, it is nice because you always have to come to the
committee and you have to come with something. So there is
always a topic to talk about.
But other jurisdictions, it is not as easy to share
information, either with financial institutions themselves or
vertically with the Government without some extraordinary
process.
Mr. Pittenger. Does law enforcement provide you with a
request for information through a 314(a) request or some other
matter?
Mr. Fox. Well, Congressman, we get the routine requests
that we get from FinCEN every 2 weeks. But I think, more
importantly, law enforcement has really stepped up over the
last year, year and a half, I would say, maybe 2 years, with
requests and with work, kind of almost joint work with 314(a)
information. And that has made a huge difference for those
investigations and those law enforcement agencies when they
have done that.
Mr. Pittenger. Thank you.
Mr. Poncy, currently it is difficult for financial
institutions to share information across borders with other
branches of the same institution. How does this actually create
more risk in the financial system?
Mr. Poncy. Thank you, Representative Pittenger. And thank
you for your leadership on the Task Force to Combat Terrorism
Financing. You guys have done terrific work over the last
several years, both here and abroad. I want to recognize that
and thank you for it.
The cross-border information-sharing issue is central to
our efforts to understand risk. When you look at how the
international financial system works and the bad guys that we
are chasing through it, anybody worth chasing is in several
different places, different institutions, different countries.
And if we are not able to connect those dots, we are in a very
difficult position, whether in industry or in Government,
trying to figure this out.
The idea of allowing a financial institution to share
information with its branches, its affiliates abroad, which is
captured in the proposed legislation, is overdue and will be
very helpful.
As I argue in my recommendations, I think there is more
that we can do. Part of this challenge is cross border. Part of
this is the way that we share information and who is in the
room, what kind of information we are sharing. Think of it this
way: The way that the BSA was developed was transactional and
reactive. We were looking for specific individuals and actors
and specific institutions based on specific transactions or
vice versa. The way the system works now, we have the ability
to turn the lights on. We have the ability to look at risk more
systemically with more information to identify patterns of
activity proactively. The more that we can do to allow our
institutions and our authorities to work together with more
information using the latest technologies to understand what
risk looks like and then pursue it, the more effective and more
efficient we will be. Those principles are clear. The real
question is, how do we get from here to there?
I think what you have done in this proposed legislation, to
put Treasury in a position to manage this, is exactly the right
way to go. And there are more details in my specific
recommendations, but that is the general thrust.
Mr. Pittenger. Thank you.
Chairman Pearce. The gentleman's time is expired.
The Chair will now recognize the gentlelady from California
for 5 minutes for questions.
Mr. Perlmutter. She is not here.
Chairman Pearce. I will recognize the Ranking Member for 5
minutes, Mr. Perlmutter.
Mr. Perlmutter. Thanks, Mr. Chairman, and thank you to our
panelists.
I appreciate your testimony.
So, Mr. Poncy, you are talking about exactly the purpose of
this bill, that we are trying to be more effective, more
efficient bring ourselves into this century with the
legislation, with the innovation, that is possible. And I think
both sides of the aisle are supportive of this.
We have seen that there are just a lot of ineffective kinds
of requirements of the financial industry to try to prevent bad
guys from doing bad things. We want to be better at that. One
of the big expansions, however, is in section 4, page 5, of the
proposed legislation, lines 8 through 16. And it is a very
innocuous section, but it is a pretty big expansion. So it
says, in this, we change the PATRIOT Act--and I would open this
to all panelists--by striking ``terrorists or money laundering
activities'' and inserting ``terrorist activities, money
laundering activities, or a specified unlawful activity as
defined in section 1956(c)(7),'' which seems pretty limited on
its face, except, if you go to that section, there are a couple
hundred crimes, from endangered species to pollution to
nutrition to housing to mail theft.
Can somebody explain to me why we want to expand it in this
fashion? Because this is a hot button spot for privacy
advocates and others.
Mr. Poncy. Thank you so much, Congressman Perlmutter. That
it is a great question.
The frustration is, when you look at the expansion of money
laundering and money laundering predicates over the past 30
years, it is astounding. We started in the BSA looking for
cash, looking for drug money, looking for tax compliance. It is
now clear under global standards and under U.S. law, under
1956, that all forms of serious criminal activity create
proceeds that then are subject to money laundering prosecution,
confiscation, and pursuit. We need those authorities. They
exist now in 1956.
The question is, if you are trying to understand risk in
the financial system, you may see something that doesn't look
right, you may think it is suspicious, you may not know if it
is money laundering, terrorism financing, you may not know if
it is fraud. If you have to tie that information-sharing
request to a specific understanding of money laundering, you
are going to put a chilling effect on information sharing.
If you expand it to say we already have money laundering
covering everything in 1956 for a reason, enabling our
financial institutions to share information even where they are
not sure whether it is a predicate offense or money
laundering--is it an act of money laundering? Is it an act of
crime?
There have been rulings and administrative rulings from
FinCEN on this that are fairly narrowly interpreted, because it
concerns the way 314, the PATRIOT Act, was written. What is
very clear in the debates over the last 16 years is that that
expansion that you have read is going to enable more sharing of
information around what everyone agrees is suspicious or
criminal activity but might not qualify under the narrow
constriction of 314. That is the intent.
Mr. Perlmutter. I think the concern that was raised by the
defense bar was that it is just a very big expansion and that,
potentially, whether it is the banking institutions or some
others are now really detectives all the time and a fear that,
instead of we get more limited in SARs, we are now expanding
SARs. So just a general concern for those of you to think
about.
The second area I would like to talk about is really Mrs.
Maloney's section of the bill on beneficial ownership. And the
complaint that I have received is initially, should the
financial institutions be the police or the initial detectives,
should the lawyers be that, or should it be somebody else?
I would just open it up to the panel, why this burden
should be shifted at all and whether or not the IRS ought to
play a role. Mr. Hill has mentioned to me, everybody sends
their tax return into the IRS; why don't we just use them as,
in effect, a clearinghouse?
And I would just open it up in my last 12 seconds to
anybody who can answer it--in now 8 seconds.
Mr. Fox. Thank you, Mr. Ranking Member.
Listen, I think we all just recognize that the information
is highly valuable to law enforcement. We think that by the
financial institutions collecting--we want the information,
frankly, ourselves. We can use it to do our work. Right? But
the fact is law enforcement is not going to have ready access
to our data unless they have a reason to suspect that some
entity is doing something untoward and they could subpoena.
So we actually support that. I think Mr. Hill has a really
interesting idea where some recipient gets this. I think it
should be studied and thought about a little bit, but we at The
Clearing House support it. Because we think the information
should be gotten, and it shouldn't be the institutions just to
get it.
The other thing to remember is that the institutions are
going to collect to the rule, which is 25 percent. If it is
less than that--
Mr. Perlmutter. You won't.
Chairman Pearce. The gentleman's time has expired.
The Chair would now recognize the gentleman from
Pennsylvania, Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Bley, section 2 of the Counterterrorism and Illicit
Finance Act addresses threshold updates to currency transaction
reports and suspicious activity reports.
Can you describe to us how increasing the CTR/SAR
thresholds would reduce regulatory burdens on financial
institutions and their customers?
Mr. Bley. Certainly. Thank you for the question. And I
have, actually, two answers to that.
I can give you the exact numbers. We do our analysis, and
we can see that increasing the thresholds is going to reduce
the number of filings. It is a pretty straightforward
calculation. And it is impactful, because there are a
significant number of large--a large volume of small-dollar
reporting and filing that takes place.
But, frankly, the MBCA's view on this is not that the
actual threshold level exactly or precisely is what is at stake
here; it is really part of a holistic solution to improving the
efficiency of the program. Having an excessive number of false
positives, an excessive number of filings on small-dollar cash
transactions is just not going to deliver valuable information
that is going to be of significance.
But, ultimately, what we believe is best is the combination
of everything. And one idea that we put out is the possibility
of some form of--a different form of reporting that would be
more efficient and effective for smaller-dollar reports.
And so it doesn't, per se, matter whether it is a $30,000
limit or a $25,000. What matters is that it is an efficient and
effective delivery of small-dollar information. But we also
believe that, fundamentally, the sheer volume that is being
submitted could not possibly be used effectively for
investigations. It might ultimately connect to a financial
crime, but we are talking about numbers that are so extreme, it
is hard to believe that it could be as valuable.
Mr. Rothfus. If I could move over to Mr. Fox, could you
give us a little more background on the SARs? Can you please
describe how a SAR is triggered and why certain activities,
regardless of the transaction amount, trigger them?
Mr. Fox. Sure.
So what we do and what I think most institutions do is that
we have sophisticated systems or processes, if you are not big
enough for systems, to really try to detect what could be
unusual activity, right, for our customers. So it all starts
with your customer, knowing your customer, knowing what is
normal for them, and really understanding what could be.
If you see activity that just doesn't make sense for either
that type of customer or you see activity that really does look
bad, then that gets escalated to an investigation, where an
analyst actually looks at that material and will make a
judgment about whether or not it is suspicious.
Suspicion is a pretty low threshold. Actually, it is one of
the lowest, I think, in the Federal system. But it still is a
threshold. So if we think that the facts--these are fact-based
judgments--demonstrate that there is something that is
suspicious, we will then move to file a report on it.
Mr. Rothfus. And, to be clear, increasing SAR thresholds
should not deter filings of suspicious reports of any amount,
correct?
Mr. Fox. I don't know that for sure, sir. I don't think it
would with us. I think we would continue to file suspicious
reports.
The danger of increasing a threshold, I think, is that you
could say that--right now, we do not file SARs unless it is
extraordinary under the $5,000 threshold that exists today.
Right? So what we take that rule to mean is that the Government
has told us that they are not interested if it is below $5,000,
with some exceptions. But if we see something that is odd at
$100 or $25 that we think could be related to something
serious, we are going to file that SAR.
Mr. Rothfus. Mr. Poncy, as you know, the Counterterrorism
and Illicit Finance Act details a no-action letter policy that
is meant to increase certainty for institutions.
How important is it that we allow financial institutions to
experiment with their AML programs for the purposes of
improving their efforts to identify money laundering and
terrorist financing?
Mr. Poncy. Thank you, Congressman.
I think such experimentation is incredibly opportunistic.
The compliance officers and the risk managers we have in our
financial institutions are increasingly entrepreneurial, and
the more that we can encourage them to think with us on how to
assess and manage risk, the more effective our system will be.
Giving them the latitude to do that involves two things.
One, they have to be protected from downside exposure. If there
is any exposure--as a general counsel for a financial
institution, it is very difficult to say, I want to go play in
that game where we can find bad guys if it is going to expose
me to regulatory risk or to enforcement risk. It is very hard
to responsibly allow that. So we have to cover the downside
risk for well-intentioned and legitimate efforts to pilot new
innovation. We have to do that.
Second, there has to be upside for that to say, I am going
to now put resources out of where I know I need them because my
examiner and others are telling me and put them in a place
where I can experiment and try to be better. What is my upside
in that? There are ideas that Treasury or ideas that these
folks have that we have talked about for literally a decade.
Again, the structure of management in the BSA here is
critical. And putting Treasury in a position where it could
aggressively cooperate with industry in stimulating these sorts
of operational pilots, I think, will create a market on how
better to assess and manage all the risks that we care about,
from terrorism financing to money laundering, to human
trafficking, to tax evasion, to bribery and corruption.
Mr. Rothfus. I thank you. And my time has expired.
Chairman Pearce. The gentleman's time has expired.
The Chair would now recognize Mr. Lynch for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman and also the Ranking
Member, for arranging this hearing. You have been doing great
work. I really appreciate it.
And I want to thank the witnesses for helping the committee
with its work, as well. Thank you.
I have to say that I think there are a lot of good things
that are being raised in this discussion draft. There are one
or two things that concern me on the negative side. And that is
raising the cash transaction, the reportable amount from
$10,000 to $30,000.
So, right now, if you have a transaction $10,000 or over
the bank will take identification, a license, a Social Security
number, and make that whole report. The draft discussion wants
to raise that to $30,000. Now, this is a per-day limit. So,
under the discussion draft, if we went to $30,000 in cash, you
could literally take $179,000 in cash, in transactions--and
that includes deposits, withdrawals, and currency exchange, so
if we are changing from dollars to rubles or rubles to
dollars--you can basically do $180,000 or just $179,000 in cash
per week and not trip the wire for reporting if this discussion
draft passes unamended.
So I have a great concern about that. I think that the
$10,000 was there for a reason. And I know it is a 1972
standard, I think, so we need to change that. But I don't think
going to $30,000 in cash per day is really warranted. I think
we might want to take a little bit more cautious approach.
The other thing is I would love to have the Financial
Crimes Enforcement Network personnel here at this hearing,
because I have had discussions with them, the same issue. I
have said, do we really need all these CTRs? We have got tens
of millions of cash transaction reports and suspicious activity
reports; can you even look at these? And they say they need
them all. And I know they are looking for a needle in a
haystack, I said, but now you have this huge haystack.
So I asked the folks at FinCEN, I said, do you need this?
And they said, yes, this helps us catch the bad guy. We need
context. We need all those reports. That is what they tell me.
But I would really like to hear--maybe in a future hearing
we have the folks whose job it is to catch the bad guys, have
them come in and tell us why they need this stuff and demand of
them some accountability.
Because I think you are on the right track; I don't think
we need all of these reports. As a matter of fact, it can bog
us down, by getting too much information. But I think we need
to right-size it rather than blow the lid off, as might happen
under this discussion draft.
So, Ms. Ostfeld, thank you very much again. I know we
worked before on some of the anti-money-laundering stuff.
The report by The Clearing House starts with the premise
that, quote, ``the current anti-money-laundering and combating
the financing of terrorism statutory and regulatory framework
in the United States is outdated and, thus, ill-suited for
apprehending criminals and countering terrorism in the 21st
century.''
Is that really true? I mean, we deal with FATF, right? A
hundred and eighty countries. And they review each country at
least year to year, some of them more often. Are we really
doing that poorly that we have to throw out this system? Could
we undermine some good things that we are doing by changing
everything?
Ms. Ostfeld. Thank you, Congressman Lynch.
I can't speak for The Clearing House report, but what I can
say is that we haven't updated these laws in a very long time,
and investigation after investigation continues to reveal dirty
money getting into our system. So, while I wouldn't say we want
to throw out all of our money-laundering protections, there are
concrete steps we could take to strengthen it.
And so some of that is putting this customer due diligence
rule into play in May of next year, as the regulation stands.
Another piece is ensuring that it is no longer possible to set
up an anonymously owned company in the United States.
Mr. Lynch. Right.
Ms. Ostfeld. The rest of the world is moving on this. And
while we used to be the leader--we were the first country
really talking about this, all the way back in 2008, but, since
then, the U.S. hasn't moved forward.
FATF told us in 2006 we are not compliant. They told us
again in December 2016 we are not compliant. And the United
States was part of developing those rules and pushing them
around the world.
And so you have now every EU member state has to put into
practice a central beneficial ownership registry. They are all
doing this. They are all in the process of--
Mr. Lynch. But we are not, right?
Ms. Ostfeld. And we are not.
Mr. Lynch. Right. Well, I appreciate that.
Mr. Chairman, I yield back the balance of my time.
Chairman Pearce. The gentleman yields back.
And the Chair now recognizes the gentleman from California,
Mr. Royce, for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
And I will start again with Stefanie Ostfeld. Thank you
very much. Let me ask you a question on human trafficking and
the fact that traffickers are increasingly using the financial
system in order to fund their illicit activities. And, clearly,
many countries are lagging behind our system here.
But do you think you would be supportive of a new standard
here in the State Department's Trafficking in Persons Report to
include whether foreign governments have a framework in place
to prevent financial transactions involving the proceeds? And
we are talking about severe cases here, trafficking underage
girls, things like that. But what would be your position on
that?
Ms. Ostfeld. Well, thank you, Mr. Royce. I would obviously
have to look at it to put forward a clear position, but, yes,
that makes sense to me, that the State Department would report
on that.
Mr. Royce. If you could take a look at my legislation on
this, I would appreciate it very much.
And the next question I was going to ask, maybe of Mr. Bill
Fox or anybody else that wanted to comment, but the
Counterterrorism and Illicit Finance Act requires Treasury to
issue rules permitting a financial institution to share
suspicious activity reports with their foreign branches.
And so here is the conundrum. I support this concept, which
would improve enterprise-wide management, but my own introduced
bill would expand similar SAR sharing under two conditions. The
first condition would be the foreign branch or affiliate must
be located in a country that is a member of the Financial
Action Task Force or is part of a FATF-style regional body.
And, second, such country must have adequate privacy and data
security protections in place.
So, Mr. Fox, if you would like to begin to opine on that,
and then I would like to hear other members of the panel.
Mr. Fox. Thank you, Mr. Royce. I agree. The Clearing House
supports the language that is in the draft bill to be able to
share.
I think one of the challenges, if you just take a look at
the J.P.Morgan enforcement action involving the Bernie Madoff
matter, it is a classic example of what happens when
information can't be shared across border for a financial
institution. And so--
Mr. Royce. I understand that part of the problem. But look
at it from the standpoint of the risks to allowing SAR sharing,
on the other hand, with foreign branches or affiliates in
certain countries. And you have to get an appropriate way here
to ensure that widespread information sharing between
institutions within the same family still protects sensitive
information, given some of these governments, because you can
have foreign access.
So that is the balance I am looking for here, and that is
why these provisions are out there in the legislation we are
pushing.
Mr. Fox. I think it is a sound issue to raise. I really do.
I think we would, of course, manage the sharing of any
information throughout our program in the way that we would do
things. And there may be information--if we had the authority
to share our actual SARs or SAR information across border, we
would take a look at that and determine whether or not we were
comfortable in a particular jurisdiction that that information
was safe and secure. Because, again, these are reports about
our customers, right? We don't want that out. We don't want it
leveraged in the wrong way.
So I think we would do that anyway, but I think you have
raised a very good issue that should be thought about pretty
heavily.
Mr. Royce. Any other perspectives on my legislation on
this?
Yes?
Mr. Byrne. Congressman Royce, I think those standards that
you have articulated make a lot of sense. I think,
historically, the reason why they could not share in the past
has been because regulators and enforcement lawyers have said
what you just alluded to: You can go to some countries where
the controls are not that strong.
So having it at a FATF or a FATF regional organizational
jurisdiction I think would give both comfort and structure to
this and could get us to a place of enterprise risk management,
which we desperately need.
Mr. Royce. And leverage them into similar arrangements.
Mr. Byrne. Absolutely.
Mr. Royce. Thanks, John.
Any other input there?
Mr. Poncy. Just very quickly, Congressman. Those are great
interests.
I would just again point to the need for ownership at a
tactical level of these issues. We have members in FATF--I was
the head of the U.S. delegation to FATF for a number of years.
There are members of that whole body that we are not very
friendly with and that we have real concerns with. It is a good
marker. Another good marker is reciprocity. You have to give to
get. We need information from others as well.
There are a set of factors that I would be happy to work
through with your staff to look at, these are factors of
consideration that Treasury should be considering when
certifying this kind of information sharing. I think that is
smart. And it is going to be impossible to legislate that on a
country-by-country basis. I think you need to delegate that to
Treasury underneath criteria that I would be happy to work with
your staff on.
Mr. Royce. Thanks, Chip.
Thanks, Chairman.
Chairman Pearce. The gentleman's time has expired.
The Chair now recognizes Ms. Velazquez for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Ms. Ostfeld, I share Mr. Royce's concern about developing
methods for financial institutions to share information on SARs
with their foreign affiliates and branches. However, I am
worried about the civil liberty and privacy concerns that arise
with the expansion of information sharing, particularly in the
overseas conflicts.
What safeguards would you recommend to ensure that civil
liberties and privacy safeguards are not eroded?
Ms. Ostfeld. Thank you, Congresswoman.
So, right now, as has been said by others, there is
information that banks can't share with other parts of the
bank, much less its foreign counterparts, without risking a
lawsuit. This doesn't make sense. And so that is what I think
this part of the bill is trying to get at.
For that reason, we support the effort to expand that.
However, it is definitely worth taking into account civil
liberties concerns and scrutinizing them further. It definitely
should be something that is looked at, to make sure that
safeguards are put into the bill, that it doesn't have any
other kind of effects that weren't intended.
Ms. Velazquez. Yes.
Mr. Fox, would you like to comment?
Mr. Fox. Sure. I think that there is always going to be a
balance between privacy and information sharing. And I think
that the way we view it at Bank of America--and I think member
institutions at The Clearing House feel the same way--is that
we are stewards of that, right? We have a responsibility to our
clients and our customers to keep their financial data safe and
secure.
Ms. Velazquez. Thank you.
And, Ms. Ostfeld, in your testimony, you indicate that we
should be encouraging banks to incorporate new technologies
into their compliance activities but warn that it must be done
responsively.
What technological innovations should we be encouraging,
and what safeguards would you recommend?
Ms. Ostfeld. Well, I think it is important to either task
Treasury or Treasury and the regulators to incentivize these
innovations. Because I think the concern is, how will banks
move forward with this? And the point is for them to look into
this, to work with the banks on this, so banks at an early
stage can be checking with the regulators to see what they
think works for any particular process.
Ms. Velazquez. Thank you.
Mr. Fox or Mr. Bley, in our letter to Secretary Mnuchin,
Representative Royce and I also raised the need for law
enforcement to provide feedback to financial institutions on
the effectiveness of their SARs.
How would you implement a process to provide financial
institutions with feedback to improve law enforcement outcomes?
Mr. Fox. Thank you, Congresswoman. That is a really
important issue. I really enjoyed that letter, by the way.
Let me tell you, I think that this is why this is
important. We get feedback from law enforcement and from FinCEN
anecdotally, and that is always good to hear, right? It is
always good to hear that you are actually helping. But to be
honest with you, we don't get bulk feedback on our filings.
The reason it is important is that we tune our systems
based on our own decisions of whether to file, mainly for other
factors, too, but mainly for those decisions. So if we have
those decisions wrong, we could be creating an echo chamber
that just causes worse filing, right? You know what I mean? So
if they could just give us a thumbs up or a thumbs down.
It is a little bit like, if you have ever been through
Heathrow and you hit the smiley face at the end of the
security. It is either a smile or a frown. If we could just get
that kind of feedback about our filings, we could do wonders
with tuning our filings to make them better, more focused. And
then you would separate the wheat from the chaff, if you will,
and leave innocent customers out of that reporting. It would
actually make us better that way.
So we think that is a really important point that you
raised and--
Ms. Velazquez. Thank you.
Mr. Bley, what is your take?
Mr. Bley. I concur wholeheartedly with Mr. Fox. It is
exactly the scenario we have. If we can get information back,
we can tune better and we can deliver more meaningful
information. That is the end of the story.
Ms. Velazquez. Very good. Thank you.
I yield back, Mr. Chairman.
Chairman Pearce. The gentlelady yields back.
The Chair now recognizes the gentleman from Texas, Mr.
Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman and also Ranking
Member, for your work on this issue.
I believe that the legislative proposals before us today
largely represent steps in the right direction toward combating
the abuse of our financial system by bad actors. Our framework
is in need of an update, and I look forward to the testimony
provided by all of you today. And thank all of you for being
here. Appreciate it.
My first question, Mr. Bley--and thank you for being here
today as a representative of the Mid-Size Bank Coalition of
America. I appreciate your testimony and look forward to your
knowledgeable answers to my questions.
Now, when considering a reform of this nature or any
legislation, for that matter, the impacts a proposal will have
on consumers and small businesses are a foremost concern of
mine since I am a small-business owner of 44 years and
understand the need to help Main Street. And I am Main Street,
still own my business.
As you rightly point out in your testimony, community
financial institutions are already struggling under the Dodd-
Frank Act, and the need for them to provide BSA and AML
compliance can sometimes mean the difference between
profitability and operating at a loss and even job loss.
Further in your testimony, you mention that all of the
ideas in the bill have merit. However, one specific idea I
would like to discuss with you is the proposed CTR threshold
change. This committee should strive to provide regulatory
relief for institutions while at the same time increasing the
usefulness of information that you refer to.
So what current resources do MBCA institutions devote to
CRT filings, and what relief will the proposed ruling's
threshold change to $30,000 provide? And then what--and we have
talked about this--and then what relief will this provide to
community financial institutions?
Mr. Bley. Thank you for that question. And I will give you
information on the impact, directly to your question, but I
also want to emphasize that just changing the thresholds isn't
the solution to this problem. It is part of a holistic package
of making the information more meaningful and more significant.
And we really applaud the broader solution that is on the
table.
But it is important to recognize that just changing a
threshold itself reduces the size of that haystack of
information that is out there. And for midsize banks, we
estimate CTR filings would drop by 50 to 80 percent, and that
was with the original $25,000 limit that was in the bill
earlier. And SAR filings would probably drop by 8 to 10
percent, structuring filings would drop.
There are just so many--and that, together, represents
about 10 percent, 8 to 10 percent, of the staff within the BSA
organizations that are just looking at the hundreds of
thousands of CTR and small-dollar report filings every year.
Mr. Williams. OK.
Another question for you. One of the problems you identify
in your testimony is the high rate of false positives that are
generated by transaction monitoring systems. One way the
proposal before us seeks to lower that rate is by allowing for
increased adoption and innovation in artificial intelligence
software used by financial institutions in reporting.
So how have midsize banks benefited from the innovative
machine learning pilot programs? And how can artificial
intelligence in reporting benefit financial institutions across
the spectrum, from large to small?
Mr. Bley. This is particularly impactful for midsize banks,
because we just don't have the scale and scope to be able to
spread the cost of analyzing the information that is just
ultimately proved to be unuseful. Generously, a 90-percent
false-positive rate is really an unacceptable outcome for a
successful program.
We have been investing in the same kinds of tools that the
large banks have been using, very high-cost, sophisticated
tools. And they are generating more meaningful alerts to us,
but, at the same time, the tuning process and the regulatory
environment that will analyze your tuning process to ensure
that you are calibrating appropriately is just not working. It
doesn't get you to a lower false-positive rate.
And there are a number of ideas that have been put out with
the midsize banks. In fact, we have worked very closely with
the OCC to try and identify techniques that we could use. So it
is both the tools and also intelligent ways of applying the
tools. And the regulators have worked productively with us on
ideas, but, ultimately, we don't know and they don't know what
is acceptable without good collaboration with Treasury, with
FinCEN, to make sure that this is an acceptable application of
the rule.
So I think the moral of my story is that they were
investing in the tools but we need more collaboration in order
to put that into practice and make the information that much
more meaningful.
Mr. Williams. Thank you for your testimony.
And I yield my time back.
Chairman Pearce. The gentleman yields back.
And the Chair now recognizes the gentleman from Georgia,
Mr. Scott, for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
This has been a very informative panel. And I would like to
let you know that I am Co-chairman of the Congressional FinTech
Caucus. And I truly believe that both our anti-money-laundering
and the Bank Secrecy Act, they offer great opportunities for
our FinTech companies to come together, partner with our banks,
and come up with some innovative solutions to this. And I think
that if it is done right, it can both ease the burden on banks
struggling to meet their requirements while also improving the
job banks are doing at threat detection and risk management. It
is a win-win situation.
So, Ms. Ostfeld, let me start with you. And as one graduate
of the University of Pennsylvania to another, let me welcome
you to your testimony to the Financial Services Committee. But
after reading your testimony, I find that you agree with me
about the use of technology.
Now, in a couple of pages in your testimony, you say this,
on page 3: ``Use of new technology should be encouraged, but
must be done responsibly. A section of Treasury should be
created or tasked with reviewing, approving, and monitoring the
use of new technology by financial institutions. There should
not be a safe harbor provision.'' And you say that in two parts
of your report.
And then you also say that you are ``supportive of banks
incorporating new technology into their compliance activity.
However, we are not supportive of the sweeping nature of safe
harbor positions.'' And, quite honestly, I couldn't agree with
you more on that.
However, in section 7 of this legislation we are taking, in
the Counterterrorism and Illicit Finance Act, my Republican
friends want to provide an explicit safe harbor for financial
institutions that use technological innovation to fulfill the
bank secrecy minimum and the anti-money-laundering program
requirements.
So, when you look at your testimony there--and let me just
ask you this, Ms. Ostfeld. Do you think that without the safe
harbor that banks would have an incentive to invest in these
new technologies and partner with fintechs?
Ms. Ostfeld. Thank you, Congressman Scott.
Yes. I think something that could happen is Congress could
direct the regulators to create innovation programs. This is
something that could happen which would include consultations
with the banks so that everybody is actually working together
to come up with these new ideas, and it makes it clear to banks
that banks are working with regulators early on in this
process, what they think will actually work to help them with
their compliance obligations. I think it is something that
could absolutely happen without a blanket safe harbor.
Mr. Scott. Well, thank you very much for that.
Mr. Chip Poncy, can you comment on what actions Congress or
the White House could take outside of the safe harbor that
would ensure that financial institutions are implementing the
latest advances in threat detection as they fulfill their Bank
Secrecy Act and the anti-money-laundering obligations?
Mr. Poncy. Thank you, Congressman.
I do think that there are steps that both Congress and the
Administration should take, and I have elaborated on those in
my testimony.
But I think the easiest way to understand this is,
technology is used in a lot of different ways in compliance.
Think about this from the perspective of a customer experience.
You walk into a bank, you are identified, you are verified. We
use pieces of paper, we use independent databases to do that.
There is a whole range of biometric technologies that are going
to facilitate the easier verification that somebody is who they
say they are. This is particularly important when you are
dealing with communities that aren't necessarily documented or
parts of the world where identification documentation isn't the
greatest. There is that use of technology.
There is the use of technology to collect, manage, and
protect bulk data. That technology is exploding, the ability to
manage that data in a way that drives analytics to identify
patterns of interest. There are ways that we should be working
to enhance that capability.
And then there are technologies that can encrypt and
protect that data, to address some of the civil liberty
concerns that Congresswoman Velazquez was talking about, that
would allow you to access and analyze that data without
necessarily getting into the personal identifier information
that people are rightfully concerned about.
So there are lots of different ways that technology can
assist in compliance and risk management. To do this well, to
do it strategically and methodically, I would argue you need
two principals. You need somebody to captain the ship. And I
think what you have done with the proposed legislation to start
to put Treasury in a position to manage this and make them
accountable, with the authority to manage it and with the
support of the Administration, from Justice to the regulators,
is one approach, is one factor--
Mr. Scott. Thank you, Mr. Poncy.
Chairman Pearce. Thank you.
The Chair would recognize Mr. Davidson, from Ohio, now for
5 minutes.
Mr. Davidson. Thank you, Mr. Chairman.
Thank you to our witnesses. I really appreciate your
testimony and your expertise in the field.
I want to share Mr. Perlmutter's concerns about privacy
and, frankly, the burden on small businesses--unintended,
perhaps, consequences, perhaps unavoidable consequences. But it
seems that there are a number of ideas that could make this an
easier way to accomplish the mission of securing our country
in, frankly, a more constitutional way. I am very concerned
about the information-sharing apparatus. Frankly, the whole
premise of BSA/AML is, in some ways, deputizing a large swath
of the private sector.
I am also concerned about cybersecurity and a number of
other provisions here. So I know in a few short minutes you
can't cover all that. But, Mr. Bley, we have seen consequences
of data breaches at Uber and Equifax and, of course, the SEC
(U.S. Securities and Exchange Commission), but Government
databases are compromised just like the SEC's was. What
additional safeguards would be included in this bill to ensure
that personally identifiable information of millions of
American citizens are not compromised?
Mr. Bley. I think this is a critically important question
for banks in general, not just regulated to BSA. We are
collecting an intense amount of information from all our
customers, and there is no doubt that cybersecurity and the
ability to protect that data remains of the highest priority
for midsize banks and, I am sure, all banks across the country.
It is our belief that we are going to continue to invest in
the tools that we need to protect our customers' data whether
this bill passes or not and whether or not we modernize the BSA
act.
But that was one of the main reasons that I believe the
beneficial ownership rule should be done at a public-sector
level, because, as it is currently structured, businesses are
supplying information to multiple institutions stored in
multiple environments, and it is really, in some ways, creating
a privacy risk as opposed to reducing it. And so a central
public-sector model should allow for the ability to protect
that more carefully.
Mr. Davidson. What would someone's remedy be if they feel
the ownership structure of their company has been improperly
released or made public from this database?
Mr. Bley. From the central database?
Mr. Davidson. Correct.
Mr. Bley. I think this is something we would have to manage
and that would have to be managed through the central
infrastructure.
Mr. Davidson. What would be the consequences? Is there
anything in the bill where authorities at Treasury would
contain--there are certainly criminal fines and penalties for
businesses that don't disclose things. What about people who
misuse the database? Law enforcement, banks, whomever has
access. Are there penalties or fines for people that misuse the
data?
Mr. Bley. I certainly didn't see that in the bill itself.
Mr. Davidson. Is there recordkeeping to say who has misused
it, whether they have been provided retraining or perhaps
terminated, perhaps prosecuted? Is there anything that would
keep records of that for people that have abused the access to
this information?
Mr. Bley. I am probably not the best person to respond to
that question.
Mr. Davidson. I haven't seen it in there.
And then there are the concerns about the nature of
beneficial ownership. If you were asking who is the beneficial
owner, most people would say, who has control of the company?
But that is not the narrow definition here. It is an incredibly
broad definition which doesn't even make it clear that it has
to be an actual owner. ``Someone who might exert influence.''
It could be a lender. It could be someone on the board. It is
so undefined, it is hard to fathom that we would launch this as
an actual law.
How could we possibly narrow this definition and still
accomplish our mission? To the panel.
Mr. Poncy?
Mr. Poncy. Thank you, Congressman.
And I certainly want to leave room for Ms. Ostfeld, but I
just want to say very quickly: Treasury engaged in a 6-year
rulemaking process; had unprecedented public hearings in New
York, Chicago, Los Angeles, Miami, Washington, D.C.--
unprecedented in the 40-year history of the BSA--to get to
understand what kind of a definition for ``beneficial
ownership'' would work for customer due diligence for financial
institutions.
Is it perfect? I don't know that anyone says it is perfect,
but--
Mr. Davidson. Could they make it more broad? You said they
spent 6 years. In 6 years, they have come up with a definition
that would be hard to imagine finding a way to write it so that
it is more broad than it is today. Surely we can narrowly
tailor this. The Fourth Amendment was very narrow. If there is
probable cause, then you go get a warrant.
Mr. Poncy. So the definition--
Mr. Davidson. My time has expired, and, Mr. Chairman, I
yield back.
Chairman Pearce. The gentleman yields back.
The Chair would now recognize the gentlelady from New York,
Mrs. Maloney, for 5 minutes.
Mrs. Maloney. Thank you. Thank you, Mr. Chairman and
Ranking Member Perlmutter.
This hearing is very important to me because I have been
working on legislation to require disclosure of beneficial
ownership information for almost 10 years, and this is the
first legislative hearing we have had on a beneficial ownership
bill. So I deeply want to thank the Chairman, as well as
Chairman Luetkemeyer, for working with me and Mr. Perlmutter
all year long on this beneficial ownership issue.
At the beginning of the year, I offered an amendment to the
committee's oversight plan that said the committee should
address this beneficial ownership issue, and Chairman Pearce
spoke in favor of my amendment and said he would work with me
on this issue. And he has been true to his word and has worked
very productively on this issue, and I want to publicly thank
him.
Of course, the legislation package that we are considering
today is just a discussion draft, and there are still some
changes that I would like to see made to the beneficial
ownership piece of the package, but I am really encouraged by
the progress we have made.
The issue was first brought to me by a really legendary
district attorney, District Attorney Morgenthau in Manhattan,
who was very famous for cracking a lot of difficult cases. And
he said they could be tracking suspected terrorism financing,
drug money, gun money, sex trafficking money, and they would
hit a wall when they hit the beneficial ownership and no one
knew who they were.
Likewise, we have had problems with the CFIUS process,
where they want to protect ownership in the United States from
any element that might hinder our national security, and they
haven't been able to find out who is buying or trying to buy
sensitive information of the United States because it is in a
beneficial ownership package.
So I think that this is a very important tool for law
enforcement. And it has been endorsed by many levels of law
enforcement. And it would help us to protect our citizens and
to help law enforcement do their job. So I hope that we will
continue to build support of it.
So the very first question that I want to ask, and I want
to ask it of everybody on the panel, just yes or no, and just
go right down the panel, I just want to know: Do you support
this legislation, or the concept of it, requiring companies to
disclose their beneficial owners to Treasury at the time that
the company is formed? Just a yes or no answer.
Mr. Bley?
Mr. Bley. Yes.
Mrs. Maloney. OK.
And Mr. Byrne?
Mr. Byrne. Yes.
Mrs. Maloney. Mr. Fox?
Mr. Fox. Yes.
Mrs. Maloney. Ms. Ostfeld?
Ms. Ostfeld. Yes, we support your bill, H.R. 3089, and we
think that the discussion draft is a good first step but it
needs some amendments.
Mrs. Maloney. Yes. I do too.
Mr. Poncy, president and cofounder?
Mr. Poncy. Thank you, Congresswoman. I agree entirely with
what Ms. Ostfeld just said.
Mrs. Maloney. OK. Thank you. That is a positive step
forward.
I would like to ask Ms. Ostfeld: You and I have worked
together on this issue for many years now, and your
organization, Global Witness, did a fantastic undercover
investigation that was featured on ``60 Minutes'' last year,
where you had undercover investigators posing as corrupt
dictators, and you had them approach 13 lawyers asking for help
hiding money. ``We don't want anyone to know who we are, but we
want to be able to have access, easy access, to our money.''
And, amazingly, 12 of the 13 lawyers agreed to do it, using
anonymous shell companies.
And I encourage everyone to watch this clip. It is a very
important one. And you would hear on it that they said, ``Don't
go to banks, because they will find out who you are. Go to the
LLC. No one will know who you are.''
So my question for you is, what are the most important
improvements that you think should be made to the beneficial
ownership section?
Ms. Ostfeld. Sure. For the bill to be fit for purpose, it
needs to do three things. It needs to collect the right
information, it needs to be accessible to the right
stakeholders, and it needs to keep it up to date. Right now, it
is not accessible to the right stakeholders.
But because the definition has been asked a few times, any
strong definition of ``beneficial ownership,'' for it to work,
needs to have two prongs. You need to understand who actually
owns it, as in shareholders, legal ownership; and you have to
understand who owns the entity, as in effective control. So
this is control by other means. This could be by a trust, power
of attorney, some other kind of way for controlling it, because
you want to understand who is benefiting economically from this
and who essentially pulls the strings, which isn't always the
shareholder.
So any definition needs to encompass both of those prongs,
which both your bill and the discussion draft do that. The
discussion draft was negotiated that it is not quite as strong
as your bill, but it still does that. So we support the
definition in the bill.
However, it makes it very difficult for law enforcement to
access this, both domestic law enforcement--it says only
Federal law enforcement with a criminal subpoena. So this means
State and local law enforcement does not have access to it, and
it means parts of the Federal Government and Federal law
enforcement that doesn't have access to criminal subpoenas,
that only have civil and administrative subpoenas, don't have
access to this. So that is something that needs to change. It
needs to be available for civil, criminal, and administrative
subpoenas or State, local, and Federal law enforcement.
But it also makes it really hard for foreign law
enforcement--
Chairman Pearce. If I could get you to wrap up your answer,
please.
Ms. Ostfeld. It makes it very difficult for foreign law
enforcement to access it. And you need to make sure that what
we are sharing with foreign law enforcement is what we are
asking foreign law enforcement, in return, to share with us.
And it needs to be able to be entered in court.
The other piece is there seems to be a loophole that makes
it easier for foreign owners to--
Chairman Pearce. The gentlelady's time has expired.
The Chair would now recognize Mr. Budd for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman.
And thank you to all our witnesses for joining us here
today and for your time.
I want to use my time to continue to discuss the
Counterterrorism and Illicit Financing Act. There is no doubt
that the Bank Secrecy Act needs an upgrade, where efficiency,
along with safety, is our ultimate end goal. And while there
are provisions in this bill that need addressing, like the new
beneficial ownership requirement found in section 9, I am
hopeful that we can get to a good final product.
So I want to talk through about section 7 of the Pearce-
Luetkemeyer legislation that deals with technological
innovation.
And, Mr. Bley, you stated in your testimony that the BSA is
among the most complicated and costly requirements with which a
bank must comply. And I agree this bill gives them some freedom
to innovate in this space. But does this provision do enough to
help with the community banks or the smaller, midsize banks
that you represent and the credit unions, who don't have the
same financial resources as the larger institutions, to keep
pace with the technological advancements that frequently
change?
Mr. Bley. Thank you for that question.
And I do think it does actually create the framework for
supporting innovation. And there are ideas out there that do
provide support for small and midsize banks that may be
different than what some of the larger banks need to do.
And one such idea that I discussed in my written testimony
is a utility that we have been developing that allows for more
collaboration and consolidation of BSA work and information
amongst the banks with an independent utility. And we have
developed such a thing, and banks are starting to look at how
they can engage with it.
In order to use a collaborative, independent utility, we
are going to need support from the regulators from Treasury to
say this works. And what that does is it allows you to benefit
from the scale that you don't have as a small bank by using a
central source to manage many of the aspects of the BSA
program.
So that is an example that I believe is in the spirit of
what this legislation produces.
Mr. Budd. Good. Thank you.
So the development of AI, or artificial intelligence, is
huge for AML and CFT. But--and this is to all the witnesses--
are there any technologies or advanced programs--or maybe it is
even this utility that you mentioned--outside of AI that could
be added to financial institutions' AML/CFT compliance program
that would enhance the detection capabilities of that
institution?
Mr. Fox. Mr. Budd, thank you for that question. I think the
answer is yes. In fact, I know it is yes.
The key thing to remember about some of these advanced
technologies and what we have learned after piloting a number
of them is that you have to have experts right along with them,
right? You can't just--back to Mr. Scott's point earlier about
fintech. Fintech is great, but you have to have the AML
expertise along with fintech in order to be able to make this
stuff come alive.
We think the biggest challenge for us presently to innovate
is, frankly, that the amount of verification and process we
have to go through to validate what we are doing on a step-by-
step basis under the current regulatory guidance--which was
designed, by the way, for large, complex economic models, not
BSA/AML--has really, really hampered us.
So I can tell you, for example, in just adjusting our
current thresholds in the innovation that we have done today,
we used to be able to do that in a matter of weeks. Today, that
takes 9 months to a year because of the process of having to go
through and prove the negative, if you will, that everything is
working perfectly.
I think there is a balance there that has to be drawn in
order to be able to--well, let me put it this way: It is very,
very hard to innovate in a context like that.
Mr. Budd. Good. Thank you, Mr. Fox.
Anybody else on the panel?
Mr. Byrne. Congressman, the thing that we have talked a
little bit about but not enough, in my opinion, is the
regulators in this space. I think a lot of the problem in terms
of burden and challenge has been the moving goalposts.
So, to Bill's point, with technology, a lot of times, you
will get second- and third-guessed by the regulators when you
want to make a change. They talk a good game about wanting to
support innovation. We need to call them out on that. They need
to actually be in these institutions and working with the
institutions. And I can tell you, at least anecdotally, it
doesn't happen as often as it should.
So I think a lot of what happens in the BSA space is banks
not understanding what the rules are, and rules are being made
up, in terms of different exams, you have different
requirements. So I think in technology, specifically, this
would be a good place for this committee and other
subcommittees to push the regulators to say and do what they
have expressed in other hearings. But this is a real problem.
Mr. Budd. Thank you.
And I believe my time has expired, and I will yield back.
Chairman Pearce. The gentleman yields back.
And the Chair now recognizes the gentleman from Georgia,
Mr. Loudermilk, for 5 minutes.
Mr. Loudermilk. Well, thank you, Mr. Chairman. Thank you
for this hearing. And I appreciate the panelists being here.
Mr. Bley, I wanted to dig a little deeper into a subject
that many have talked about here, the Bank Secrecy Act,
especially the currency transaction reporting.
Back when I had a real life before I came here, I owned a
small IT business. And because of the unbelievable complexity
of our tax laws, I was unwilling to handle my own payroll,
because I figured it would be better to pay somebody else to be
responsible than go to jail myself, right? So, fortunately, now
we are, hopefully, addressing the complexity through our tax
reform.
But during that time period, the way we processed our
payroll, which was twice a month, is I would actually do a wire
transfer to the payroll processing company, which always
exceeded $10,000. Quite often, I was also purchasing equipment
that I didn't have an account with or credit with an equipment
manufacturer, and so sometimes we were wire-transferring
$20,000 or $30,000 to buy a piece of network equipment.
The point being is I generated a lot of transfers of cash
in the normal operation of business. And since 1970--and it was
set at $10,000--we haven't adjusted that. And we began looking
at this early on in the year. And, of course, if you look at
the rate of inflation, we should be at about $60,000 today,
which I have been strongly advocating for. However, I
understand we need to strike a balance between what is a
reasonable amount to not overburden our financial institutions
and what doesn't handcuff law enforcement. And I understand
that the Chairman's bill has that set at $30,000.
Now, I spoke with some of the community banks in my
district, and they really support this approach, especially the
$30,000 level. So I think I am going to be able to be OK with
that. One of them said that 78 percent of their cash
transactions are below $30,000. Another said 92 percent of
their cash transactions are below $30,000. A third, a community
banker in Georgia, said they had 21 employees devoted solely to
BSA compliance--21. That is a lot for a small community bank.
They file 67 CTRs a day, but they almost never receive requests
for information from law enforcement based on a CTR.
So my question for you is, do you think that this $30,000
does strike that balance, to give regulatory relief and provide
the law enforcement the tools they need?
Mr. Bley. We believe it does. We don't get the information
back to know how useful it is, so it is very difficult for us
to put a hard statement on that. But what we think is important
is, whatever number we choose here, it has to be accompanied
with logical adjustments to the way in which this process
works.
One of the facts that we learned from midsize banks is it
takes over 4 hours to file a SAR, to create the work, on each
individual one, with 150 a month in one small bank. The amount
of time to deliver the information is so difficult, is so time-
consuming. And moving to a structured and maybe even fully
automated approach for delivering data, rather than free text
format and a story about the local company that is moving money
totally legitimately, would really be a benefit.
So I think most important is--$30,000, $25,000, they all
seem like very reasonable numbers in today's dollars, but most
important is that the program efficiency and effectiveness
accompanies that. And there is a difference between the larger
dollar and the smaller dollar.
Mr. Loudermilk. What are the typical transactions we see
that are below $30,000?
Mr. Bley. They are essentially the same types of
transactions, but they could be ice cream parlors that are open
in the summertime moving money back and forth between
branches--
Mr. Loudermilk. Similar things I experienced in my
business.
Mr. Bley. It is all the same kind of local businesses that
are wondering why this is a question for them.
Mr. Loudermilk. Another area that I have really been
focused on here is when it comes to a cybersecurity concern,
which is of grave concern right now. And when I was in the
military, I worked in intelligence, and we lived by an adage,
which is: You don't have to secure what you don't have.
Would this actually lessen the amount of data that banks
are keeping on customers, reducing their risk in the cyber--and
even passing on to the Federal Government, which is, of course,
a grave cybersecurity risk, in my opinion.
Mr. Bley. It may reduce the number of detailed
investigations, but all the data is still there. The systems
are still there, and it is delivering alerts. It is just a
difference of how much time is spent on the lower value added
information. And the goal of all of us is to focus the maximum
attention on the things that matter most. But under the current
program, we spend the same amount of time on everything.
Mr. Davidson. Thank you, Mr. Chairman. I yield back
Chairman Pearce. The Chair now recognizes the gentleman
from Arkansas, Mr. Hill, for 5 minutes.
Mr. Hill. I thank the Chairman. I thank the Ranking Member
for this good hearing. And it is good to see that the committee
is considering a complete rewrite of our bank secrecy and money
laundering. We don't want to rush into it since 1970. So it is
good that we are taking it up now. And Mrs. Maloney had her
decade of work on the topic, which I appreciate. And going on 3
years, I feel her pain three times over, I guess.
I want to go back to my favorite subject with Mr. Poncy and
Mr. Fox, already know what it is, which is my feelings on the
beneficial ownership provisions in this bill. I am not a fan of
yet this different approach. And I understand and I appreciate
the efforts to move away from the financial institution burden
and try to, again, streamline it and take a different approach,
but I still find it concerning. I just want to have some dialog
on that. And since I am toward the end of the questioning, you
are well rehearsed on it.
I still say the same comment I made about the Treasury's
rulemaking that is proposed, which is 25 percent standard, as a
former banker for 30 years, is too high. It is ridiculous. If I
am going to now structure a transaction to avoid you, it will
be under 25 percent. Thanks for telling me what the road map
is.
I think this definition is better in the sense that it has
this broader definitional context on control, and yet that then
becomes hard to measure and hard to define and makes the
definition more murky, which I share the concerns, I think Mr.
Perlmutter mentioned at the top of the hearing, that it is
overly broad, hard to get our arms around. And it also has
these new exceptions, nominee, custodian, agent exception. And
yet, of course, that is the prime way that people use to
structure an LLC to avoid detection, is through an agent
process. And yet you do catch them, maybe with substantial
control, but that, again, adds a lot of burden to the process.
And then you have this exception on if they have an
operating premise, a physical office in the United States, they
are excepted. So now we will just quickly form--buy a pizza
company and run everything through the LLC with this, quote,
``physical presence'' exception.
So I just want to challenge our creative process on this. I
do like the idea of the filing concept and the sharing of the
data, and I want to go back to my idea again. We are smarter.
We have to be able to figure this out. We have all this data on
the 1065 that every entity in this country files, and we ought
to figure out a way to use the existing tax filing as a way to
meet this test.
So I would ask everybody, would you--if my filing, my 1065
with FinCEN, would that comply with this information? Forget
the definition for the moment. Would you find that an adequate
disclosure?
Mr. Poncy, you are the great author on this, so I yield.
Mr. Poncy. Congressman Hill, you are being too kind. Look,
you have been one of the most provocative thinkers on this. And
you made, when I was at Treasury, you made us better, and I
really appreciated it.
I can tell you what I was trying to say to Congressman
Davidson about the rulemaking process, for exactly the points
that you have raised, a lot of this requires the type of dialog
and the type of expertise that a rulemaking is designed to do,
right? And so--and the flexibility that that affords and the
ability to make adjustments that do not require congressional
legislation is critical. So delegation of some authority to
Treasury is going to be key, whether on CDD, which we have
done, or whether it is on company information, as the
legislation proposes. That delegation is a starting point.
Second, when you look at definitions of beneficial
ownership, for exactly the reasons that you have explained, we
have this challenge of clarity versus structuring around that
clarity. And one of the key issues in that 6-year rulemaking
process that may attend how this definition ultimately is
formed with the notion of 25 percent is a floor, not a ceiling.
There are higher risk scenarios where financial institutions
will be expected to go below it, and they do. FATCA is a good
example. So 10 percent floor on FATCA. That is a whole separate
conversation, but it is a floor. It is not a ceiling.
Second, no matter what the ownership is, you always get a
controlling officer for precisely the reason of you can
structure under any threshold. So law enforcement was very
clear in saying, not just in the United States but globally, we
want to make sure that there's a natural person at the end of
the investigation that we can squeeze and say, ``You need to
start answering questions.'' The rulemaking from Treasury is
designed to do exactly that. It is not necessarily--
Mr. Hill. Let me reclaim my time because I want to cover--
and Mr. Chairman, Mrs. Maloney had 1 minute 25 over. May I
continue?
Mr. Perlmutter. Ask Mr. Tipton. You are delaying him.
Chairman Pearce. Yes, go ahead.
Mr. Hill. Thank you for that. So I hear you on that. But I
also want to get one other topic in here, which is the issue of
the impact on our secretaries of States on all these
exceptions. I know there is a 2-year period for implementation
here which isn't satisfactory to Ms. Ostfeld for very good
reasons, I think. But, this is shifting burden also to our
secretaries of State, our forms in Arkansas, we don't take into
account all these exceptions; there is no place for that. And I
would really urge you, as you work with our staff, to think
through, how can we take the existing data that we have in a
secure format that is already machine-readable, to use the IT
term, in the 1065 form, where we have K-1's, we know the
ownership, we know the name, we have a responsible person, we
have a tax filer, we don't have an agent, we have principals,
and find a way to let FinCEN access that data.
And thank you, Mr. Chairman. I yield back.
Chairman Pearce. The gentleman yields back.
The Chair now recognizes Mr. Tipton, from Colorado, for 5
minutes.
Mr. Tipton. Thank you, Mr. Chairman.
And I thank the panel. I guess maybe everything has been
asked but not by the same person each time. So I do appreciate
the comments that you have made.
This has been, I think, a very interesting conversation. I
come from a rural district, and a lot of the issues that we
face are faced by our community banks. And we have had
testimony from Chair Yellen on down in terms of some of the
impact, in terms of actual compliance.
I think we also face, in rural areas like mine, the real
issue that we are having actually with illicit finance going
on, with drug trafficking, cartel activity that is going on.
Certainly want to be able to address it but also to be
respectful of the burden that is put on our financial
institutions.
Mr. Bley, in your testimony, you have spoken to the CDD
Rule, which is going to be coming effective, I think, in May of
this coming year. Would you speak to how that is going to have
some real impact on some of our smaller community banks? I am
very cognizant--a small rural bank in my town, just visited
with the president of it, and he said: ``Hey, good news, we
have made three hires. Bad news, they are all compliance.'' And
it is not to certainly diminish the importance of this issue.
My home county is one that they are now looking to be able to
designate. And we are trying to encourage this just from a law
enforcement standpoint, high drug trafficking area; it is a
corridor, moving through. But can you speak to the proposed
rule and then maybe section 9 of the draft bill to be able to
get your thoughts on it?
Mr. Bley. I think that, when you think of it from a
community bank's perspective, it really points to the
challenges of the current model because it really applies the
cost and the burden on everybody exactly the same way, on every
institution the same way. All want to collect whatever
information is necessary, and they will do it. But the reality
is they are going to be asking questions of their customers,
not only on day 1 in opening an account--their customers will
be new process; those customers will be asked at any
institution that they are going to, and then they will be need
to be asked and refreshed and constantly updated throughout the
course of time. And then that will support the investigation
analysis down the road, where needed.
And the idea of a centralized structure basically
eliminates the burden on the individual smaller institutions
and levels the playing field, allows everybody to have the
right information available at all times. And so it is just a
better model. It affects the smaller institutions more than the
bigger ones.
Mr. Tipton. Mr. Fox, do you have any comments on that?
Mr. Fox. Yes, sir, Congressman. Thank you. I have a lot to
say, I guess. I think you are right. One of the things The
Clearing House supports is the notion that a Treasury study on
the BSA writ large and how it is actually being implemented,
part of that is, Does it really make sense to treat community
banks in the same way that you would treat a gatekeeping bank
like Bank of America? And, today, while the regulatory efforts
are different--certainly I can probably attest to that--it is
not--in a lot of the ways, the same rules apply, right? And so
we ought to think about that. We ought to really think freshly
about this: Do these things have to be filed on forms, whether
they are electronic forms or not? Can we just get data? It is a
lot easier for banks to do that sort of thing.
I think on the beneficial ownership, I really agree with
Mr. Hill. Look, we all agree--or at least, I think most agree--
that this information is really important for law enforcement
purposes. We think that this is how organized crime and
transnational crime organizations game the system and even
State actors, I think, probably game the system through these
entities.
So it seems to me that the best way to do that is we
already have a structure that is working in the Code. The
problem is we can't share it with anybody because of the Code
provisions that prohibit sharing tax information. So could that
go to FinCEN? Actually, the Treasury rule, while we supported
it, when it was going--and we are happy to comply with it and
get the information we have to get--the reality is that we
actually are chasing the innocent a bit here because, to be
honest with you, if I am a criminal, there is no way I am going
to have an ownership structure that is going to get caught in
that net.
So we really have to kind of rethink this a little bit, I
think. And I think one way to do it is to make that repository
at the Treasury or FinCEN so that law enforcement can access
that data. By the way, law enforcement can't get at this data
without a subpoena right now. I can't just give this beneficial
ownership data to law enforcement wholesale. That is customer
information that Gramm-Leach-Bliley protects, and there is no
Bank Secrecy Act exemption for that, unless it is suspicious or
law enforcement has a subpoena to get it.
So we think there is a lot of thinking that could go on in
that where you could probably weave a way to take some of that
burden off and actually make this a lot more efficient and for
not only the banks or the financial institutions, not only the
community banks, but for the entire panoply across the entire
regime, which is in, 2017, is what you want, right? Think about
it: We are filing narrative reports on terrorism. It doesn't
make sense.
I think you really need to think about how the regime
itself is set up and how it is working, right? And that, I know
that The Clearing House is, stands ready, and Bank of America
stands ready to do anything we can to work with the staff to do
that.
Chairman Pearce. The gentleman's time has expired.
I would like to thank all of our witnesses for your
testimony today. You have been very gracious with your time and
with your answers. We thank you for that.
Miss Poncy, I hope that you have gotten sufficient
information for your article today, so thank you for joining us
today.
Without objection, all members will have 5 legislative days
within which to submit additional written questions for the
witnesses to the Chair, which will be forwarded to the
witnesses for their response. I will ask our witnesses to
please respond as promptly as you are able.
This hearing is adjourned.
[Whereupon, at 4:40 p.m., the subcommittees were
adjourned.]
A P P E N D I X
November 29, 2017
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