[Senate Hearing 115-212]
[From the U.S. Government Publishing Office]
S. Hrg. 115-212
COMBATING MONEY LAUNDERING AND OTHER FORMS OF ILLICIT FINANCE:
ADMINISTRATION PERSPECTIVES ON REFORMING AND STRENGTHENING BANK SECRECY
ACT ENFORCEMENT
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING WAYS TO MODERNIZE THE UNITED STATES' ANTI-MONEY LAUNDERING
AND COUNTERTERRORIST FINANCING REGIME AND EXPLORING WAYS TO STRENGTHEN
THE ENFORCEMENT AND INTEGRITY OF THE U.S. FINANCIAL SYSTEM IN A NEW
TECHNOLOGICAL ERA
__________
JANUARY 17, 2018
__________
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Affairs
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__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas DOUG JONES, Alabama
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
John O'Hara, Chief Counsel for National Security Policy
Sierra Robinson, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Colin McGinnis, Democratic Policy Director
Dawn Ratliff, Chief Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, JANUARY 17, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Statement of Sigal Mandelker, Under Secretary, Terrorism and
Financial Intelligence, Department of the Treasury............. 4
Prepared statement........................................... 34
Responses to written questions of:
Chairman Crapo........................................... 47
Senator Brown............................................ 49
Senator Sasse............................................ 54
Senator Menendez......................................... 64
Senator Perdue........................................... 66
Senator Warner........................................... 69
Senator Cortez Masto..................................... 71
M. Kendall Day, Acting Deputy Assistant Attorney General,
Criminal Division, Department of Justice....................... 6
Prepared statement........................................... 38
Responses to written questions of:
Chairman Crapo........................................... 85
Senator Brown............................................ 85
Senator Sasse............................................ 93
Senator Tillis........................................... 100
Senator Warner........................................... 102
Senator Cortez Masto..................................... 104
Additional Material Supplied for the Record
Report: ``Trends in Bank Secrecy Act/Anti-Money Laundering
Enforcement,'' submitted by the Congressional Research Service. 111
(iii)
COMBATING MONEY LAUNDERING AND OTHER FORMS OF ILLICIT FINANCE:
ADMINISTRATION PERSPECTIVES ON REFORMING AND STRENGTHENING BANK SECRECY
ACT ENFORCEMENT
----------
WEDNESDAY, JANUARY 17, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:10 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. The hearing will come to order.
This morning, the Committee will receive testimony from
Treasury and Justice Department witnesses on the potential for
modernization of the United States anti-money laundering and
counterterrorist financing regime. We look forward to hearing
the Government's views on strengthening enforcement and
protecting the integrity of the U.S. financial system in a new
technological era.
The Committee held a hearing with industry stakeholders on
this same topic last week. A clear bipartisan interest in
modernizing the BSA/AML regime emerged from that hearing.
The hearing highlighted significant interest in several
areas: beneficial ownership, information sharing, technology,
and BSA reporting requirements. The hearing also highlighted
the need to work with bank examiners to ensure that AML
compliance is not just a ``check-the-box'' exercise.
There seems to be space to improve information and
coordination between industry, regulators, and law enforcement.
The breadth of each of these areas merit further consideration
and discussion.
For example, today's technology promises new ways to catch
criminals and facilitate compliance. But technology also poses
challenges for law enforcement, such as the rise of
cryptocurrencies and their potential to facilitate sanctions
evasion and perhaps other crimes.
I appreciate the strong interest in this topic from my
Banking Committee colleagues and others in the Senate. As this
Committee looks deeper into the potential for reforms or
modernization of the broader U.S. counter threat financing
space, all stakeholders' interests must be critically examined
to assure that financial institutions, among a myriad of other
stakeholders, can work effectively with the Government to
efficiently provide information that results in a ``high degree
of usefulness'' to combat crime and terrorism.
The Committee, in doing its work on this shared policy
goal, must also be ever mindful of the potential for creating
any new or different set of unintended consequences that may
lead to inefficiencies and undue burdens.
Clearly, the United States cannot afford to allow criminals
and terrorists to move illicit funds in furtherance of their
criminal objectives.
At the same time, during last week's hearing, Mr. Baer
shared an example of a community banker with a $100 million
bank and three branches. This bank had seven AML compliance
officers and only four lending officers. We cannot let AML
compliance weigh disproportionately on the costs of community
banks.
I look forward to working with my colleagues in helping to
find a bipartisan path forward to a modernized, reformed BSA/
AML regime that works for law enforcement, industry, and other
stakeholders.
Under Secretary Mandelker and Mr. Day, I am eager to hear
your thoughts today. Your testimony will help set the stage for
taking BSA/AML compliance and enforcement into the future.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and we both welcome
Senator Moran to the Committee. Welcome, Jerry. Nice to see
you. The Chairman appropriately introduced you earlier.
Senator Moran. I can almost see you from here.
[Laughter.]
Chairman Crapo. Patience.
Senator Brown. Thanks for calling this important hearing as
a follow-up to our session last week as we begin to consider
ideas to strengthen and reform our money-laundering and illicit
finance laws.
I am pleased that today we will hear Administration views,
including from Treasury Under Secretary for Terrorism and
Financial Intelligence Mandelker, welcome, and Deputy Assistant
Attorney General Day from the Criminal Division, welcome. They
will both, I am sure, provide important law enforcement and
counterterrorism perspectives.
As I noted last week, we should keep in mind that we are
operating against a backdrop where in recent years some of the
world's largest banks and their foreign partners continue to
run afoul of these laws. In some cases they had inadequate
anti-money-laundering oversight and compliance regimes. In
others, banks willfully and persistently violated U.S. bank
secrecy, sanctions, and anti-corruption laws.
Though some have tried to minimize them, these were not
simply paperwork missteps or administrative errors. In fact,
the GAO concluded last year that over recent 6 years,
approximately $12 billion was collected in fines, penalties,
and forfeitures from financial institutions for violations of
the Bank Secrecy Act, the Foreign Corrupt Practices Act, and
the U.S. sanctions requirements--including $5 billion
specifically assessed for Bank Secrecy Act violations.
Some of these banks violated U.S. anti-money-laundering and
sanctions laws by knowingly facilitating illegal financial
transactions for rogue regimes in Iran and Sudan and Libya and
Syria and Burma, and in some cases for trying to conceal this
activity by repeatedly stripping relevant information from
transaction records. Some conducted transactions with
individuals or entities affiliated with terrorist organizations
and drug cartels directly in violation of U.S. law. Many
violated the law for several years. I encourage my colleagues
to read a sampling of these Deferred Prosecution Agreements on
these banks; some will make your hair stand on end.
These are not victimless crimes. In addition to
strengthening, for example, interdiction of the supply of drugs
like fentanyl coming into the country through initiatives like
my INTERDICT Act signed into law by the President last week, we
also must cutoff the traffickers' money supply. Money
laundering on behalf of drug cartels has a direct line to the
opioid epidemic in my State, where Sinaloa cartel actors have
been active, destroying thousands of families. Eleven people a
day, more than any other State, die in my State. Every single
day 11 people die.
Human traffickers exploiting the misery of runaways here or
recruiting young women from overseas with promises of
legitimate work in the United States use our financial system
to launder their profits.
That is why these laws are so critical: they protect the
integrity of our financial system; they provide critical
intelligence to law enforcement to combat crime.
Even so, as last week's hearing made clear, we want to
assess whether there are ways to responsibly update and
strengthen the current anti-money-laundering framework,
including through new measures to require beneficial ownership
information when companies are formed in the United States,
shedding once and for all the U.S. reputation for being a haven
for anonymous shell companies. That must end.
Broadening information sharing may make sense, but there
were good reasons that such sharing was limited to terrorism
and money-laundering cases after 9/11. Important questions
about privacy protections must be answered before considering
any expansion.
And as we heard from witnesses last week, we should focus
on sharpening suspicious activity reporting and bolstering
efforts by law enforcement to give banks better guidance on
what to look for, instead of on substantially raising currency
reporting thresholds. Questions have been raised, including on
how to enable banks to make better use of artificial
intelligence, while retaining room for critical human
judgments.
I know today's two distinguished Government witnesses have
thought deeply for years about these issues. We welcome you
both and look forward to hearing your perspectives.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
First, we will receive testimony from the Honorable Sigal
Mandelker, who is the Under Secretary for Terrorism and
Financial Crimes at the U.S. Department of Treasury. Following
her, we will hear from Mr. Kendall Day, who is the Acting
Deputy
Assistant Attorney General for the Criminal Division of the
U.S. Department of Justice.
Under Secretary Mandelker, you may please proceed. I do
remind the witnesses to try to follow the 5-minute clock that
you have in front of you so we have time for questions and to
remind our Senators to follow your own 5-minute clocks when it
is time for your questions.
Please proceed.
STATEMENT OF SIGAL MANDELKER, UNDER SECRETARY, TERRORISM AND
FINANCIAL INTELLIGENCE, DEPARTMENT OF THE TREASURY
Ms. Mandelker. Thank you. Thank you, Chairman Crapo,
Ranking Member Brown, and distinguished Members of the
Committee. As the Under Secretary for Treasury's Office of
Terrorism and Financial Intelligence, I am honored to once
again appear before you today to discuss the critical work that
we at TFI are doing to safeguard the United States and
international financial systems.
The offices that I lead are tasked, as you know, with using
our financial intelligence, expertise, and powerful economic
authorities to combat terrorist financing, money laundering,
weapons proliferators, rogue regimes, human rights abusers,
cyber criminals, and other illicit finance and national
security threats to the United States and in the international
financial system to our allies.
TFI is actually the only office in the world that houses
these unique authorities under one roof, and we are proactively
integrating our authorities and expertise across components,
deploying the best tools suited to each challenge and achieving
significant impact.
The foundation of our economic authorities is a strong and
robust anti-money-laundering/combating the financing of
terrorism regime, and one of my top priorities as Under
Secretary is to ensure that the AML/CFT framework remains
strong and effective. Such a regime keeps illicit actors out of
the financial system and allows us to track and target those
who try to slip through. And that is exactly what we have been
doing against a wide array of law enforcement and national
security priorities.
Just as an example, we have been laser-focused on using our
unique economic tools to identify and disrupt North Korea's use
of covert representatives as well as front and trade companies
to disguise, move, and launder funds that finance its weapons
programs.
We are also targeting Iran's use of deceptive financial
practices to generate revenue. As just one example, in
November, we sanctioned an IRGC Quds Force network involved in
a large-scale scheme to counterfeit bank notes to support its
destabilizing activities.
In the past year, we have imposed sanctions, issued
financial advisories, and undertaken diplomatic engagements to
counter human rights abusers and the corrupt across the globe.
Just last month, we sanctioned human rights abusers and corrupt
actors under an Executive order that builds on the Global
Magnitsky Act, which was passed by Congress just over 1 year
ago.
We are also using our other economic tools and authorities,
such as using geographic targeting orders and exercising other
authorities against transnational criminal organizations, cyber
criminals, human-trafficking networks, and other law
enforcement priorities. And we are taking a hard look, as you
are, at the Bank Secrecy Act and the broader AML/CFT regime.
We need to continuously upgrade and modernize our system,
which was a statutory and regulatory construct that was
originally adopted in the 1970s, and make sure that we have the
right framework in place to take us into the 2030s and beyond.
In particular, we have to make sure that financial
institutions are devoting their resources toward high-value
activities and are encouraged to innovate with new technologies
and approaches so that we in law enforcement are able to better
address these threats. And we are working closely with our law
enforcement and regulatory partners in this effort.
In recent years, financial institutions have been more
proactive in their AML/CFT efforts, building sophisticated
internal financial intelligence units, improving their ability
to identify customers and monitor transactions by experimenting
with new technologies, and working together to share
information. We think these are good developments. These
initiatives advance the BSA's underlying purpose and have been
instrumental in assisting our efforts to identify and disrupt
key streams of financing by illicit actors, including just as
an example North Korea.
We have also been working with the financial community to
understand their perspectives and achieve our shared
objectives. They are on the front lines, detecting and blocking
illicit financing streams, combating financial crimes, and
managing risk.
Deploying our tools for maximum impact also requires
proactive dialogue and information sharing with financial
institutions. Enhancing public-private partnerships that reveal
and mitigate vulnerabilities is a top priority of ours. That is
why last month we launched FinCEN Exchange, a new public-
private information-sharing program led by FinCEN.
FinCEN Exchange is bringing law enforcement, financial
institutions, and FinCEN together to facilitate greater
information sharing between the public and private sectors on
issues like cases, typologies, and threats. This effort enables
the private sector to better identify risks and provides FinCEN
and law enforcement with critical information to disrupt money
laundering and other financial crimes.
I want to thank the Committee for its leadership and
support, both of which are truly essential to combating the
threats that we face and ensuring our continued success. I look
forward to working with this Committee on AML/CFT improvements
and with other Members of Congress as we seek to fulfill our
shared responsibilities to keep Americans safe and secure.
Chairman Crapo. Thank you.
Mr. Day.
STATEMENT OF M. KENDALL DAY, ACTING DEPUTY ASSISTANT ATTORNEY
GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE
Mr. Day. Thank you, Senator. Chairman Crapo, Ranking Member
Brown, and Members of the Committee, thank you for the
opportunity to discuss our Nation's anti-money-laundering laws,
including the Bank Secrecy Act.
The Department of Justice draws upon the resources and
expertise of various components to combat money laundering,
including the Criminal Division's money-laundering and asset
recovery section, the U.S. Attorneys' Offices, the Federal
Bureau of Investigation, the Drug Enforcement Administration,
and other prosecution and investigating components and
agencies. We work with partners across the country and around
the globe to pursue complex, sensitive, multi-district, and
international money-laundering and asset recovery
investigations and cases. We devote significant resources to
this problem because money laundering facilitates some of the
most serious and significant threats to our security and our
safety.
Transnational criminal organizations, kleptocrats, cyber
criminal groups, terrorists, drug cartels, and alien smugglers
alike must find ways to disguise and use their illicit
proceeds. Money laundering, which best estimates peg at more
than $2 trillion annually, is a global problem, but the threat
it poses to the United States is acute and specific. Here we
enjoy some of the deepest, most liquid, and most stable markets
in the world. Those features of the U.S. financial system
attract legitimate trade and investment, foster economic
development, and promote confidence in our markets and in our
Government. Those advantages--transparency, liquidity, and
stability--also attract criminals. Through vigorous anti-money-
laundering enforcement, we protect those hallmarks of our
financial system, and we safeguard our citizens from the harms
wrought by the underlying criminal conduct.
Unfortunately, however, criminals frequently seek to thwart
or evade our efforts by exploiting gaps and vulnerabilities in
the existing laws and regulations. As you are aware, the
pervasive use of front companies, shell companies, nominees,
and other means to conceal the beneficial owners of assets is
one of the great loopholes in this country's anti-money-
laundering regime. We constantly see bad actors using these
entities to disguise the ownership of the dirty money they
derive from their criminal activities.
The Bank Secrecy Act imposes a range of obligations on
financial institutions, including reporting suspicious
activity, performing customer due diligence, preventing
transactions that involve the proceeds of criminal activity,
and establishing effective anti-money-laundering programs.
These requirements play a critical role in law enforcement's
fight against money laundering. Effectively, they mean that
financial institutions are often the front line of our Nation's
efforts to prevent and detect such activity. Ensuring the
ability of financial institutions to detect, investigate, and
report illicit financial activity is of critical importance to
law enforcement and the U.S. Government's fight to combat money
laundering and prevent terrorist financing.
Compliance with the Bank Secrecy Act is fundamental to
protecting the security of financial institutions and the
integrity of the financial system as a whole. In most cases
financial institutions seek to do the right thing, implementing
effective anti-money-laundering programs to detect and prevent
money laundering through the U.S. financial system. In some
cases, however, financial institutions have willfully failed to
implement effective anti-money-laundering programs or failed to
document suspicious transactions. In recent years the
Department of Justice has resolved numerous anti-money-
laundering and sanctions-based violations with major financial
institutions, demonstrating that those institutions still
struggle to create and incentivize anti-money-laundering and
sanctions compliance programs.
The effectiveness of our current anti-money-laundering
regime merits continued discussion among law enforcement,
industry, and Congress as we strive to detect, target, and
disrupt illicit financial networks that threaten our country. I
am pleased to be with you talking about these important issues,
and I thank the Committee for holding this hearing today to
bring attention to the threat that money laundering poses to
our financial system and our national security.
I will be pleased to take the Committee's questions. Thank
you very much.
Chairman Crapo. Thank you to both of you.
My first question is just to ask each of you to very
briefly, if you could, tell me if there are reforms to our
system that are gaining attention in your offices, of things in
your office or in your work that you and your colleagues
believe need to be fixed or changed. Ms. Mandelker?
Ms. Mandelker. Thank you, Mr. Chairman. So what I can tell
you is there are reforms and then there are actions that we can
take independent of any legislative reforms, such as----
Chairman Crapo. Yes, and I am referring to legislative
fixes.
Ms. Mandelker. Understood. So I do think that this is a
very important time to take a look at the BSA framework that
was stood up again in the 1970s. We have to look to see whether
or not our reporting requirements are sufficiently meeting our
needs. We have to look to make sure that we have a system in
place that is harnessing all those financial crimes analysts
that are sitting in the financial institutions and are very
much on the front lines of what we are trying to accomplish
through their reporting.
So we are taking a very hard look at that framework. We are
looking at the thresholds. We are looking at the examination
process. I think it is very important to study these issues
carefully, to engage in conversations with law enforcement
about what has been useful to them, what has been most useful,
what has not been as useful so that we are getting the
information that we need from the financial institutions in the
right way, in the right form, and also so that we are
incentivizing the financial institutions to prioritize work
that is of high value to us.
I know that there was a lot of discussion, just as an
example, about the examination process, so we need to take a
look at the examination process and make sure, again, that it
is tailored toward incentivizing the banks to do the difficult
work of analyzing potential illicit activity in a way that is
going to be more productive for us.
Chairman Crapo. Rather than checking the box.
Ms. Mandelker. That is right.
Chairman Crapo. Thank you. Mr. Day?
Mr. Day. Thank you, Chairman. I think in addition to the
issues that Under Secretary Mandelker mentioned, I would like
to flag beneficial ownership. That is an issue that continues
to present challenges for law enforcement because it is no
secret that one of the ways criminals try to obscure their
conduct is by hiding behind shell companies and front
companies.
Law enforcement has to devote enormous resources and time
to piercing the corporate veil and amassing the evidence
necessary to figure out who stands behind these companies and
who is actually benefiting from the illicit financial flows. So
that is another area that I think is ripe for consideration
legislatively.
Chairman Crapo. Well, thank you. And I appreciated the
written testimony you both provided, and we will look forward
to further information from you on helping to achieve these
objectives as we move forward with legislative efforts here.
Back to something that you both referenced, there was a lot
of discussion in our last hearing about this check-the-box
notion, that we have an army of analysts out there, but the
question that seemed to come through to me in the last hearing,
or one of them was: Are they just, you know, mathematically
looking at numbers and checking boxes as they report
transactions? Or are they trying to analytically identify what
is risky or dangerous behavior and help you find that? Could
you both address the--do you see the objective that we want to
get at and the objective we want to avoid? Could you address
that for me?
Ms. Mandelker. I want to just start by saying that we have
a cadre of examiners that we work with that are in the Federal
banking agencies that are, of course, very devoted and
dedicated to make sure that financial institutions are
complying with their AML/CFT obligations.
At the same time, I think that now is a very good
opportunity to have a discussion with the Federal banking
agencies that are conducting these exams to make sure that they
are understanding what our priorities are from the Treasury
Department, from law enforcement, to make sure that we are
incentivizing financial institutions in the right way to devote
their very substantial resources toward the high-value threats,
toward identifying AML/CFT risks.
And so I have begun that process. We are discussing this
very issue with the Federal banking agencies, and you will be
hearing more from us on that front. I think this is a very
important time to have that conversation.
Mr. Day. Thank you, Mr. Chairman. I will say that the
information we get from the existing regime is very helpful to
law enforcement. Our job fundamentally is all about identifying
crimes,
catching criminals, putting them in jail. And we often initiate
investigations based on that reporting as well as, if we have a
preexisting investigation that started with other information,
further an investigation with the intelligence we are able to
glean from that reporting.
So I think that is very true, there is opportunity to
consider this issue. It is just it should be done with an eye
toward preserving what is already good about the system.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Secretary Mandelker, let me start with you. I am sure you
are familiar with the recent Clearing House Association report
on these issues. One Clearing House recommendation is to have
FinCEN's BSA oversight authority over large banks delegated to
Federal banking agencies over 20 years ago returned to FinCEN.
But it seems clear FinCEN does not have the bandwidth to make
such a radical change.
My questions are these, connected to that: Do you know what
this change would require in terms of additional Federal
funding and personnel? Why would we redo a system, an oversight
system, that has worked reasonably well and put in place the
kind of centralized examination teams suggested by the Clearing
House when bank examiners already have extensive expertise and
experience with these large entities on BSA issues and have
been doing this job successfully for years? Tell us what you
think.
Ms. Mandelker. So I cannot tell you exactly what the
numbers would look like if that authority--if we were to take
back that authority. What I can tell you is that it is, again,
very important, as we are with our partners charged with
safeguarding the financial system, it is very important that we
have continued conversations with the Federal banking agencies,
with those examiners, so that they understand what law
enforcement's priorities are and so that we continue to have an
active discussion about how they are executing those
responsibilities. So that is where our focus is, and, of
course, we also have responsibility not just with respect to
banks, but we have other responsibilities when it comes to
executing our oversight responsibilities with money service
businesses, in the virtual currency space, among a wide variety
of areas. So we are very mindful of how we allocate our
resources to make sure that we are not undertaking duplicative
efforts.
Senator Brown. Thank you.
Mr. Day, as recently as last September, in its quarterly
report to the court on HSBC's Deferred Prosecution Agreement,
which stemmed from the bank's unlawful moving of hundreds of
millions of dollars for Mexican drug cartels and other AML
violations, DOJ wrote the following: ``The monitor has observed
that HSBC is continuing to work toward the implementation of a
reasonably effective and sustainable AML and sanctions
compliance program.'' But despite progress in certain areas,
the monitor had still identified ``significant control
deficiencies.'' It also noted that HSBC has successfully
implemented a majority of the monitor's recommendations but has
not implemented others. Even so, last month DOJ agreed to
terminate its Deferred Prosecution Agreement with HSBC.
Has the monitor certified with no conditions or
qualifications that HSBC has complied with the letter and the
spirit of its obligation to effectively implement a sound AML
compliance program? That is the first question. Second, if so,
how do you reconcile that with recent statements by the monitor
that HSBC still has those control deficiencies I mentioned, it
has not implemented all the monitor's recommendation? Why
didn't DOJ simply extend the term of the DPA, as it has done
with other DPAs in the past?
Mr. Day. Thank you, Senator, for that question. I think it
is important to highlight the Department's--the lens through
which we view this type of conduct. Our role in this area is
really to prosecute willful violations of the Bank Secrecy Act,
so, in other words, when a financial institution understands
its obligations and persists in choosing another course of
conduct they know does not satisfy the law, that was the reason
behind the initial deferred prosecution that we brought in
2012.
Since then, though, as we have reported to the court in
regular filings, including the ones you mentioned, the bank had
not engaged in that type of misconduct; rather, they had gone
about a very lengthy process of taking the monitor's
recommendations and implementing them. That is the lens that we
have to apply when we are deciding whether or not to apply an
additional sanction, extend a Deferred Prosecution Agreement,
or let that document rest as it was originally intended.
So I cannot really comment about the specifics that are not
public in that process, but I think that lens, the fact that
the Department's perspective is focused on willful criminal
violations and things that might fall short of that do not come
to the Department's attention, can help explain why we take the
steps in that case or any other.
Senator Brown. But that lens, does that lens suggest
allowing an incompleteness in complying? Because it seems that
you acknowledge many ways they complied, some ways they did
not. How does this encourage them to comply where they have
fallen short?
Mr. Day. Yes, Senator, so their obligations under the
Deferred Prosecution Agreement they did comply with. Whether or
not they at any given moment have satisfied all the monitor's
recommendations is a different issue, but their obligations
under the Deferred Prosecution Agreement are do not engage in
any further violations of the law, implement a remedial program
that at a given point satisfies the concerns the monitor has,
even if it is not by an exact date. Those are the obligations,
and that is why, because they had satisfied those obligations
to the Government's satisfaction, we did not extend the DPA or
take further action.
Senator Brown. OK. Thank you.
Chairman Crapo. Senator Sasse.
Senator Sasse. Thank you. Thanks to you both for being
here, and thanks for really good written testimony. It was
helpful.
Mr. Day, can you break down the $2 trillion number? What do
we know by business type--type of crime business I mean--by
geography, et cetera?
Mr. Day. So I do not have those figures at hand, although I
am happy to go back and see if we can further parse that
figure. What I can say is that a substantial portion of it does
impact the United States literally hundreds of millions of
dollars. Part of that is because of the centrality of our
financial system, right? Those strengths that I talked about
attract criminals who wish to launder their proceeds, even if
they did not generate them here in the United States.
Senator Sasse. So I would love to get any follow-up
information on that. Thanks. I think your numbers say $300
billion is U.S. and $2 trillion is the global number, and I
think tax evasion is not in that universe.
Of the $1.7 trillion--I know these are broad estimates, but
setting aside the $300 billion that is in the United States and
is going to use our financial system, of the $1.7 trillion
outside the United States, does a third of it, most of it, does
it touch the U.S. financial system somehow?
Mr. Day. So I hesitate to give precise figures in part
because I would need to go back and see if we have got any
better data on that. But, yes, a large amount that is not
included in the $300 billion would touch the U.S. financial
system through U.S. dollar clearing or other services that our
financial system provides essentially to the global economy.
And that is why we have to be so vigilant in protecting against
money-laundering crimes.
Senator Sasse. And so I guess--and this is for both of you
two, not just you, Mr. Day. But I guess one thing I am trying
to understand is the suspicious activity reports, we are not
reading most of them, right? That is not your fault. It is that
there is a huge flood of these things. Do we have anything like
red zone statistics to have a kind of theory of the world and
where the money-laundering crime is? And then where do we get
reports, and how much of it ends up being aligned with the
kinds of stuff we are trying to prevent? We would like to
prevent, you know, all $2 trillion of illicit funds, but do we
know that there is high-yield data that you are getting versus
stuff that ends up just being noise in the system?
Ms. Mandelker. So that is exactly what we are studying, you
know, as we undertake this effort to examine whether or not we
need to change these thresholds. What I can tell you is, yes,
we get a lot of data, and there are review teams that are
stationed all over the country who really take a very careful
look at these SARs.
We also use technology, of course, to analyze the data so
that while not every SAR may be reviewed, it certainly is
targeted for analysis, which has been extraordinarily helpful.
But as we continue our review, I am happy to share with you
what we are learning.
Senator Sasse. Thanks. My team and I would love to not
formally send you a letter on that but just learn your after-
action reports. That would be really helpful.
Could you also walk us through a typical case, either as an
agent or a field manager, where you used financial intelligence
such as the suspicious activity reports and then ultimately
catch criminals? What is the modal type of investigation that
leads to successful prosecution?
Mr. Day. I will give you an example, but I should say that
there is no necessarily prototypical way because it is so
useful. This type of information to prosecutors and agents can
be used in a variety of ways. One way is to start a case. So,
in other words, as Sigal mentioned, there are teams that
regularly look through, setting criteria, the system to try to
determine are there new financial crimes occurring in their
district that they need to initiate an investigation into. In
other instances, we might have started an investigation based
on a cooperating witness or some completely
independent source of information. Then we go query the Bank
Secrecy Act system that includes the SAR data in order to
further the investigation, to learn more about what other
things are these potential defendants into that we need to
investigate. So it really is a very wide universe precisely
because it is so useful to law enforcement.
Senator Sasse. I think lots of Americans would have a sense
of how a drug cartel would need to use the financial system to
launder their money. But in a case like human trafficking, give
us an example of how a case would unfold where you get
information and where does it yield something. Why and how are
they abusing our system?
Mr. Day. Sure. So human trafficking or really almost any
other crime is all motivated by financial gain. So there has to
be a way for the criminals, if they are going to engage in the
crime, to use the proceeds that they glean from that, and that
involves bringing the proceeds into the financial system; if
they are successful, laundering those proceeds so that they can
use them to purchase goods, reinvest in the criminal
enterprise, create additional harms to the community.
So often the financial data is useful because it allows us
to see the full human-trafficking network or other criminal
networks, because the money goes out to the different parts of
the network or it comes in from the different parts of the
network that generate the illicit proceeds. It has to come in
and be redistributed.
Senator Sasse. I am at time, but I will follow up with you
both off-line. I would like to ask some specific questions
about how we target specific organizations like MS-13, for
example. So thanks.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Well, thank you, Mr. Chairman, and thank you
both for your excellent testimony.
At page 5 of your testimony, Mr. Day, you say that one of
the money-laundering threats is the purchase of real estate and
other assets. And I understand, Secretary Mandelker, that there
is a program in the Department of Treasury where you have
identified certain areas of the country, and you are looking at
these acquisitions of above a certain value and doing so
through the title insurance companies. Can you explain how that
is working?
Ms. Mandelker. So we are using our geographic targeting
order, which is an authority that was given to us by the
Congress and expanded over the summer to extend to wire
transactions. Essentially, what we are doing is we are telling
the title insurance companies that they have to report to us
who the beneficial owners are involved in transactions
involving high-end real estate, in all-cash type of real
estate, again, high-end real estate transactions.
Senator Reed. Right.
Ms. Mandelker. And then, of course, we are analyzing that
data. We have already issued an advisory, which was a result
not only of the data that we analyzed when we first issued the
geographic targeting orders, but we also thought that it was
very important to highlight to the real estate industry some of
the red alerts, some of the risks that they should be
identifying when they are taking in and working on this
business.
Senator Reed. And you have the legal authority, there is no
question about the legal authority for you to do this.
Ms. Mandelker. It is a legal authority that the Congress
gave to us, yes.
Senator Reed. One of the difficulties is finding who the
ultimate beneficial owner is, so how insistent are you with
these--it seems to me that title insurance companies typically
do not do that, so how effective is this in terms of actually
discovering the ultimate beneficial owner rather than the first
phase of several phases of ownership?
Ms. Mandelker. Again, they are required by law and required
by our order to report that information to us, and we have been
able to gather a great deal of information as a result.
Senator Reed. Is that information available to the Congress
and the public?
Ms. Mandelker. That is not information that is available to
the public. We are analyzing--it is submitted to us----
Senator Reed. It is available to us, though?
Ms. Mandelker.----pursuant to the Bank Secrecy Act
authorities.
Senator Reed. But it is available to us?
Ms. Mandelker. We would be happy to work with you on any
requests.
Senator Reed. What type of beneficial owners trigger a
response by the Treasury? Is it someone who has a criminal
activity? Is it someone who has been sanctioned by the United
States Government? What is the red line in terms of the
beneficial owner is bad or good?
Ms. Mandelker. Senator, that is really going to depend on
the investigation. Of course, it is not just Treasury that is
looking at the information that comes in through the Bank
Secrecy Act and the SAR reporting. It is also a cadre of law
enforcement agents all over the country that are taking a very
careful look at it. Any particular economic authority that we
deploy in connection with SAR activity or other information we
receive in a variety of sources about illicit activity, again,
what we decide to do with depend on the----
Senator Reed. Have you made a referral to the Justice
Department yet for enforcement action in any of these real
estate transactions?
Ms. Mandelker. Again, that information is likewise
available to law enforcement through the Bank Secrecy Act. So
as with all of the BSA data that comes into the Treasury
Department, law enforcement has full access to any information.
And, of course, we work closely with them to the extent they
need our assistance to analyze the data.
Senator Reed. I know Mr. Day wants to respond. I have one
other question. Would you want a quick response, Mr. Day, now?
And then I will go back to the Secretary.
Mr. Day. Only to add that law enforcement is excited about
the potential and is starting to see some of the fruits of this
effort, because, remember, if you are talking about money
laundering into real estate, you are talking a very large
dollar money-laundering transaction. So those are big-time
cases we need to bring.
Senator Reed. All right. Switching gears slightly, your
sanction activities against the North Korean regime, are you in
any way able to impede the remissions that are paid by North
Korean workers in Russia or other places?
Ms. Mandelker. Senator, to the extent that we can use our
sanctions authorities to target that kind of activity, we have
done so. We have had designations connected to laborers. Of
course, as you know, there are U.N. Security Council
resolutions in place that specifically address, among other
sources of revenue, laborers, and we expect that those
countries will abide by their U.N. Security Council resolution
obligations. And, of course, we continue to pressure them to do
so.
Senator Reed. But, unilaterally, are we pursuing them
aggressively in terms of identifying any type of transmission
mechanism and disrupting it?
Ms. Mandelker. We continue to pursue North Korea's sources
of revenue on a wide variety of fronts.
Senator Reed. Thank you very much. Thank you.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Thank you both for
being here.
Madam Secretary, I had a question for you. It relates to
some of the questions that I had in the hearing a couple of
weeks ago. You have mentioned a couple of times that you think
the financial institutions are engaged in a number of high-
value activities, and I think that is a good thing. But when
you see some of the numbers--Bank of America is headquartered
in North Carolina--when you see 800 people focused on that, I
have got to believe there are some low-value activities that
are going on there, too. If you take a look at the fines, I
think the GAO issued a report back in 2016 that said since
2009, $5.1 billion in penalties I guess have been paid by the
financial institutions.
What work have we done to look at, you know, with that sort
of exposure out there, how much of their work could actually be
dedicated to doing nothing more to make sure they are compliant
and not subject to a penalty versus focusing their resources on
the higher-value activities that I think we all need to do?
What are we looking at to try and make an objective assessment
about the current status?
Ms. Mandelker. Thank you, Senator. So, again, we do this in
very close coordination with our regulatory partners and our
law enforcement efforts. I do think we need to make sure that
those resources are carefully calibrated toward producing the
kind of financial crimes analysis that we need that really
feeds into the cases that we are able to bring to tackle the
threats, the money-laundering threats that we face. So we are,
again, taking a very careful look at how we are incentivizing
the banks to target their resources and efforts to the kinds of
activities that provide higher value to us, and we are talking
to the Federal banking regulators about that. We are talking to
law enforcement about it as well.
Senator Tillis. This is only conceptual. I am not offering
this up as necessarily--thematically, it is more along the
lines of offer them a bounty to identify bad actors versus
subject them to a
penalty for not necessarily getting the paperwork right. It is
just, I think, a mentality that we should look at.
Mr. Day, I had a question for you, and it relates to
Secretary Mnuchin recently announcing that he is going to have
a working group on digital currencies, and that kind of skates
into the money-laundering lanes. If we are going to start
looking at how to do a better job here and establish a working
group, it seems that it would be helpful to have DOJ at the
table since at the end of the day everything you put into place
would be with the goal of ultimately having a successful
prosecution. What is your view of that? And, Madam Secretary,
you can weigh in as well.
Mr. Day. I agree, but I should say, just as my colleague
Sigal said, we already have a very good, robust working
relationship, and so I fully expect--I saw that announcement as
well, but I----
Senator Tillis. So whether or not you sit on the working
group, you feel like you will have adequate input into the
process, Madam Secretary?
Ms. Mandelker. I do not have any question. We actually do
sit in working groups with the Department of Justice very
specifically focused on virtual currencies. In fact, in a
previous iteration, I supervised the section of the Justice
Department that was focused on cryptocurrency and virtual
currency. So we have a robust relationship. Of course, we need
to work very much in concert with each other as we identify and
regulate and enforce our laws to counter illicit uses of
virtual currency.
Senator Tillis. I had a couple of questions that I think
add on to where Senator Sasse was going. If it is a $2 trillion
aggregate market, $300 billion in the United States, does that
mean if we solve our whole problem, we have still got an 80
percent problem to deal with out there? In other words, how do
we go about this? I understand that we have to deal with our
back yard, but how are we going about this to where we have
just simply not made it an unfavorable jurisdiction but
fundamentally the same activity is going to occur?
Ms. Mandelker. Actually, we already do a great deal of work
with our international partners in a wide variety of areas. So
just as an example, we sit as the Vice President of the
Financial Action Task Force, which is an international body
that is focused on making sure that countries all over the
world have the same kinds of standards that we do when it comes
to AML/CFT regimes. We also work very closely with law
enforcement and other agencies all over the world on tackling
the threats at the Treasury Department. We likewise do that in
the context of the G-7 and the G-20. I engage and I have a team
of people at the Treasury Department who engage with our
partners, again, all over the world to make sure that we are
aggressively tackling illicit financing that is coming through
the U.S. system and also that resides elsewhere.
Senator Tillis. Madam Secretary, is the Treasury going to
be on point to define other stakeholders and really set the
priority? I always talk about the tip of the spear because we
have got different people who are looking at--or different
agencies who may be looking into this issue. Is Treasury at the
tip? Are they going to kind of coordinate, engage the
stakeholders, and be the one that the industry looks to for
guidance going forward, and certainty?
Ms. Mandelker. So we already do that. We have--among the
mechanisms in which we engage with the private sector, we
also--we chair the Bank Secrecy Act Advisory Group, which is an
entity that brings together law enforcement, our interagency
partners, as well as a wide spectrum of entities in the
financial sector. So that is something that we do. It is
something we will continue to do in that venue and in other
fora as well.
Senator Tillis. Thank you. Sorry I went over, Mr. Chair.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman. I want to thank
both the witnesses for being here today.
Kind of going on with that, other countries that are
tackling this issue, how effective have they been, number one?
Ms. Mandelker. It is really going to depend on the country.
It is something that, again, we monitor very carefully. So
within, just as an example, the context of the FATF, the FATF
conducts evaluations of other countries' AML/CFT regimes, and
we play a very important role in that area. And where countries
are not living up to their standards--Iran is a perfect example
of that--we push very heavily to make sure that there are
consequences to not having an AML/CFT regime in place that
meets our standard.
Senator Tester. All right. And of the money laundering that
is done worldwide, can you give me any estimate how much of it
is done in this country?
Ms. Mandelker. I think Mr. Day spoke to that already.
Senator Tester. Fine. Go ahead. Shoot quickly then.
Mr. Day. Sure. Roughly $300 billion I believe is----
Senator Tester. And what is that a percentage of the total?
Mr. Day. So the best estimates I have seen are more than $2
trillion globally on an annual basis.
Senator Tester. OK. So when it comes to money laundering in
this country, is most of it done through the largest
institutions, or is it done through regional or community
banks?
Mr. Day. I do not think you can actually pinpoint exactly
where. The safe answer is criminals will go wherever they can
with their illicit proceeds, so it happens at global financial
institutions, national, regional, small banks.
Senator Tester. Got you.
Mr. Day. And even nonbanks like brokerage houses.
Senator Tester. But you--and it is OK if you do not, I
guess, but you do not know if most of it is going through the
big guys or the small guys or the regional guys? I know I get
it. They will go to the weakest link in the fence. But,
currently, where is most of it happening?
Mr. Day. It all depends on the case. That is a very case-
specific question.
Senator Tester. OK.
Mr. Day. Sometimes it goes to the biggest institutions.
Sometimes it does not. It just depends on how the criminals put
together their----
Senator Tester. So what I hear you say--unless I do not
understand this issue properly myself. What I hear you say, of
that $300 billion that is being laundered here, it is pretty
much equal between small, medium, and large?
Mr. Day. I would not want to put a percentage on it. I
really do not know, Senator.
Senator Tester. I do not want to be--but isn't that
important to know? Isn't it important to know where the dough
is going and how it is being laundered so that you can make the
regulation fit the risk?
Mr. Day. Well, you know, Treasury can speak to this even
better than Justice, but the Bank Secrecy Act is a risk-based
approach, and so you are exactly right. We are focused on
identifying the largest risks, and we are constantly
reevaluating and fine-tuning and training our investigative
resources where we think is the largest threat.
Senator Tester. OK.
Mr. Day. But it would be a mistake to think of it as just
happening in----
Senator Tester. No, no. I am not saying that. I am just
saying as we look at this from 30,000 feet, you are going to
put the resources where most of the problems are having, and if
you do not know where those problems are, that is a bit
disturbing for me.
Mr. Day. Well, I do not mean to suggest we do not know
where those problems are. It is just that we never rest on our
laurels in the sense that where the problems are today is not
where they will be tomorrow.
Senator Tester. I have got it. But today you cannot even
tell me where the laundering----
Mr. Day. Not as a percentage basis.
Senator Tester. All right. Is there technology out there
that can be--that you guys are recommending for banks of any
size, but particularly the smaller ones, to be able to utilize
to protect themselves?
Mr. Day. So the Justice Department would not play that
role.
Senator Tester. Who does? Anybody?
Mr. Day. I do not know if a regulator does or not.
Ms. Mandelker. We do not recommend a particular vendor or
type of technology for any particular kind of financial
institution. We do provide guidance and training to----
Senator Tester. OK. That is good, Sigal. So where do they
go? Where do they go to get the information so they know where
the threats potentially are coming from to be able to protect
themselves and the consumers ultimately?
Ms. Mandelker. I think there are a variety of places that
they go. Of course, there is a whole AML/CFT compliance
industry out there, of course, that they can talk to. But we
are----
Senator Tester. And where are they getting their
instruction from?
Ms. Mandelker. What we are focused on, Senator, is making
sure that we are providing financial institutions of all types
and sizes with critical information to help them identify risks
and typologies. That is why, for example, in this initiative,
FinCEN Exchange, which I mentioned at the beginning, we are
going to be--we are going to and we have in the past, frankly--
talking to not just the big banks but also local, regional,
community banks so that we can help them build their system,
their red alerts, their algorithms to identify critical risk.
And I think that kind of information is really critical to
achieving the strong and effective regime that we want.
Senator Tester. OK. We will have a few more for the record.
Senator Tester. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Thank you both
for being here.
Can we agree that you and your agencies could not do your
job without the cooperation of our private sector financial
institutions?
Ms. Mandelker. The cooperation that we receive from
financial institutions is critical to doing what we are trying
to accomplish, which is to have a strong and effective regime.
Senator Kennedy. In fact, it is mandated, is it not?
Ms. Mandelker. Absolutely.
Senator Kennedy. OK. How much do American financial
institutions spend every year complying with the mandates?
Ms. Mandelker. I am sure those figures are available. I do
not have them before me. I think Clearing House, for example,
might be able to provide you with some of those numbers. But it
is a significant amount. There are a lot of resources that the
banks, financial institutions, and other entities regulated by
the Bank Secrecy Act are devoting to compliance.
Senator Kennedy. Was it in the hundreds of millions?
Ms. Mandelker. Again, I do not have those numbers, but they
are substantial.
Senator Kennedy. You have never looked at the cost?
Ms. Mandelker. Again----
Senator Kennedy. Have either of you ever looked at the
cost?
Mr. Day. I do not have those figures either, Senator.
Senator Kennedy. OK. What is the dollar amount of money
laundering that you stop every year?
Mr. Day. I do not have those figures in front of me, but it
is also significant, both in terms of actual money that is
being laundered that we seize and forfeit, as well as conduct
that we are able to prevent and deter from the prosecutions we
bring. But I do not have a precise figure for you.
Senator Kennedy. Do you know, Madam Secretary?
Ms. Mandelker. So I cannot give you a number. What I can
tell you is that we use a number of different economic
authorities to stop illicit money from coming into this system.
That is what we use our designations for. For example, we are
sending out the message that if you are going to try--not only
if you are a designated entity and you have money in the United
States----
Senator Kennedy. I get it. I am sorry to interrupt----
Ms. Mandelker.----but your money is not welcome.
Senator Kennedy.----but I have only got 5 minutes.
Ms. Mandelker. Yes.
Senator Kennedy. Don't you think it would make sense at
some point to say, OK, here is the cost and here is the
benefit? Is there anybody in your agencies that do that?
Ms. Mandelker. Absolutely, Senator. I think that is a very
important endeavor, and as we decide what rules and regulations
roll out----
Senator Kennedy. Can you get me that information?
Ms. Mandelker.----in the future, we undertake that kind
of--those kinds of exercises.
Senator Kennedy. Can you get me that information?
Ms. Mandelker. Again, some of that information is resident
within the financial institutions in terms of what costs that
they----
Senator Kennedy. Yes, ma'am, but can you get it for me?
Ms. Mandelker. I can provide to you what information we
have. I do not know that I have an assessment of the total
costs----
Senator Kennedy. General, can you get it for me?
Mr. Day. Senator, I do not know either that the Justice
Department--remember, I guess our role is more narrow. We are
ultimately focused on prosecuting----
Senator Kennedy. I am going to take that as a no.
Mr. Day. I am happy to take back any----
Senator Kennedy. Yeah, if you could just ask, pretty
please.
Mr. Day. Of course.
Senator Kennedy. This is our second hearing, and I have
learned a lot, but I still have not heard what changes you are
recommending. I understand we need to have more conversations.
Tell me in the 2 minutes I have with specificity what changes
you are recommending that we make, General.
Mr. Day. Beneficial ownership is a problem we need to fix.
Senator Kennedy. Do you have a suggestion on how we fix
beneficial ownership?
Mr. Day. We need to gather information about----
Senator Kennedy. But in terms of a bill.
Mr. Day. We do not have any proposed legislation, no, but
we are more than happy to engage with you or your staff.
Senator Kennedy. Well, I am engaging. Can you send to me
with specificity the changes you need to make, you are
recommending we make in beneficial ownership?
Mr. Day. I would be happy to take that back, and there are
some----
Senator Kennedy. OK. Anything else?
Mr. Day.----increased penalties for bulk cash smuggling.
Senator Kennedy. OK.
Mr. Day. So that is right now subject to a 5-year statutory
maximum.
Senator Kennedy. Can you send that to me with some
specificity?
Mr. Day. I would be happy to take that back, but increased
statutory maximums.
Senator Kennedy. OK. Anything else?
Mr. Day. There are some additional tweaks to the money-
laundering statutes that we would be----
Senator Kennedy. All right. Can you send me those tweaks?
Mr. Day. Yes, sir.
Senator Kennedy. Madam Secretary, how about you,
specificity?
Ms. Mandelker. We would be happy to work with your staff.
What I can tell you is--but I also want to, as I mentioned
already, this is something that we have to do carefully, and we
have to make sure that any fixes that we propose are supported
by the analytics.
Senator Kennedy. I want to be careful, and I appreciate all
that. But what I am asking is at some point you have got to go
from 30,000 feet to the ground. Are you ready to send to us
with specificity suggested changes in the acts that we should
make and why?
Ms. Mandelker. Again, Senator, we are studying that issue
very carefully. I want to make sure----
Senator Kennedy. You are not ready? I mean, I am not trying
to be rude.
Ms. Mandelker. I understand.
Senator Kennedy. This is the second hearing that we have
sat through, and I have learned a lot, and I appreciate it. But
I am ready--I understand the global perspective. I am kind of
ready to get down out of La La Land down into the nuts and
bolts. How do we fix the problem, and what is it going to cost?
Ms. Mandelker. And, again, Senator, we are getting into the
nuts and bolts. I want to make sure that whatever changes we
recommend, those changes are supported by the data, the
analytics, and the law enforcement community to make sure that
we are doing this----
Senator Kennedy. OK. When do you think you will have that?
Ms. Mandelker. I cannot give you a timeframe, but I am
happy to have further discussions about it.
Senator Kennedy. Within 6 months?
Ms. Mandelker. I would hope that we could have some
recommendations within 6 months.
Senator Kennedy. Three months?
Ms. Mandelker. Again, you know, I want to make sure that we
are doing this carefully, that any changes we are making are
made--or we are recommending are made in very close cooperation
with the law enforcement community, because it----
Senator Kennedy. Well, I would just respectfully ask you,
let us get down to it. OK?
Ms. Mandelker. I appreciate that request.
Senator Kennedy. You are raising problems. Let us look for
solutions, and if you cannot tell us how to solve them, then
point us in the right direction. And if you could get me that
cost-benefit analysis, that would be--I will send you both a
fruit basket. OK?
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Let the record
show that this is the second of one of these hearings. I have
stayed until the end, and I am the last guy talking. Let me,
first of all----
Chairman Crapo. Duly noted.
Senator Warner.----commend my friend, the Senator from
Louisiana, for once again asking common-sense, practical,
bottom-line questions. And I actually think this is one of
those rare areas where, you know, I do not think there is a
difference, Democrat and Republican, in terms of how we
approach this. So I would love to work with you on beneficial
ownership. I think we need to look at areas where we could use
technology. I think we heard in the last hearing, for example,
literally tens of thousands of SARs reports, we do not really
know how to sort through them, so how do we do this in a
technology-friendly way that still protects consumer
information?
I still think we have got a lot of work to do on
cryptocurrencies to get ahead of this, and I think we have also
heard both in this hearing and the other that, you know, a lot
of the money laundering may have moved from traditionally
through the banks particularly into real estate, and there is
work there. So I appreciate very much the Senator's questions.
I would look forward to those answers as well. But if the
Administration cannot come up with some ideas, I think you and
I and Members of this Committee and the leadership of the
Chairman could.
Let me try to drill down on a couple of these. At the last
hearing, I raised the issue around cryptocurrencies and what we
are doing, and I know Senator Tillis raised the issue that
Secretary Mnuchin has got a working group. But when we see just
the notion that China said they were going to look a little bit
more into this, and we saw a huge drop in value, for example,
on one of these cryptocurrencies, on bitcoin, in the last
couple weeks, do you feel like you have all the tools you
need--and this is an area that is happening--moving so quickly.
Do you have the tools you need and the technology analysis you
need to make sure that we get ahead not just with bitcoin but
any kind of blockchain-related technology to do this right?
Ms. Mandelker. So this is an area of high focus for us,
and, in fact, I think it is an area where the Treasury
Department, in close coordination with our law enforcement
partners, has been ahead of the game globally, and I will just
walk you through some of the efforts that we have----
Senator Warner. Fairly quickly, because I have got a series
of questions.
Ms. Mandelker. Sure.
Senator Warner. Unless the Chairman wants to give me a
couple extra minutes since I waited so long.
Ms. Mandelker. And I would be happy to provide more
information in another setting. But just as an example, in 2014
FinCEN issued guidance identifying virtual currency exchangers
and administrators as entities that are regulated under the
BSA. So those entities are now required, among other things, to
file SARs. They are subject to examinations by FinCEN and the
IRS, which we have been conducting. We have had enforcement
actions. Both the Treasury Department and the Justice
Department have gone after virtual currency----
Senator Warner. Madam Secretary, could you get me that
list? Again, because I want to get a couple more questions in.
Ms. Mandelker. Yes, happy to do so.
Senator Warner. I would love to see it and share it with
the full Committee.
Senator Warner. Again, talking about SARs, for example, one
of the things that appears is we have got this massive amount
of information, and it would seem to me that there may be
technology tools we could use that could show patterns that
might not otherwise be evident. How do we do that and also a
way where we protect--an issue Senator Warren and I have worked
on--personal consumer financial information? How do we get that
balance right between being able to see patterns but still
protect consumers' information?
Ms. Mandelker. So just in terms of detecting patterns, we
have efforts underway to make sure that we are using technology
to analyze the vast amount of information that is in the BSA.
In fact, I have a council of folks at the Treasury Department
that I have recently stood up who are working very
collaboratively together to make sure that we are appropriately
using the tools that we have and that we are identifying other
areas or other tools that we can deploy to make sure that,
again, we are detecting patterns, trends. And a lot of what we
are able to obtain using those kinds of tools and analysis feed
into authorities, the economic authorities that we use, the
Justice Department authorities, but we also then loop that
information back out into the financial sector.
Senator Warner. If you could, again, get us a little more
background on that.
Ms. Mandelker. Happy to.
Senator Warner. I have got a couple seconds left. You know,
one of the issues I think we wrestle with as well is we have
got to have strong anti-money-laundering procedures, but how do
we get that right with also making sure that there are
appropriate financial products for the underbanked, for
example, the immigrant community that uses remittances a lot?
Obviously, there is a ripe area for abuse, but there are wide
swaths of our country that are underbanked that need to use
these tools. How do you sort through and think through that
notion?
Ms. Mandelker. That is a very good question, and I think it
is a complicated one. Again, I think it is important that we
make sure that our financial institutions, including money
services businesses, money transmitters, are appropriately
regulated so that those avenues of transferring money are
available and available in ways that are used licitly. And, of
course, we also do outreach to those kinds of communities to
make sure that they understand both the risks and the
requirements that they have in place to have the kind of AML/
CFT programs that we believe are appropriate.
Senator Warner. Thank you, Mr. Chairman. I think there is a
lot of work to be done here.
Chairman Crapo. Thank you.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. And I want to
thank the witnesses for being here.
Mr. Day, in your testimony you highlight virtual currencies
as an alternative to cash that criminals may use for illicit
transactions. Cryptocurrencies such as bitcoin and ripple and
ethereum provide anonymity and are lightly regulated, with
limited AML controls. And this would be to both of you. To what
extent do you believe criminal networks, terrorist groups, and
rogue nations have utilized cryptocurrencies as a means for
moving money? Mr. Day, if you would go first.
Mr. Day. So we have seen criminal groups focus on digital
currencies. There have been a number of prosecutions. Several
years ago, the Justice Department prosecuted Liberty Reserve,
and as Sigal mentioned, that was a coordinated effort where
Treasury deployed anti-money-laundering authorities. At the
same time we announced our prosecution, the estimates at the
time were about $6 billion worth of money laundering through
Liberty Reserve, so a very significant money-laundering
problem, precisely because it offered anonymity to the
criminals that were using it.
More recently, the Justice Department has prosecuted a
digital currency exchange service in the Northern District of
California for failure to have anti-money-laundering controls,
and it is a problem where we are going to continue to devote
significant additional resources.
We just hired a digital currency counsel whose job is to
make sure that prosecutors and agents are up to speed on the
latest evolving money-laundering threats in the digital
currency space.
Senator Donnelly. Ms. Mandelker?
Ms. Mandelker. It is an area that we are tracking very
carefully. We are concerned about the use of cryptocurrencies
for illicit purposes all over the world, just as we are a
number of other means that illicit actors use to transfer
value.
I think one area that we are working on but that we have to
really hone in on is the fact that while in the United States
we have regulations over these virtual currency exchangers and
administrators, those kinds of regulations are lacking in many
different regions of the world. And so we have to encourage
other countries to do what we, Japan, Australia, and some
others have done to make sure that those industries are
appropriately----
Senator Donnelly. And I guess that follows up on my next
question, which was: How can law enforcement and Federal
authorities minimize--or monitor these transactions? As you
move forward, what is the most important thing you need to do
to be able to have success in that area?
Ms. Mandelker. So we are monitoring the transactions.
Because we do have AML/CFT requirements here in the United
States, we actually get a lot of SAR reporting from the virtual
currency exchangers. But we also have to send the message,
which we have done throughout the world, that to the extent
these virtual currency exchangers are engaging in illicit
activity, we are going to go after them.
So just as a brief example, with the Justice Department we
recently assessed a very significant monetary penalty of $100
million against a virtual currency exchanger that was resident
and principally operating in a foreign jurisdiction.
Senator Donnelly. There have been a number of reports that
the United States is among the easiest countries to create
anonymous shell companies in. Anyone can legally open bank
accounts. Anyone can buy property. As a result, criminal
networks, corrupt dictators, and terrorists can move money
through the United States as a legal business entity.
I would like to know from both of you, what resources are
available to you to identify the sources of illicit financing?
And what
difficulties are presented by these weak corporate transparency
rules where, in effect, almost anything goes?
Ms. Mandelker. So I just wanted to start by pointing out
that FinCEN did issue a rule in 2016, the customer due
diligence rule, that actually now requires financial
institutions to get information about the actual persons that
are behind their customer accounts. I think that is a very
important development. That rule is going to go into effect in
May, and I know a lot of financial institutions are already
gathering and collecting that information.
Of course, there has also been a lot of discussion about
other mechanisms that we can put in place through legislation
to gather additional beneficial ownership information, which is
important in the context where you cannot just rely on the
financial institutions to gather that kind of information.
Senator Donnelly. Mr. Day?
Mr. Day. Thank you, Senator, for your question on this
issue. Law enforcement does view the lack of a systematic
beneficial ownership regime in the United States as something
that does cause us to expend a lot of additional time and
effort in individual cases, piercing the corporate veil, trying
to figure out who are the bad actors that are hiding these
illicit proceeds. So we are able to do it through a lot of
gumshoe traditional investigative work, but we would bring more
cases more quickly with more impact if we had a better system
in place to make that information available to law enforcement.
Senator Donnelly. Thank you to both of you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Good morning, Under Secretary
Mandelker, Mr. Day. Thank you for the conversation. A very
important discussion we are having.
One of the things I want to shift just a little, though,
and you will appreciate this. Besides the financial
institutions--I come from the State of Nevada, and gaming is
considered like those financial institutions. Qualified casinos
are subject to the Bank Secrecy Act, so I have a couple
questions around gaming in general, because I know the
organizations within my State, and across the country, have
suggested that gaming operators would welcome a review of the
BSA requirements, like everyone else that we are talking about
today, and they look forward to this Committee's thoughtful,
bipartisan review of the BSA requirements that takes into
account the security imperative for robust anti-money-
laundering efforts as well as the impact those requirements
have on all industries.
So one of the top priorities of the gaming industry is to
eliminate the requirement that a detailed factual narrative is
required when filing a suspicious activity report form for
structuring situations. What are the pros and cons of such a
change? And I am going to ask both of you to answer that
question.
Ms. Mandelker. As with any SAR reporting, we do receive a
great deal of benefit from the narratives that are provided in
the context of--by the gaming industry, by financial
institutions, among other areas. I understand that there have
been some discussions about whether or not resources are well
spent when it comes to the structuring SARs. Of course, that is
something that we will take into consideration and consider,
and we welcome the thoughts of others in discussing----
Senator Cortez Masto. You are willing to address it--listen
to them and address some of the concerns, too?
Ms. Mandelker. We are certainly happy to have a discussion
with them.
Senator Cortez Masto. OK. Mr. Day?
Mr. Day. I would just second what Sigal said, which is the
information that we glean from the narrative portion of a
suspicious activity report can be very helpful in deciding to
initiate a criminal investigation or furthering a preexisting
case. So there probably is opportunity to at least discuss
changes, but it should be, you know, at least leavened by the
notion that there is a lot of benefit to law enforcement now,
and what can we do to preserve that benefit going forward?
Senator Cortez Masto. OK. And then the gaming industry and
others have recommended--and I heard it at our last hearing--
raising the currency transaction and suspicious activity
reporting thresholds. Some have recommended increasing the rate
roughly to about $60,000. Others say that is too high, but a
lesser amount, from $5,000, $10,000, to $20,000 and $25,000,
would be an improvement. Your thoughts on that, pros and cons?
Or should we even be looking at that threshold amount?
Mr. Day. Similar to the answer I gave a moment ago. There
are crimes that do not involve a lot of money, and so I fear--
or one potential disadvantage to raising the thresholds without
substantial study, like Sigal is discussing, is that you risk
losing visibility into those types of crimes. The classic
example is the lone wolf terrorism example. That does not
involve a lot of money and might not hit upon one of those
thresholds, but might a lower threshold.
So it is obviously an opportunity for us all to have this
discussion and make sure the thresholds are correct or, if they
need to be tweaked, what should they be. But it should be
balanced against this need to maintain visibility into those
types of criminal activity.
Senator Cortez Masto. OK. And what I have heard constantly
is the lack of communication. So I appreciate and applaud the
launch of FinCEN Exchange. Can you talk a little bit more about
that? And how will that draw in industry that is being
regulated and the discussion that we are having today and how
they can talk to you directly about some of the concerns and
whether those concerns can be addressed or not?
Ms. Mandelker. I would be happy to. So this is actually
something that we had piloted in the past and now we are
accelerating. So what we have been able to do in these settings
is bring together financial institutions of all different types
and sizes across the country and, among other things, have
discussions with them on particular cases. So we will provide
them with information that they can then use----
Senator Cortez Masto. And this would include nondepository
institutions, like gaming and others?
Ms. Mandelker. Right now we are focused on the financial
institutions, but we are happy to have discussions about
whether or not we would want to use it in other settings as
well.
Senator Cortez Masto. OK.
Ms. Mandelker. But we also are very focused on doing,
through FinCEN Exchange and through our financial advisories,
among other ways of communicating, is providing financial
institutions with typologies. What are the kinds of activity
that they should be alert for? How can they continue to
sophisticate their algorithms based on what our priorities are,
the threats that we are seeing that are most troubling? So it
is a mechanism to make sure that we are really significantly
enhancing the private-public information sharing that is, I
think, going to be so critical to ensuring that we are getting
the kind of data from the financial institutions that we need
to continue to be all the more effective in safeguarding our
system.
Senator Cortez Masto. I appreciate that. And is DOJ
involved in the FinCEN Exchange?
Ms. Mandelker. Absolutely.
Senator Cortez Masto. So it is everybody that is involved
with FinCEN that would be part of it.
Ms. Mandelker. Exactly.
Senator Cortez Masto. OK, all the agencies.
Ms. Mandelker. These would be meetings with FinCEN, with
law enforcement, and with the financial----
Senator Cortez Masto. I would hope you would open it up to
nondepository institutions as well, as you well know, because
they are regulated--particularly, if we really want to address
anti-money laundering, go after and target, then we need to
bring all of the regulated agencies in to have this
conversation.
One final thing. I do think that there needs to be more
risk-based assessment, more targeted investigations, and
everybody should be a part of that, not this check the box, ``I
have done what I had to do,'' and pass this form on and up the
ladder to somebody else. I think we have got a lot of
opportunity here, both in the compliance departments that exist
in all of the agencies that are regulated along with our law
enforcement and our Treasury to really have a targeted approach
and streamline it and be effective when we are trying to
address money-laundering issues and stop money laundering. So
thank you for the conversation today.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So at the last hearing on this topic, I focused on a few
areas where we could update our money-laundering laws to make
life easier both for law enforcement and for small financial
institutions, including making reporting requirements more
sensible and making sure we know who owns American
corporations.
Today I want to focus on cracking down harder on the big
banks that repeatedly violate anti-money-laundering laws. So
think about Citigroup. Just this month, the OCC fined the bank
$70 million for ignoring a 2012 order to beef up its anti-
money-laundering controls. In May, Citi was fined by the Fed
$97 million for letting Mexican drug cartels launder money
through the bank. How many money-laundering operations are they
assisting?
And Citi is not the only one. Other big banks break the
law. They get caught. And then they shrug off fines that barely
dent their massive profits, while criminals and terrorists
continue to move drug money and terrorist money all around the
globe.
Under Secretary Mandelker, are you confident that the
biggest financial institutions in the world are doing enough to
comply with anti-money-laundering laws?
Ms. Mandelker. I think that there is a lot of effort within
the financial institutions to make sure that they have----
Senator Warren. I am not asking if there is a lot of
effort. It is a really simple question. I am asking, do you
think they are doing enough to comply with the anti-money-
laundering laws?
Ms. Mandelker. Again, I think that there are very
substantial efforts underway within the financial institutions
to comply with the laws. To the extent that they are not
complying with the laws, of course, we are going to be focused
on those both through our----
Senator Warren. So let me ask it again. Do you think they
are doing enough?
Ms. Mandelker. Again, Senator, that is a very broad
question, and it is difficult for me to make a generalization.
I think we are very vigilant in monitoring and making sure that
they are doing enough, and where they are not, we and the
Justice Department have and will continue to use our
authority----
Senator Warren. Well, I am concerned about the fact that we
keep going back at them repeatedly, which kind of sounds like
it is not working. You know, I am very concerned that big banks
will continue to allow money laundering because the business is
profitable and the penalties for violating the law are weak.
Let us take another example: HSBC. I think Senator Brown
raised it. In 2012, the bank agreed to pay a fine of almost $2
billion for letting Mexican drug cartels and a Saudi bank
linked with al Qaeda to launder money for years. It also
admitted to moving money for customers in Iran, Libya, Sudan,
and Burma, all of which were subject to U.S. sanctions. That
was the largest penalty ever under the Bank Secrecy Act, and
you know what? It was about 4 weeks' worth of income for HSBC.
The bank's CEO swore that the bank would fix the problems. But
it did not.
Last February, the court-imposed monitor told a judge that
he had ``significant concerns'' about the bank's compliance
program, and HSBC faces a new money-laundering investigation
right now in the United Kingdom Still, the Department of
Justice dismissed its case against the bank in December.
So let me ask, Mr. Day, do you think the fine in the HSBC
case worked? Did it get HSBC to start following the law?
Mr. Day. I think there are a number of parts about that
prosecution that cumulatively had their desired impact. When
you think----
Senator Warren. So--let me just stop. It had the desired
impact. Then how can it be that a court-installed monitor
refused to certify that HSBC's anti-money-laundering compliance
program was working? And in November, the United States just
opened a new investigation evidently based on new evidence of
money laundering? I do not understand how you can say that
worked.
Mr. Day. So that was a Justice Department-installed
monitor, and that is another way of, I guess, thinking about
the Deferred Prosecution Agreement, is that it included a range
of measures,
including, for example, the decision by the Justice Department
to impose a monitor to give us confidence that the various
provisions of the agreement were being satisfied by HSBC.
Senator Warren. Well, I am glad for you to have confidence,
but I only want you to have confidence if it is actually
working. And the monitor said it is not. So I am not clear how
you can say that this is working.
You know, let me just make the point because I am running
out of time here, and I have one more quick question I want to
ask. It is never going to work so long as the consequences are
lame fines and no accountability for individuals at the bank
who are responsible for the illegal conduct. I promise you that
if HSBC executives had been hauled out in handcuffs and were
sitting in jail after their violations in 2012, they would have
gotten the procedures in place pretty darn fast to make sure
that that bank was in compliance with the law.
So I am over, but let me just ask a quick one. Mr. Day,
doesn't the Bank Secrecy Act empower the Justice Department to
go after individuals responsible for breaking the law?
Mr. Day. Of course, Senator, and we are focused on bringing
individual cases where the facts and the evidence merit such
cases. And we have done so in the past and will continue to do
so.
Senator Warren. Well, if we want to stop money laundering,
these giant banks really need to feel the penalties. And the
people who are in charge who are making the decisions need to
understand that if they are putting the American people at
risk, they will go to jail. Until that happens, we are not
going to fix anything here.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
And our final set of questions from Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank both
of you for your testimony today, and I do just want to add to
what both the Chairman and the Ranking Member said and you have
said in your testimony earlier about the importance of getting
to this beneficial ownership issue. I believe that is going to
be a major focus of the Committee's efforts.
Secretary Mandelker, when you were here for your nomination
hearing, I asked you about FinCEN's geographic targeting order,
and I think Senator Reed asked some questions regarding that.
You did extend it to March 20th, I believe, of this year. Have
you found that a useful tool? And I see that you did expand
some of the geographic areas.
Ms. Mandelker. Yes, we have found that it is a very
valuable tool. It allows us the opportunity to get critical
information to support our efforts and to support law
enforcement's efforts.
Senator Van Hollen. And do you have an expectation you will
continue this beyond March 20th of this year?
Ms. Mandelker. So I cannot--you know, as with any kind of
tool, I cannot tell you what our forward plans are. We have
extended that tool a number of times in the past.
Senator Van Hollen. OK. Well, based on the past track
record, I would hope that you would do that.
I know Senator Warner asked some questions about
cryptocurrency, and I did want to follow up on some of those.
Did you see the Reuters report January 8th headlined,
``Cryptocurrency may be getting quietly channeled to North
Korea University''? Did that hit your radar screen?
Ms. Mandelker. I did not see that particular report, but I
have seen similar reports linking cryptocurrency to the North
Korean regime.
Senator Van Hollen. Right, so I just want to follow up on
that because I know we are all working hard on effective
sanctions regimes and enforcement. A chief analyst at one of
the South Korean cybersecurity firms, EST, was quoted in this
article as saying that, ``With economic sanctions in place,
cryptocurrencies are currently the best way to earn foreign
currency in North Korea's situation. It is hard to trace and
can be laundered several times.'' They specifically mention the
13th largest cryptocurrency trader in the world, I guess
Monero. Has that been on your radar screen? And what steps are
you taking to make sure that North Korea cannot evade different
sanctions regimes through use of cryptocurrency?
Ms. Mandelker. So as you know, we are focused on illicit
financing to North Korea in a wide spectrum of areas. Of
course, cryptocurrency is one of them, but the North Korean
regime has been able to finance itself through a number of
different mechanisms, including through the financial system.
So to put cryptocurrency to the side, we have to remain
vigilant in making sure that North Korea is not using the
international financial system, as they have repeatedly in the
past, to finance their weapons program. So cryptocurrency, of
course, will be an effort of focus for us, but as is the many
different ways in which the North Korean regime has been able
to buildup to the place where we find ourselves today.
Senator Van Hollen. Absolutely. I think we have got to make
sure we cover all of those sources of financing. It appears
that to the extent that we are more successful at shutting down
conduits through the normal financial system, they may turn to
these cryptocurrencies, increasingly do that.
So with respect to these exchanges for cryptocurrencies, do
you think that they should be held to the same standards as we
do banks?
Ms. Mandelker. So here in the United States they are. They
are subject to the same AML requirements that--they are
characterized under our laws as a ``money transmitter,'' and so
they are required to have an AML/CFT regime. We do examine
them, just as we examine other financial institutions. We have
brought enforcement actions not just here in the United States
but also against a virtual currency exchanger overseas. We
assessed a $100 million penalty over the summer, and the
Justice Department has brought even stronger penalties against
those kinds of exchangers.
I think the real vulnerability that we all have to address
is that while we have regulatory authorities in place here in
the United States and we do enforce those authorities, we need
other countries to do the same. So countries like Japan and
Australia are very much in line with us in regulating virtual
currency exchangers, but we have a focused effort on
encouraging other, many different countries to make sure they
have the regime in place to keep this type of currency from
being manipulated and used by illicit actors.
Senator Van Hollen. Got it. And that brings me to my last
question, which I know Senator Tillis raised earlier, and other
Members of the Committee, which is we are doing our best to
defend our own financial system, and encourage others through
international efforts that you testified about earlier. What at
the end of the day is our--are we looking at tools to make sure
that we strengthen penalties and the costs for those overseas
that are not complying with our efforts? Because we can do
everything we can here, but if you have got, as others have
said, 75 percent of these money-laundering efforts going on
overseas, we are just plugging one hole out of a whole lot of
them. So what is the plan going forward to make sure we use our
leverage in the financial system to make sure that other people
are complying?
Ms. Mandelker. Absolutely. So as I just mentioned, for
example, in the virtual currency space we brought an
enforcement action against a virtual currency exchanger that
was resident overseas. A lot of the work that we do is focused
on these kinds of cross-border illicit transactions, and I know
many of the cases, just as an example, the Justice Department
brings, I know from my days at the Justice Department and just
looking at the work that they are doing now, there is a very,
very big focus on bringing criminal penalties against illicit
actors no matter where in the world that they operate. We do
that. We do that through FinCEN, OFAC, and the Justice
Department does it as well.
Senator Van Hollen. And you have all the authorities that
you think you need to do that effectively now?
Ms. Mandelker. Yes.
Senator Van Hollen. OK. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
For those Senators who want to ask questions for the record
following the hearing, they will be due by January 24th, and
our witnesses, I ask you, as you get follow-up questions, to
respond promptly.
Senator Menendez. Mr. Chairman, if I may?
Chairman Crapo. Well, that was close. We will give you your
5 minutes.
Senator Menendez. Thank you very much. This is important.
Especially as someone who has been one of the architects of our
sanctions, I would like to hear some of the answers to some of
these questions. So thank you both for your appearance.
As someone who has been the architect of sanctions laws
impacting Iran and Russia and North Korea, I understand how
important it is to prevent criminals and sanctioned individuals
from anonymously accessing the financial system. Therefore, it
is critical that we improve beneficial ownership information to
understand exactly who benefits in a legal entity, and I think
there has been some discussion about that from what I gathered
before, and ensure that information is quickly available to law
enforcement.
In May, Treasury's new customer due diligence requirements
for financial institutions are going to go into effect. There
has been some testimony here about the nature of that in terms
of banks having to identify and verify beneficial owners owning
25 percent or more of a legal entity as well as an individual
on the management team. Some witnesses expressed concern about
Treasury's implementation of these regulations. Some suggested
that if there is not an actual 25 percent or more stake, there
would be no one to list as a beneficial owner.
Ms. Mandelker, can you address these concerns and provide
some additional detail on how Treasury plans to implement this
new regulation?
Ms. Mandelker. Well, again, as you mentioned, Senator, the
rule is going to go into effect in May. I know a lot of
financial institutions have been taking steps underway to make
sure that they are complying with the rule.
In addition to the 25 percent beneficial ownership mandate,
companies are also going to have to identify a controlling
person that is resident within a particular entity. So it is
not just the ownership trigger. It is also the controlling
person that needs to be identified.
Senator Menendez. So whether or not it is sufficient to
establish 25 percent, the controlling person will have to be
identified?
Ms. Mandelker. A control person will have to be identified
as well.
Senator Menendez. Do you think that that will give you the
breadth and scope necessary to make sure that we know who is
the beneficial entity?
Ms. Mandelker. I think it is a very important step. Of
course, that is information that is going to go to the banks,
so it is a requirement that the banks identify and verify who
the beneficial owners are and who a controlling person is. And,
of course, to the extent--and it will have the ability to
obtain information as necessary and in the right circumstances
from the banks.
Senator Menendez. All right. Let me follow up on both
Senator Warner's and Senator Donnelly's questions on
cryptocurrencies. I am interested in your view on the use of
virtual currencies by foreign sovereign states, like Russia and
Venezuela, to evade sanctions. In recent months both Venezuela
and Russia have expressed interest in state-backed virtual
currencies. In December, Venezuelan President Maduro announced
he is launching a virtual currency backed by the nation's oil
reserves for the explicit purpose--this is what he stated--or
circumventing sanctions imposed by the United States.
Now, perhaps lack of technological sophistication will
delay or hamper this plan, but we know full well that Maduro
will use every tool at his disposal to perpetuate his
authoritarian objectives, so it is critical that we understand
the risk here.
Do you believe that the Treasury Department is monitoring
these developments? And do you have the technical tools and
enforcement mechanisms to combat the use of cryptocurrencies to
evade U.S. sanctions?
Ms. Mandelker. So we are monitoring the developments. As I
am sure you are aware, we have had a very active portfolio in
the context of what Venezuela is doing. In addition to a very
strong Executive order that the President issued in August, we
have also been designating individuals who have enabled the
Maduro regime and committed what we think are a variety of
different types of offenses.
When it comes to the resources and tools to make sure that
we are monitoring virtual currency and cryptocurrency, we do
have a dedicated team of individuals at Treasury who have the
expertise to monitor these activities very carefully and
closely. We are regulating this industry, which is very
important. We are examining virtual currency exchangers along
with the IRS----
Senator Menendez. So my question is--OK, so now I
appreciate and am glad to hear that you are monitoring it, but
do you believe you have the tools and mechanisms necessary in
place to combat the use of cryptocurrencies to evade U.S.
sanctions?
Ms. Mandelker. We do have tools and authorities in place to
make sure that we are staying very much on top of this
burgeoning industry.
Senator Menendez. Nothing that you need?
Ms. Mandelker. At this time, no, Senator.
Senator Menendez. OK. Fair enough. Glad to hear that.
Finally, I am sure you are aware that FinCEN issued
guidance in 2014 to clarify Bank Secrecy Act expectations and
set the rules of the road for banks and financial institutions
seeking to provide services to legitimate marijuana-related
businesses in States that have legalized, and what I have
heard, including from New Jersey institutions for which medical
marijuana is legalized and now the State is considering the
possibility of passing--legalizing the essence of recreational
marijuana, is that there is a concern that, according to the
Pew Charitable Trust, since the guidance was issued, the number
of banks and credit unions serving businesses in the industry
has more than tripled to nearly 400. Regardless of my views on
this, if it is going to be legal in any State, I think it
should be bankable and transactionable and we should be able to
have eyes on it and understand revenues and how the money is
flowing.
FinCEN's guidance has been critical to alleviating some of
the public safety risks as well in terms of accumulation of
large quantities of cash at dispensaries and businesses. And I
worry that any steps to walk back this guidance only serves to
undermine public safety.
So can you commit that this guidance is going to stay in
place?
Ms. Mandelker. We are reviewing the guidance in light of
the Attorney General's recent decision to revoke a Justice
Department memorandum on this issue. What the guidance did was
it provided guidance to financial institutions with respect to
what kinds of SARs they should file in different circumstances.
The laws with respect to the Controlled Substances Act, of
course, remain on the books. Those have not undertaken any
changes. That would have to be done by the Congress.
Senator Menendez. But when you are saying you are
reviewing, does that mean that you find a conflict with FinCEN
having the standards for banking transactions in States where
the law permits these sales to take place or uses to take
place, and that you see there is a conflict that would lead you
to say, no, you cannot bank them anymore?
Ms. Mandelker. I am not suggesting that there is a conflict
or not a conflict. The guidance remains in place, and we are
taking a look at it in light of the Justice Department's----
Senator Menendez. Well, would you let us know if you move
to change it?
Ms. Mandelker. Yes, of course we would let you know.
Senator Menendez. Thank you, Mr. Chairman, for your
courtesy.
Chairman Crapo. Thank you. And that is the last
questioning. I have already given instructions on follow-up
questions from Senators, and, again, I urge the witnesses to
respond. I am sure we will be engaging with you as we move
forward on this issue.
Thank you for testifying today, and that concludes our
hearing.
[Whereupon, at 11:46 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SIGAL MANDELKER
Under Secretary, Terrorism and Financial Intelligence, Department of
the Treasury
January 17, 2018
Introduction
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee, as the Under Secretary for Treasury's Office of
Terrorism and Financial Intelligence (TFI), I am honored to appear
before you today to discuss the critical work that TFI does to
safeguard the United States and international financial systems.
The offices I lead are tasked with deploying our financial
intelligence, expertise, and economic authorities to combat terrorist
financing, money laundering, weapons proliferators, rogue regimes,
human rights abusers, and other national security threats to the United
States and our allies.
In 2004, Congress and the executive branch had the tremendous
vision to combine under one roof a broad range of powerful economic
tools, including sanctions, anti-money laundering (AML) measures,
enforcement actions, foreign engagement, intelligence and analysis, and
private sector partnerships, among others. We are the only country that
combines these economic authorities within one office, which has proven
invaluable in combating some of the most serious illicit finance and
national security threats we face today.
Terrorist groups such as ISIS, al Qaeda, Hezbollah, and others seek
to infiltrate the financial system to finance their activities and
threaten our national security.
Rogue regimes in Iran, North Korea, and Venezuela continue to
assault the integrity of the financial system, including by using
deceptive financial practices to advance their corrupt, criminal, or
terrorist aspirations. Russia continues to occupy Crimea and
destabilize Ukraine, in violation of international norms of
sovereignty.
These regimes, and many more, engage in human rights abuses and
corruption, putting their own interests above the well-being of their
people. That is why we are also targeting human rights abusers and the
corrupt through authorities like the Global Magnitsky Human Rights
Accountability Act. Simply put, the United States will not allow our
financial system to be compromised by human rights abusers and corrupt
actors who exploit innocent people around the world.
Transnational criminal organizations, drug kingpins, cyber
criminals and others likewise seek out vulnerabilities in the global
financial system, including by looking to use emerging technologies
such as virtual currencies to launder their ill-gotten gains and
advance their malicious enterprises.
These and other malign actors cannot operate without funding.
Cutting off their access to the financial system requires calibrating
our economic tools in strategic and complementary ways. TFI integrates
our authorities and expertise across components, deploying the tools
best suited to each challenge and achieving significant impact. The
foundation of our economic authorities is a strong and robust anti-
money laundering/combating the financing of terrorism (AML/CFT) regime.
Many of our efforts to identify and disrupt terrorist financiers,
weapons proliferators, rogue regimes, and other illicit finance threats
depend on financial institutions implementing the laws and regulations
designed to protect the financial system. Financial intelligence
reported to us by financial institutions serves as a key component of
our efforts to target illicit actors.
One of my top priorities as Under Secretary for TFI is to ensure
that the AML/CFT framework remains strong and effective. My testimony
today will focus on both the threats that we face and the efforts we
are undertaking to strengthen the AML/CFT framework in order to counter
those challenges.
Threats to Our Financial System
We bring enormous economic power to bear against an array of law
enforcement and national security threats. Below are just a few of the
challenges we have been combating.
For example, North Korea uses covert representatives as well as
front and trade companies to disguise, move, and launder funds that
finance its weapons programs. The regime's illicit financial activity
is not just conducted in dollars, nor is it limited to a handful of
jurisdictions. Once a North Korean trade or financial representative
successfully accesses a nation's financial system, illicit funds can
flow indirectly through global banks, who may be unwittingly conducting
currency clearing operations for North Korea.
We are laser-focused on detecting and disrupting these networks as
part of the Administration's strategy to impose maximum pressure on
North Korea. We are
deploying the full range of our economic authorities to combat the
North Korean threat. Treasury has a cadre of analysts, including in the
Office of Intelligence and Analysis (OIA) and the Financial Crimes
Enforcement Network (FinCEN), who are mapping out these networks so
that we can target and disrupt them.
There are now six North Korea-related executive orders, in addition
to robust congressional authorities, that we use to target key North
Korean financial middlemen and others who support the regime. Over the
last year, Treasury's Office of Foreign Assets Control (OFAC)
designated over 100 individuals and entities related to North Korea as
part of our concerted effort to pressure the regime. Our recent action
under Section 311 of the USA PATRIOT Act against Bank of Dandong, a
Chinese bank facilitating North Korean money laundering and sanctions
evasion, highlights our resolve to target key nodes of financial
support for North Korea.
We are also warning financial institutions both here and abroad
about the deceitful ways in which North Korea abuses the international
financial system. In November 2017, FinCEN issued an advisory to alert
financial institutions about North Korea's attempts to use front
companies to launder money and evade sanctions. This information helps
the private sector detect and report such activity, which in turn
supports our efforts to target those persons and entities that help the
regime fund its weapons program.
Our focus on depriving North Korea of its ability to earn and move
revenue through the international financial system means that we must
work with other countries to achieve this goal. Not only do we work
bilaterally with key partners to coordinate our domestic sanctions
programs, the Secretary, myself, and others within TFI engage with
leaders across the world to stress the importance of implementing
United Nations Security Council Resolutions (UNSCRs). We also work
bilaterally with governments and through the Financial Action Task
Force (FATF) and the G7 Financial Experts Group to ensure that
countries have the regulatory framework in place to detect and freeze
assets linked to North Korea. I raise these concerns in virtually every
engagement I have with my foreign counterparts and with many financial
institutions, and will do so again in my upcoming trip to Asia next
week.
Iran is another rogue regime that seeks to subvert the financial
system. It is the leading state sponsor of terrorism and finances
terrorist groups such as Hezbollah and Hamas, the brutal regime of
Bashar al-Assad, and a host of Shi'a militant groups in Bahrain, Iraq,
Syria, and Yemen.
Like North Korea, Iran uses deceptive financial practices to
generate revenue. As just one example, in November, we sanctioned an
Islamic Revolutionary Guards Corps-Qods Force (IRGC-QF) network
involved in a large-scale scheme to counterfeit Yemeni bank notes to
support its destabilizing activities. This network employed deceptive
measures to circumvent European export control restrictions and
procured materials to print counterfeit bank notes potentially worth
hundreds of millions of dollars.
In addition to Iran's financing of terrorism and other
destabilizing activities, the IRGC has an extensive presence in Iran's
economy, including in the energy, construction, mining, and defense
sectors. In our engagements both here in the United States and abroad,
we have made clear that companies doing business in Iran face
substantial risks of transacting with the IRGC or IRGC-linked entities.
This risk is heightened by the lack of transparency in the Iranian
economy, which is one of the least transparent in the world. Indeed,
Iran is on the FATF's blacklist precisely because it has failed to
address such systemic deficiencies in its controls to combat terrorist
financing and money laundering. This has led the FATF to highlight for
the past decade the terrorist financing risk emanating from Iran and
the threat that it poses to the international financial system. Thus
far, Iran has failed to fulfill its commitments to the FATF in
addressing its weak controls.
We will continue to take action to protect the international
financial system and to combat Iran's relentless campaign to support
terrorism, destabilize the region, and abuse its own people. Over the
last 2 weeks, OFAC designated 19 individuals and entities in connection
with serious human rights abuses and censorship in Iran, and for
assisting designated Iranian weapons proliferators. As Secretary
Mnuchin stated when announcing last week's sanctions, the United States
will not stand by while the Iranian regime continues to engage in human
rights abuses and injustice.
In Venezuela, the Maduro regime's systematic destruction of
democracy, as well as its endemic corruption, also pose a threat to the
international financial system. Under Maduro, embezzlement, graft, and
fraud have become the regime's de facto economic policy, aimed at
maintaining the loyalty of the security apparatus to keep Maduro and
his cronies in power. In August 2017, the President issued an Executive
order carefully calibrated to deny the Maduro dictatorship a critical
source of financing to maintain its illegitimate rule and protect the
U.S. financial system from complicity in Venezuela's corruption and in
the impoverishment of the Venezuelan people, while still allowing for
the provision of humanitarian assistance.
In September, FinCEN issued an advisory to alert financial
institutions of widespread public corruption in Venezuela and the
methods that senior political figures and their associates may use to
move and hide proceeds of their ill-gotten gains, at the grave expense
of the Venezuelan people. Combined with our powerful sanctions, this
advisory put financial institutions on watch for possible illicit fund
flows.
Endemic corruption also undermines the U.S. and international
financial systems, perpetuating violent conflict and damaging economic
markets. In the past year, we have imposed sanctions, issued financial
advisories, and undertaken diplomatic engagements to counter corruption
across the globe. Building on the Global Magnitsky Act, which Congress
passed just over 1 year ago, the President signed an Executive order on
December 20, 2017, declaring a national emergency with respect to human
rights abuses and corruption globally and enabling Treasury to impose
financial sanctions on malign actors engaged in these activities.
In this Executive order, the President imposed sanctions on 13
serious human rights abusers and corrupt actors, and OFAC
simultaneously imposed sanctions on an additional 39 affiliated
individuals and entities under the newly issued Order. Since this
action, we have seen public reports regarding the notable impact of
these sanctions, with some of the designated individuals being cutoff
from lucrative business arrangements, while others face investigation
by their home governments.
TFI has also been deploying its authorities against transnational
criminal organizations, fraud, cybercriminals, human trafficking
networks, and other law enforcement priorities in which our economic
tools have had a meaningful impact. In recent years, for example, we
have issued geographic targeting orders (GTOs) aimed at combating tax
refund fraud and sophisticated trade-based money laundering schemes
orchestrated by drug trafficking networks and their money launderers.
To mitigate the money laundering vulnerabilities associated with
luxury real estate, in 2016 we issued GTOs to identify the beneficial
owners behind shell companies used to pay all-cash for high-end
residential real estate in certain U.S. cities. In 2017, following the
enactment of the Countering America's Adversaries through Sanctions
Act, FinCEN revised the GTOs to capture a broader range of transactions
and include transactions involving wire transfers. The information
gathered from the GTOs supports law enforcement and helps inform our
broader approach to mitigating the money laundering vulnerabilities in
the real estate sector.
Strengthening the AML/CFT Framework
As we employ our economic tools to address these challenges, we
must continue to increase the transparency and accountability in the
financial system, which underpins much of our economic statecraft. A
strong and effective AML/CFT framework keeps illicit actors out of the
financial system, and allows us to track and target those who
nonetheless slip through. This framework must address the evolving
forms of illicit finance threats that we face.
As such, we are taking a hard look not only at the Bank Secrecy Act
(BSA) but also at the broader AML/CFT regime. We need to continuously
upgrade and modernize our system--a statutory and regulatory construct
originally adopted in the 1970s--and make sure that we have the right
framework in place to take us into the 2030s and beyond.
Incentivizing Innovation
In particular, we must make sure that financial institutions are
devoting their
resources toward high value activities and are encouraged to innovate
with new technologies and approaches. In recent years, for example,
financial institutions have become more proactive in their AML/CFT
approach, in some cases building sophisticated internal financial
intelligence units devoted to identifying strategic and cross-cutting
financial threats. Financial institutions have been improving their
ability to identify customers and monitor transactions by experimenting
with new technologies that rely on artificial intelligence and machine
learning. Institutions are also working together to share information
on suspicious activities, enabling them to identify and report activity
that would not otherwise be visible or concerning to a single
institution.
We laud and encourage these innovations. These initiatives advance
the BSA's underlying purpose. We are working closely with our
counterparts at the Federal Banking Agencies (FBAs) to discuss ways to
further incentivize financial institutions to be innovative in
combating financial crime. We have also been speaking with many in the
financial community to understand their perspectives.
Public-Private Partnerships
Deploying our tools for maximum impact requires proactive dialogue
and information sharing with financial institutions. They are on the
front lines, detecting and blocking illicit financing streams,
combating financial crimes, and managing risk. The safeguards employed
by the private sector, and the information reported about terrorist
financiers, weapons proliferators, human rights abusers and
traffickers, and cyber and other criminals, help prevent malign actors
from abusing our financial system.
Enhancing public-private partnerships that reveal and mitigate
vulnerabilities is one of our top priorities. To make these
partnerships work, we are arming the private sector with information
that enhances their ability to identify and report suspicious activity.
We have also been issuing advisories to warn financial institutions
about illicit finance risks.
I have heard from my outreach with financial institutions here and
abroad how this information helps them better prioritize targets and
utilize their limited resources. That is why last month I announced the
launch of FinCEN Exchange, a new public-private information sharing
program led by FinCEN.
FinCEN Exchange brings financial institutions, FinCEN, and law
enforcement together to facilitate greater information sharing between
the public and private sectors.
Information sharing should be a two-way street. As part of FinCEN
Exchange, we are convening regular briefings--at least once every 6-8
weeks--with law enforcement, FinCEN, and financial institutions to
exchange targeted information on priority illicit finance threats. In
close coordination with law enforcement, our goal is to provide
information to support specific matters through Section 314(a) of the
USA PATRIOT Act and other authorities, and also to provide financial
institutions with broader typologies to help them identify illicit
activity. These types of exchanges enable the private sector to better
identify risks and provide FinCEN and law enforcement with critical
information to disrupt money laundering and other financial crimes.
I have seen firsthand the immense value of this public-private
partnership. Information provided by financial institutions in
connection with public-private briefings has helped us map out and
target weapons proliferators, sophisticated global money laundering
operations, human trafficking and smuggling rings, and corruption and
trade-based money laundering networks, among others. This also creates
a positive feedback loop in which we can share with the broader
financial community the typologies learned from these exchanges,
enabling other financial institutions to identify and report similar
activity.
Through FinCEN Exchange, we are increasing public-private
information sharing, which will include financial institutions of all
types and sizes across the country.
We are also discussing BSA reform with the private sector,
including in the Bank Secrecy Act Advisory Group (BSAAG). The BSAAG,
chaired by FinCEN, is comprised of members from financial institutions,
trade groups, and State and Federal regulators and law enforcement. The
topics addressed in the BSAAG include identifying metrics for
determining effective financial reporting, streamlining the reporting
of money laundering ``structuring'' transactions, and more efficient
ways for
industry to report cash transactions.
Promoting Information Sharing Among Financial Institutions
Public-private partnerships are even more effective when financial
institutions share information with each other. Money launderers are
sophisticated. They move across borders and financial institutions, and
financial institutions are better able to keep pace and effectively
combat them when they communicate with each other.
Some institutions have started forming consortia to share
information more
dynamically under Section 314(b) of the USA PATRIOT Act, which provides
safe harbor for financial institutions to voluntarily share information
related to money laundering or terrorist activities. We are highly
encouraged by, and supportive of, the private sector's willingness to
engage in this type of exchange. By working together, these groups of
financial institutions are directly assisting our efforts to identify
and disrupt streams of financing for North Korea and other top illicit
finance threats.
Evolving Threats
Part of our effort to update the AML/CFT regime includes staying
ahead of evolving threats. We lead the world in mitigating the illicit
finance risks of emerging technologies, such as the use of virtual
currencies. We stand at the regulatory and supervisory forefront of
this emerging industry. Currently, the United States, Japan, and
Australia are among the few countries regulating virtual currency
payments/exchange activities, including in particular decentralized
convertible virtual currency, for AML/CFT purposes.
To ensure that virtual currency providers and exchangers know the
rules and follow them, FinCEN has prioritized engagement with--and
examination of--these entities, focusing both on the approximately 100
that have registered with FinCEN as money transmitters as required, as
well as those that have not. As part of the examination process,
FinCEN, working with delegated Internal Revenue Service (IRS)
examiners, has recommended virtual currency providers and exchangers
take certain actions to improve their compliance activities.
The effectiveness of this structure depends on compliance by the
regulated entities, and so we aggressively pursue virtual currency
exchangers and others who do not take these obligations seriously. In
July 2017, for example, FinCEN assessed a $110 million fine against
BTC-e, an internet-based, foreign-located money transmitter that
exchanges fiat currency as well as the convertible virtual currencies
Bitcoin, Litecoin, Namecoin, Novacoin, Peercoin, Ethereum, and Dash. At
the time of our action, it was one of the largest virtual currency
exchanges by volume in the world and facilitated transactions involving
ransomware, computer hacking, identity theft, tax refund fraud schemes,
public corruption, and drug trafficking. FinCEN also assessed a fine
against Russian national Alexander Vinnik, one of the operators of BTC-
e, for his role in the violations.
This action sends a very powerful message that we will hold
accountable virtual currency exchangers that violate our AML laws,
wherever they are located. We will do so in conjunction with our law
enforcement partners and foreign counterparts.
We understand that the European Union is finalizing its amendments
to its anti-money laundering directive, which will put in place a
requirement for EU members to regulate virtual currency exchangers, a
significant step. Even with these advancements, there is still a major
gap in regulating these entities globally and we are actively engaged
with other countries, bilaterally and multilaterally, to encourage them
to apply international AML/CFT standards to virtual currency payments.
We also prioritize increasing the transparency of shell companies
in the U.S. financial system. To that end, we have strengthened one of
the fundamental components of our AML/CFT regime: customer due
diligence. Treasury's customer due diligence rule, which takes effect
this May, requires covered financial institutions to identify and
verify the identity of the beneficial owners of companies at the time
of account opening. We look forward to working with Congress on the
important issue of enhancing the transparency of beneficial owners.
As we call upon the private sector to enhance its systems, we at
TFI are doing the same. Financial intelligence is central to our
efforts to combat the national security threats I outlined above. As
such, I have directed my staff to work innovatively on employing new
tools to analyze and use information more effectively. Last month, I
established a Technology Council, which, among other things, is
implementing new technologies to further enhance our analytic
capabilities.
Conclusion
I am grateful for this Committee's leadership and support, both of
which are essential to combating the threats we face and ensuring the
continued success of TFI. I look forward to working with this Committee
and other Members of Congress as we seek to fulfill our shared
responsibility to keep Americans safe and secure. I look forward to
your questions.
______
PREPARED STATEMENT OF M. KENDALL DAY
Acting Deputy Assistant Attorney General, Criminal Division, Department
of Justice
January 17, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee.
Thank you for the opportunity to discuss our Nation's anti-money
laundering (AML) laws. They constitute one of the pillars of our
national security strategy, while also serving as a critical element of
our transparent and robust financial system.
As economies and financial systems become increasingly global, so
too do the criminal organizations and other bad actors who attempt to
exploit them. Transnational criminal organizations, kleptocrats,
cybercriminal groups, terrorists, drug cartels, and alien smugglers
alike must find ways to disguise the origins of the proceeds of their
crimes so that they can use the profits without jeopardizing their
source. These criminal actors and their illicit proceeds--which best
estimates peg at more than $2 trillion annually are a global problem.
But this is a global problem with acute and specific effects here in
the United States, where we enjoy some of the deepest, most liquid, and
most stable markets in the world. Those features of the U.S. financial
system attract legitimate trade and investment, foster economic
development, and promote confidence in our markets and in our
Government. Those same advantages, however, also attract criminals and
their illicit funds as they seek to launder their proceeds to enjoy the
fruits of their crimes, or to promote still more criminal activity.
One of the most effective ways to deter criminals and to stem the
harms that flow from their actions--including harm to American citizens
and our financial systems--is to follow the criminals' money, expose
their activity, and prevent their networks from benefiting from the
enormous power of our economy and financial system. Identifying and
disrupting illicit financial networks not only assists in the
prosecution of criminal activity of all kinds, but also allows law
enforcement to halt and dismantle criminal organizations and other bad
actors before they harm our citizens or our financial system. More
broadly, money laundering undermines the rule of law and our democracy
because it supports and rewards corruption and organized crime,
allowing it to grow and fester. Our efforts to combat money laundering
thus directly affect the safety and security of the American public,
and the stability of our Nation.
The Department of Justice (Department), in coordination with our
colleagues from other agencies--one of whom is here today--as well as
our international law enforcement partners, has had numerous recent
successes in thwarting criminals who sought to move, hide, or otherwise
shelter their criminal proceeds using the U.S. financial system.
Despite our successes, criminals continue to exploit gaps and
vulnerabilities in existing laws and regulations to find new methods to
conduct their illicit transactions and abuse and weaken our financial
system and economy, causing real harm to our country and its citizens.
Thus, it is imperative that domestic and international law enforcement,
policymakers, regulators, and industry continue to work together to
implement and enforce strong AML laws to detect, target, and disrupt
illicit financial networks that threaten our country.
I. Background
Crime is big business. The U.N. Office on Drugs and Crime estimates
that annual illicit proceeds total more than $2 trillion globally. Here
in the United States, proceeds of crimes, excluding tax evasion, were
estimated to total approximately $300 billion in 2010, or about 2
percent of the overall U.S. economy at the time. Of that $300 billion,
drug trafficking sales in the United States generate an estimated $64
billion annually. Fraud, human smuggling, organized crime, and public
corruption also generate significant illicit proceeds.
For any illegal enterprise to succeed, criminals must be able to
hide, move, and access the proceeds of their crimes. And they must find
ways to do so without jeopardizing their ongoing criminal activities.
Without usable profits, the criminal activity cannot continue. This is
why criminals resort to money laundering.
Money laundering involves masking the source of criminally derived
proceeds so that the proceeds appear legitimate, or masking the source
of monies used to promote illegal conduct. Money laundering generally
involves three steps: placing illicit proceeds into the financial
system; layering, or the separation of the criminal proceeds from their
origin; and integration, or the use of apparently legitimate
transactions to disguise the illicit proceeds. Once criminal funds have
entered the financial system, the layering and integration phases make
it very difficult to track and trace the money.
II. Specific Money Laundering Threats
Criminals employ a host of methods to launder the proceeds of their
crimes. Those methods range from well-established techniques for
integrating dirty money into the financial system, such as the use of
cash, to more modern innovations that make use of emerging technologies
to exploit vulnerabilities. Some of the more well-known methods of
money laundering are described below.
Illicit cash. Cash transactions are particularly vulnerable to
money laundering. Cash is anonymous, fungible, and portable; it bears
no record of its source, owner, or legitimacy; it is used and held
around the world; and is difficult to trace once spent. Additionally,
despite its bulk, cash can be easily concealed and transported in large
quantities in vehicles, commercial shipments, aircrafts, boats,
luggage, or packages; in special compartments hidden inside clothing;
or in packages wrapped to look like gifts. Criminals regularly attempt
to smuggle bulk cash across the United States' borders using these and
other methods.
Cash-intensive sources of illicit income include human smuggling,
bribery, contraband smuggling, extortion, fraud, illegal gambling,
kidnapping, prostitution, and tax evasion. Drug trafficking, however,
is probably the most significant single source of illicit cash.
Customers typically use cash to purchase drugs from street-level drug
dealers, who in turn use cash to purchase their drug supply from mid-
level distributors. Mid-level distributors purchase drugs from
wholesalers using cash, and wholesalers often make payment to their
suppliers in cash. Mexican drug trafficking organizations responsible
for much of the United States' drug supply commonly rely on multiple
money laundering methods, including bulk cash smuggling, to move
narcotics proceeds across the U.S.-Mexico border into Mexico.
Trade-based money laundering. Drug trafficking organizations also
use money brokers to facilitate trade-based money laundering. In
complex trade-based money laundering schemes, criminals move
merchandise, falsify its value, and misrepresent trade-related
financial transactions, often with the assistance of complicit
merchants, in an effort to simultaneously disguise the origin of
illicit proceeds and integrate them into the market. Once criminals
exchange illicit cash for trade goods, it is difficult for law
enforcement to trace the source of the illicit funds.
This particular method of money laundering harms legitimate
businesses. For example, the U.S. Department of Treasury's (Treasury)
National Money Laundering Assessment (2015) notes that transnational
criminal organizations may dump imported goods purchased with criminal
proceeds into the market at a discount just to expedite the money
laundering process, putting legitimate merchants at a competitive
disadvantage.
Illicit use of banks. U.S. banks handle trillions of dollars of
daily transaction volume. Most Americans use depository financial
institutions--such as commercial banks, savings and loan associations,
and credit unions--to conduct financial transactions. Those who do not
have access to these institutions, or who choose not to use depository
financial institutions, may conduct financial transactions using money
services businesses such as money transmitters, check cashers, currency
exchangers, or businesses that sell money orders, prepaid access
devices, and traveler's checks. Some money services businesses
themselves may also engage the services of depository financial
institutions to settle transactions. Banks may also hold accounts with
other banks, including foreign banks, to facilitate domestic and cross-
border transactions. For example, some banks establish correspondent
relationships with other banks to enable them to conduct business and
provide services to clients in foreign countries without the expense of
establishing a presence in those foreign countries.
The sheer volume of business that banks handle on a daily basis
exposes them to significant money laundering risks. In fact, in most
money laundering cases, criminals employ banks at some point to hold or
move illicit funds.
Because they play such a significant role in the U.S. financial
system, financial institutions are often the front line in AML efforts.
Compliance with the Bank Secrecy Act and sanctions laws is fundamental
to protecting the security of financial institutions and the integrity
of the financial system as a whole. These laws impose a range of
obligations on financial institutions, including filing of transaction
reports, reporting suspicious activity, performing customer due
diligence, preventing transactions that involve the proceeds of crimes,
and establishing effective AML programs.
Effective AML programs play a critical role in the fight against
criminal activity. For example, effective AML programs help financial
institutions detect efforts to launder illicit proceeds, which can, in
turn, prevent those funds from ever entering the U.S. financial system.
Accurate and timely suspicious activity reporting can be a critical
source of information for law enforcement investigations. Further,
domestic collection of AML information improves the United States'
ability to respond to similar requests from foreign law enforcement for
investigative assistance, thus increasing our ability to fight
financial crime on the global stage.
The Bank Secrecy Act's requirements are designed to help ensure
that banks avoid doing business with criminals. However, criminals
frequently seek to thwart or evade these requirements. For example,
criminals may structure cash deposits to avoid threshold reporting
requirements, or seek out complicit merchants who will accept their
illicit proceeds without reporting the transactions. Criminals may also
misuse correspondent banking services to further their illicit
purposes. Because U.S. banks may not have a relationship with the
originator of a payment when they receive funds from a correspondent
bank, banks may face additional challenges in evaluating the money
laundering risks associated with those transactions. When criminals
successfully deploy these techniques, they are one step closer to
``cleaning'' their illicit proceeds--with significant consequences for
our financial system.
Obscured beneficial ownership. Increasingly, sophisticated
criminals seek access to the U.S. financial system by masking the
nature, purpose, or ownership of their accounts and the sources of
their income through the use of front companies, shell companies, or
nominee accounts. Front companies typically combine illicit
proceeds with lawful proceeds from legitimate business operations,
obscuring the source, ownership, and control of the illegal funds.
Shell companies typically have no physical operations or assets, and
may be used only to hold property rights or financial assets. Nominee-
held ``funnel accounts'' may be used to make structured deposits in
multiple geographic locations and corresponding structured withdrawals
in other locations. All of these methods obscure the true owners and
sources of funds. And without truthful information about who owns and
controls an account, banks may not be able to accurately analyze
account activity and identify legitimate (or illegitimate)
transactions.
Misuse of money services businesses. While many money services
businesses engage in legitimate business activities, they, too, can
serve as a means for criminals to move money. Although money services
businesses have customer verification requirements above certain
thresholds and other Bank Secrecy Act obligations, individuals who use
money services businesses may do so in a one-off fashion, without
establishing an ongoing relationship that banks maintain with their
customers, which can make it more difficult to identify money
laundering. While money services businesses are subject to Bank Secrecy
Act compliance requirements, some money services businesses fail to
register with the proper authorities, making it more likely that AML
violations at those money services businesses go undetected.
Prepaid access cards. Prepaid access cards, also known as stored
value cards, may be used as an alternative to cash. Prepaid access
cards provide access to funds that have been paid in advance and can be
retrieved or transferred through an electronic device such as a card,
code, serial number, mobile identification number, or personal
identification number. They function much like traditional debit or
credit cards, and can provide portable and absent regulation,
potentially anonymous ways to access funds.
Prepaid access cards may be used by criminals in a variety of ways.
Criminals can direct Federal or State tax authorities to issue
fraudulent tax refunds on prepaid debit cards. Drug traffickers,
meanwhile, may convert drug cash to prepaid debit cards, which they may
then use to purchase goods and services or send to drug suppliers,
where they can use the cards to withdraw money from a local ATM.
Virtual currencies. Virtual currencies offer yet another
alternative to cash. Criminals seek to use virtual currencies to
conduct illicit transactions because they offer potential anonymity,
since virtual currency transactions are not necessarily tied to a real
world identity and enable criminals to quickly move criminal proceeds
among countries. Some of those countries, unlike the United States, do
not currently regulate virtual currencies and therefore have limited
oversight and few AML controls.
Purchase of real estate and other assets. Criminals may also
convert their illicit proceeds into clean funds by buying real estate
and other assets. Foreign government officials who steal from their own
people, extort businesses, or seek and accept bribery payments, in
particular, have used this method to funnel their illicit gains into
the U.S. financial system. Recent investigations and prosecutions have
revealed that corrupt foreign officials have purchased various U.S.
assets to launder the proceeds of their corruption, from luxury real
estate and hotels to private jets, artwork, and motion picture
companies. The flow of kleptocracy proceeds into the U.S. financial
system distorts our markets and threatens the transparency and
integrity of our financial system. For example, when criminals use
illicit proceeds to buy up real estate, legitimate purchasers--
businesses and individuals--are foreclosed from buying or investing in
those properties. Moreover, kleptocracy erodes trust in Government and
private institutions, undermines confidence in the fairness of free and
open markets, and breeds contempt for the rule of law, which threatens
our national security.
Those are only a few of the methods criminals use to launder ill-
gotten gains through the U.S. financial system. New methods are always
being devised, as the criminal underworld seeks to take advantage of
emerging technologies and to outpace the development of new detection
and investigation tools by law enforcement.
III. The Department's Efforts to Combat the Threat
To keep pace with and disrupt the evolving threats of money
laundering, the Department draws on the full complement of its law
enforcement tools. The Criminal Division's Money Laundering and Asset
Recovery Section (MLARS) leads the Department's AML efforts. MLARS
works in parallel with U.S. Attorneys' Offices around the country,
other Government agencies, and domestic and international law
enforcement colleagues to pursue complex, sensitive, multi-district,
and international money laundering and asset forfeiture investigations
and cases. MLARS' Bank Integrity Unit, for example, investigates and
prosecutes criminal cases involving financial institutions and their
employees or agents who violate Federal criminal statutes, including
the Bank Secrecy Act, the Money Laundering Control Act, and economic
and trade sanctions authorized by the International Emergency Economic
Powers Act and the Trading with the Enemy Act. MLARS' Money Laundering
and Forfeiture Unit investigates and prosecutes professional money
launderers who provide their services to criminal organizations, such
as Mexican drug cartels, and, in partnership with U.S. Attorneys'
Offices, litigates criminal and civil forfeiture cases.
In addition--and as part of its efforts to fight global corruption
and money laundering on the international stage--MLARS leads the
Department's Kleptocracy Asset Recovery Initiative. Large-scale
corruption by foreign government officials who steal from their people
and seek to invest those funds in the U.S. financial system erodes
citizens' trust in Government and private institutions alike,
undermines confidence in the fairness of free and open markets, and
breeds contempt for the rule of law. When kleptocracy is allowed to
take root, organized criminal groups and even terrorists are soon to
follow. Accordingly, this initiative seeks to protect the U.S.
financial system from the harmful effects of large flows of corruption
proceeds, and, whenever possible, to return stolen or illicit funds for
the benefit of the citizens of the affected countries.
Also instrumental in the Department's AML efforts are the Criminal
Division's Fraud Section, Computer Crimes and Intellectual Property
Section, Narcotic and Dangerous Drug Section, and Organized Crime and
Gang Section; the Tax Division; the Civil Rights Division's Human
Trafficking Prosecution Unit; and their U.S. Attorneys' Office
partners. These prosecutors lend critical expertise in the predicate
offenses involved in money laundering. They work in tandem with a host
of domestic law enforcement partners--among them, the Federal Bureau of
Investigation (FBI); the DEA; the Bureau of Alcohol, Tobacco, Firearms
and Explosives (ATF); the Department of Homeland Security, U.S.
Immigration and Customs Enforcement-Homeland Security Investigations
(HSI); U.S. Secret Service; and the Internal Revenue Service-Criminal
Investigations (IRS-CI)--as well as State, local, tribal, and
international law enforcement partners. Agents investigate a range of
financial fraud schemes, including health care fraud, false claims for
Federal income tax refunds, and identify theft and other internet-
related schemes. They also investigate drug trafficking organizations
and organized crime groups responsible for alien smuggling, extortion,
illegal gambling, prostitution, and racketeering, among other crimes.
In July 2017, for example, Attorney General Jeff Sessions and the
Department of Health and Human Services (HHS) announced the largest-
ever healthcare fraud enforcement action by the Medicare Fraud Strike
Force. Investigating agencies included the FBI, and HHS-Office of the
Inspector General, with the assistance of the DEA, U.S. Department of
Defense-Office of Inspector General-Defense Criminal Investigative
Service, and State Medicaid Fraud Control Units. The Criminal
Division's Fraud Section, with its strike force partners, led a series
of coordinated actions that charged 412 defendants across 41 Federal
judicial districts with crimes stemming from their participation in
health care fraud schemes involving $1.3 billion in false billings.
Interagency task forces, including those that fall under the
umbrella of the Organized Crime Drug Enforcement Task Forces program,
similarly play a critical role in the Department's investigation and
prosecution of the money laundering of drug traffickers. They draw upon
the resources of Federal, State, local, and tribal law enforcement
partners to identify, target, and dismantle drug trafficking
organizations that seek to launder illicit drug proceeds through the
U.S. financial system.
U.S. law enforcement wields a number of powerful tools in the fight
against criminals who engage in money laundering:
First and foremost, criminal money laundering charges are of course
essential to the Department's efforts to disrupt and dismantle criminal
organizations' financial networks. Federal prosecutors have secured, on
average, more than 1,200 Federal money laundering convictions each
year, and have successfully investigated and prosecuted complex,
global, and high-value money laundering cases.
For example, in June 2017, MLARS and the U.S. Attorney's Office for
the Eastern District of New York secured the guilty plea of Jorge Luis
Arzuaga, a private banker formerly employed by several Swiss banks on
money laundering conspiracy charges stemming from the distribution and
receipt of millions of dollars of bribes paid to high-ranking soccer
officials. Arzuaga furthered the bribery conspiracy by opening a bank
account in the name of a shell company ostensibly established on behalf
of a sports marketing company, when in fact, the true beneficial owner
of the account was a high-ranking soccer official. In exchange for
facilitating more than $25 million in bribe payments to the soccer
official through this account, Arzuaga received more than $1 million in
bonus payments.
In 2016, moreover, MLARS and the U.S. Attorney's Office for the
Southern District of California successfully prosecuted a drug
trafficking and money laundering organization based primarily in
Tijuana and Culiacan, Sinaloa, Mexico. The organization smuggled
cocaine, heroin, methamphetamine, and marijuana from Mexico to the
United States for distribution and arranged for the proceeds to be
smuggled from the United States to Mexico, where a portion was
laundered through money exchange houses in Culiacan and Tijuana. The
remaining currency was sent back to the United States, deposited at
banks, and wire transferred to bank accounts controlled by the
organization in Mexico. The total amount laundered by the organization
is believed to have exceeded $100,000,000. That figure included
approximately $45,000,000 wired from U.S. bank accounts to accounts in
Mexico and at least another $28,000,000 smuggled through Southern
California ports of entry into Mexico.
Criminal charges against financial institutions complicit in money
laundering are likewise a component of the Department's AML strategy.
In considering how a criminal enterprise was able to move illegal
proceeds through the financial system, prosecutors and agents
necessarily ask: Were the criminals just lucky, or did a financial
institution fail to implement an effective AML program? Today's
investigations often look at which companies processed the payments,
which banks held the relevant accounts, whether any automated alerts or
Suspicious Activity Reports were (or should have been) filed in
connection with the movement of funds, and who served as the financial
advisors, the tax preparers, and the accountants. In appropriate cases,
prosecutors have brought actions against financial institutions for
criminal violations of the Bank Secrecy Act and anti-fraud statutes.
For instance, in 2017, a global money services business admitted to
criminal violations, including willfully failing to maintain an
effective AML program and aiding and abetting wire fraud, through
agreements with the Department, the Federal Trade Commission, and four
U.S. Attorneys' Offices. Specifically, the money services business
admitted to processing payments between 2004 and 2012 for fraudsters
who posed as family members in need or who had promised prizes or job
opportunities and directed victims of their scams to send money through
the business. Some of the money services business's employees were
complicit in the schemes, processing the fraud payments in return for a
cut of the proceeds. And the money services business knew of the
agents' involvement, yet failed to take corrective action against them.
Beyond criminal charges, civil penalties and forfeiture are
additional tools in the Department's AML efforts. Civil forfeiture
gives law enforcement the ability to go after what criminals value
most--the money and property motivating their crimes--and to remove the
proceeds of crime and other assets used to perpetuate criminal
activity. It is a critical tool when prosecutors have no jurisdiction
over culpable persons but have jurisdiction over property obtained
through their criminal activity because it is located in the United
States.
The Department also uses targeted financial sanctions in
conjunction with criminal and civil prosecutions. The Department works
closely with Treasury and other agencies to impose financial sanctions
where appropriate-measures that are particularly useful when criminals
have evaded arrest or are otherwise outside the jurisdiction of the
United States. For example, Treasury's Office of Foreign Assets Control
(OFAC) may level significant economic sanctions against individual drug
traffickers under the Foreign Narcotics Kingpin Designation Act, and
against transnational criminal organizations under Executive Order
13581. Section 311 of the USA PATRIOT Act authorizes Treasury, through
its Financial Crimes Enforcement Network (FinCEN), to require domestic
financial institutions and agencies to take certain special measures
against foreign jurisdictions, foreign financial institutions, classes
of international transactions, or types of accounts of primary money
laundering concern. Special measures include, among other actions,
enhanced recordkeeping and reporting requirements, the collection of
beneficial ownership information, or prohibitions on banks from opening
or maintaining in the United States any correspondent account or
payable-through account for or on behalf of a foreign financial
institution. Such economic sanctions can help freeze money launderers'
financial accounts, block their U.S. properties, and deny them access
to the U.S. financial system.
Forfeiture and sanctions authorities have been deployed in a number
of recent money laundering prosecutions. In August 2017, the Department
announced the filing of two complaints seeking the imposition of a
civil money penalty and the civil forfeiture of more than $11 million
from companies that allegedly facilitated financial transactions for
North Korea. These companies did so by brokering the sale of North
Korean coal, transferring the proceeds of those sales to front company
accounts, and using those front companies and the coal proceeds to
purchase goods and services for North Korea. The complaints allege that
the front companies
supported OFAC-sanctioned North Korean entities, including North Korean
military and North Korean weapons programs--direct threats to our
national security.
In 2016, the Department announced the filing of criminal charges
and civil forfeiture actions against four Chinese nationals and a
China-based trading company for conspiring to evade U.S. economic
sanctions and violating the Weapons of Mass Destruction Proliferators
Sanctions Regulations (WMDPSR). Simultaneously, OFAC imposed sanctions
on the defendants for their ties to the government of North Korea's
weapons of mass destruction proliferation efforts. The defendants used
front companies to facilitate prohibited transactions through the
United States on behalf of a sanctioned entity in North Korea with ties
to sanctioned weapons of mass destruction proliferators.
Similarly, in the Liberty Reserve case in 2013, the Department's
filing of criminal charges against the web-based money transfer system
was coupled with regulatory action by Treasury. FinCEN announced that,
in coordination with the unsealing of the criminal indictment, Liberty
Reserve had been named as a financial institution of primary money
laundering concern under Section 311, effectively blocking its access
to the U.S. financial system.
Civil forfeiture has also been critical to the success of the
Kleptocracy Asset Recovery Initiative, which has seized or restrained
$3.5 billion worth of corruption proceeds to date and has filed
complaints seeking the restraint of assets in a range of other high-
profile matters. These include actions seeking to recover more than
$1.7 billion in assets allegedly associated with a Malaysian sovereign
wealth fund, more than $850 million allegedly related to bribe payments
made by the world's sixth-largest telecommunications company and other
firms, and more than $140 million allegedly obtained through corrupt
oil contracts awarded by Nigeria's former Minister for Petroleum
Resources. These cases demonstrate that the Department will not let
corruption undermine and destabilize our markets, the rule of law, or
democracy.
In the Malaysia matter--the largest single action ever brought
under the Initiative--the Department filed a complaint in 2016 to
forfeit and recover assets associated with an international conspiracy
to launder more than $4.5 billion stolen from the country's sovereign
wealth fund, known as 1Malaysia Development Berhad, or 1MDB. The
Malaysian government created 1MDB to promote economic development
through international partnerships and foreign direct investment, with
the ultimate goal of improving the lives of the Malaysian people.
However, corrupt 1MDB officials treated this public trust as a personal
bank account.
Between 2009 and 2015, those corrupt officials and their associates
took more than $4.5 billion from the development fund in four phases.
These funds were laundered through a complex web of opaque transactions
and fraudulent shell companies with bank accounts in countries around
the world, including Switzerland, Singapore, Luxembourg, and the United
States. The funds were then used to purchase approximately $1.7 billion
in assets that the Department seeks to recover, including a $261
million, 350-foot yacht; a $35 million jet; masterpieces by Van Gogh,
Picasso, and Monet; and a motion picture company that used the funds to
finance, among other things, the production of the films ``The Wolf of
Wall Street,'' ``Daddy's Home,'' and ``Dumb and Dumber To.'' MLARS and
the U.S. Attorney's Office in Los Angeles filed civil complaints
targeting assets that, according to court documents, were
misappropriated and diverted by Malaysian officials and their
associates from 1MDB. In June 2017, the Department announced additional
steps to forfeit and recover assets, bringing the total assets subject
to forfeiture in this case to more than $1.7 billion. If the United
States is successful in court, we will forfeit this more than $1.7
billion in property, liquidate it, and, ultimately, return as much as
possible to the citizens of Malaysia.
IV. Challenges in Pursuing and Prosecuting Money Laundering Cases
Notwithstanding the Department's many successes, Federal
prosecutors and investigators continue to face significant challenges
in bringing to justice those who threaten our financial system and
national security by laundering the proceeds of their crimes.
A. Opaque Corporate Structures
The pervasive use of front companies, shell companies, nominees, or
other means to conceal the true beneficial owners of assets is one of
the greatest loopholes in this country's AML regime. Except in very
narrow circumstances, current Federal laws do not require
identification of beneficial owners at account opening. Although banks
are required to obtain certain types of customer account information
during the account-opening process, those requirements do not address
the conduct of bad actors who make misrepresentations to banks to
achieve their illicit purposes.
The Financial Action Task Force (FATF), the inter-governmental body
responsible for developing and promoting policies to protect the global
financial system against money laundering and other threats,
highlighted this issue as one of the most critical gaps in the United
States' compliance with FATF standards in an evaluation conducted last
year. FATF noted that the lack of beneficial ownership information can
significantly slow investigations because determining the true
ownership of bank accounts and other assets often requires that law
enforcement undertake a time-consuming and resource-intensive process.
For example, investigators may need grand jury subpoenas, witness
interviews, or foreign legal assistance to unveil the true ownership
structure of shell or front companies associated with serious criminal
conduct. Moreover, the failure to collect beneficial ownership
information also undermines financial institutions' ability to
determine which of their clients pose compliance risks, which in turn
harms banks' ability to comply with their legal obligation to guard
against money laundering.
A recent case involving Teodoro Nguema Obiang Mangue, the Second
Vice President of Equatorial Guinea, highlights the challenge of
successfully prosecuting money laundering schemes when parties have
concealed the true ownership of bank accounts and assets. In that case,
Nguema Obiang reported an official government salary of less than
$100,000 a year during his 16 years in public office. Nguema Obiang,
however, used his position and influence to amass more than $300
million in assets through fraud and corruption, money which he used to
buy luxury real estate and vehicles, among other things. Nguema Obiang
then orchestrated a scheme to fraudulently open and use bank accounts
at financial institutions in California to funnel millions of dollars
into the United States. Because U.S. banks were unwilling to deal with
Nguema Obiang out of concerns that his funds derived from corruption,
Nguema Obiang used nominees to create companies that opened accounts in
their names, thus masking his relationship to the accounts and the
source of the funds brought into the United States. The Department
ultimately reached a settlement of its civil forfeiture actions against
assets owned by Nguema Obiang. However, the Department needs effective
legal tools to directly target these types of fraudulent schemes and
protect the integrity of the U.S. financial system from similar
schemes.
The Treasury Department's recent Customer Due Diligence Final Rule
(CDD rule) is a critical step toward a system that makes it difficult
for sophisticated criminals to circumvent the law through use of opaque
corporate structures. Beginning in May 2018, the CDD rule will require
that financial institutions collect and verify the personal information
of the beneficial owners who own, control, and profit from companies
when those companies open accounts. The collection of beneficial
ownership information will generate better law enforcement leads and
speed up investigations by improving financial institutions' ability to
monitor and report suspicious activity, and will also enable the United
States to better respond to foreign authorities' requests for
assistance in the global fight against organized crime and terrorism.
Important as it is, however, the CDD rule is only one step toward
greater transparency. More effective legal frameworks are needed to
ensure that criminals cannot hide behind nominees, shell corporations,
and other legal structures to frustrate law enforcement, including
stronger laws that target individuals who seek to mask the ownership of
accounts and sources of funds.
B. Evidence Collection Involving Foreign Entities
The assistance of our interagency and international partners is an
important element of the Department's success in its AML efforts.
Because money often moves across multiple countries in the global
economy, U.S. law enforcement depends on the cooperation of foreign
counterparts to aggressively investigate money laundering cases
touching the United States. Domestic and international law enforcement
partners must work together to obtain evidence and to trace, freeze,
and seize assets wherever they are located. The ability to pursue
investigative leads in transnational criminal investigations and
terrorist financing cases using foreign bank records is vital to
successful AML efforts on the international stage.
Recent cases reinforce this need. The Department's 2017 complaints
against the companies that sought to help North Korea circumvent the
U.S. sanctions--noted above--allege that sanctioned North Korean
entities were able to send financial transactions in U.S. dollars
through U.S. correspondent banks without detection and thereby avoided
being blocked under the WMDPSR program. In these and similar cases,
foreign bank records may be of great benefit in demonstrating
potentially illicit conduct.
Under the existing authority in Title 31 U.S.C. 5318(k), however,
foreign banks are not required to produce records in a manner that
would establish their authenticity and reliability for evidentiary
purposes. The statute also does not contain any anti-tip-off language,
meaning that banks who receive subpoenas could disclose the subpoenas
to account holders or others, thereby compromising an ongoing
investigation. The only sanction provided under current law is the
closure of the correspondent account, which, in most cases, will not
result in the production of the records, and may in fact impede law
enforcement investigations. There is no procedure to seek to compel
compliance with subpoenas to foreign banks, nor any explicit authority
to impose sanctions for contempt. Finally, the current statute provides
that no effort can be taken by the Attorney General or the Secretary of
Treasury to close the correspondent account or a foreign bank when the
foreign bank has brought proceedings to challenge enforcement of the
subpoena.
C. Practical Problems in Prosecutions of Money Laundering Cases
Several specific areas of the current legal framework have in
practice served as loopholes or obstacles in the investigation and
prosecution of money laundering cases.
For instance, current law in at least two Federal circuits may
prevent the Government from pursuing money laundering charges under
Section 1957 in cases in which some or all of the illegal proceeds were
moved through accounts that mask the source of funds by commingling
illegal proceeds with the proceeds of legitimate businesses. Supreme
Court precedent requiring proof that a defendant knew not only that
cash was being transported in secret, but that the cash was being
transported in secret specifically to conceal its criminal nature, has
created an enforcement gap when it comes to charging certain culpable
intermediaries, like couriers or persons who agree to engage in
transactions or transportation as directed for cash, with concealment
money laundering. Prosecutors are hampered in pursuing entities like
check cashers, which do not transmit money, because the money
laundering statutes govern unlicensed money transmitting businesses, as
opposed to the broader category of unlicensed money services
businesses. This may present challenges for bringing cases against
emerging technologies that fall within the broader category, but not
the narrower one. On these and other points, there remains room for
streamlining and updating our money laundering laws to enhance the
Department's efforts to combat money laundering.
V. Conclusion
I thank the Committee for holding this hearing today and bringing
attention to the threat that money laundering poses to our financial
system. In conjunction with our domestic and international law
enforcement partners, the Department looks forward to working with
Congress in the global fight against money laundering.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM SIGAL
MANDELKER
Q.1. During our recent hearings, the Committee heard the BSA
regulators being criticized for taking a ``check-the-box''
approach to compliance. How can we encourage regulators and
examiners to allow more innovative approaches to BSA/AML
compliance that go beyond a ``check the box'' exercise? How can
we encourage regulators and examiners to allow more innovative
approaches? What are the obstacles and challenges here?
A.1. Treasury is taking a hard look at both the Bank Secrecy
Act (BSA) and the broader AML/CFT regime. We need to
continuously upgrade and modernize our system--a statutory and
regulatory construct originally adopted in the 1970s--and make
sure that we have the right framework in place to take us into
the 2030s and beyond. In particular, we must make sure that
financial institutions are devoting their resources toward high
value activities and are encouraged to innovate with new
technologies and approaches. In recent years, for example,
financial institutions have become more proactive in their AML/
CFT approach, in some cases building sophisticated internal
financial intelligence units devoted to identifying strategic
and cross-cutting financial threats. Financial institutions
have been improving their ability to identify customers and
monitor transactions by experimenting with new technologies
that rely on artificial intelligence and machine learning.
We encourage these innovations. These initiatives advance
the BSA's underlying purpose. We are working closely with our
counterparts at the Federal Banking Agencies (FBAs) to discuss
ways to further incentivize financial institutions to be
innovative in combating financial crime, including through the
examination process. We have also been speaking with many in
the financial community to understand their perspectives.
Q.2. Moving forward, it is important to hear the voices of all
stakeholders in the BSA/AML compliance space. In your
testimony, you noted that Treasury uses the Bank Secrecy Act
Advisory Group (BSAAG) to communicate with the private sector
and provide guidance. Please provide formal recommendations
from the BSAAG.
A.2. The Bank Secrecy Act Advisory Group (BSAAG) provides a key
forum for Treasury to receive feedback on Bank Secrecy Act
requirements from a broad, diverse representation of the
financial industry, law enforcement, and regulatory
communities. As such, BSAAG generally does not provide
consensus formal recommendations, but rather provides a forum
for Treasury to understand views from different impacted
constituencies in order to balance diverse stakeholder needs.
In addition to BSAAG, we regularly
engage with financial institutions through a variety of forums,
including the FinCEN Exchange, outreach efforts, and other
engagements. We value the importance of proactive dialogue and
information sharing with financial institutions. The safeguards
employed by the private sector, and the information reported
about terrorist financiers, weapons proliferators, human rights
abusers and traffickers, and cyber and other criminals, help
prevent malign actors from abusing our financial system.
Q.3. The Clearing House report on ``A New Paradigm: Redesigning
the U.S. AML/CFT Framework to Protect National Security and Aid
Law Enforcement'' includes an assertion that ``the examination
and enforcement regimes for the Bank Secrecy Act have
incentivized financial institutions to exclude (or ``de-risk'')
accounts from any customer, industry, or country that has
relatively higher potential to engage in criminal activity.''
We need to ensure a fair and proper regulatory framework that
balances the policy goals of stopping criminals while not
overburdening banks and causing the unintended consequences of
unbanking small, main street businesses.
LWhat is Treasury currently doing to address de-
risking?
LMoving forward, how do we ensure our policy
approaches do not create incentives to de-risk?
A.3. Protecting the integrity of the U.S. financial system and
preventing its use for criminal purposes is of paramount
importance. It is our responsibility at Treasury and within the
law enforcement community to detect and prevent illicit use of
the U.S. financial system. Financial institutions play a
critical role in safeguarding the international system from
abuse by illicit actors, which at times includes making risk-
based decisions about with whom, where, and how they conduct
business.
At the same time, we take concerns about de-risking
seriously. We value the importance of preserving access to the
U.S. financial system to support economic growth, financial
inclusion, and financial transparency while continuing to
enforce U.S. laws and regulations. Financial inclusion and
financial transparency are complementary and mutually
reinforcing objectives. Keeping legitimate transactions in the
regulated financial systems improves financial transparency.
Treasury has worked with the Federal regulators to issue
guidance and clarify the importance to financial institutions
of implementing risk-based approaches that assist in preventing
overcorrections that might exclude legitimate banking
customers.
In the last few years, Treasury has led the U.S.
Government's efforts related to de-risking. These efforts have
included Treasury-led engagements and dialogues with
stakeholders from the public sector and industry, in addition
to Treasury's ongoing open line of communication with U.S.
financial institutions. Further, Treasury's work on this issue
involves close coordination with global bodies and multilateral
organizations, including the Financial Action Task Force, the
Financial Stability Board, the World Bank, and the IMF.
Treasury recognizes that financial institutions' decisions
on whether and how to maintain customer relationships are
driven by multiple factors, including: profitability and
business strategy motives; current global economic conditions;
and real concerns about suspicions of illicit financial
activity, including money laundering and the financing of
terrorism.
An important way to ensure financial inclusion while
increasing transparency is by making sure financial
institutions are devoting the resources they have to high value
activities. As discussed in my testimony, financial
institutions have been improving their ability to identify
customers and monitor transactions by experimenting with new
technologies that rely on artificial intelligence and machine
learning. We laud and encourage these innovations, which
advance the underlying purposes of the BSA. We are working
closely with our counterparts at the Federal Banking Agencies
to discuss ways to further incentivize financial institutions
to be innovative in combating financial crime.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM SIGAL
MANDELKER
Q.1. Can you describe from your previous experience in the
Department of Justice and your current position with Treasury
the role that BSA-generated financial intelligence plays in
counterterrorism and other law enforcement investigations--in
developing investigative leads, sharpening focus on certain
criminal players and their banks, or otherwise?
A.1. I know from my prior experience at the Justice Department
and in my current role that financial intelligence is a vital
source for law enforcement, counterterrorism, and other
national security investigations, as we work to follow the
money used by illicit actors. This includes our investigations
related to North Korea, terrorist financing, drug trafficking,
fraud, tax evasion, cybercrime, corruption, sanctions evasion,
among other areas. We work closely with Federal, State and
local law enforcement across the country to provide access to
FinCEN's data to support their investigative efforts including
those who are part of SAR Review Teams and financial crime task
forces. This includes SAR Review Teams covering the 94 Federal
judicial districts, as well as 55 task forces led by IRS-CI. In
the last 5 years, regulatory and law enforcement partners, and
FinCEN's Intelligence Division made over 10 million queries of
the FinCEN database.
Two recent examples that highlight the importance of BSA
data include weapons proliferation and cyber threat
investigations. On the former, law enforcement used a high
volume of financial intelligence from 7 different financial
institutions with a transaction value totaling over $17.7
billion in a multi-year investigation into a criminal
organization moving hundreds of millions of U.S. dollars to
support foreign nuclear and ballistic missile programs. Foreign
authorities took action against several of the targets, while
the United States is prosecuting others.
Similarly, a multi-year, multi-agency investigation, led by
IRS-CI, focused on several targets selling narcotics on the
dark web and distributing them throughout the United States
through the U.S. Postal Service. BSA reporting by six different
financial institutions included over 2.5 million in
transactions and provided details of the financial and personal
information of the subjects of the investigation and the use of
Bitcoins to conceal the illicit proceeds. The targets were
arrested, indicted, and pled guilty to various drug and money
laundering charges. This was the first case in this
particular Midwest district where money laundering charges were
approved based on Bitcoin transactions.
Q.2. What financial intelligence tools are currently most
useful to prosecutors, sanctions overseers and others who
combat money laundering, and where do we need to strengthen
Treasury's and DOJ's tool kit?
A.2. Treasury has broad access to financial intelligence tools
and related data as well as information systems and facilities
to conduct its mission. Our Office of Intelligence and
Analysis, one of the 16 U.S. Intelligence Community agencies,
provides expert analysis of financial networks and illicit
actors, identifying key nodes that enable us to take disruptive
action and build impactful strategies. Likewise, FinCEN
continually collects and analyzes BSA and other financial
intelligence, including information provided by Geographic
Targeting Orders, Foreign Financial Agency rules, and the BSA,
and works closely to support law enforcement. Treasury uses
this information to inform our strategies, effectively deploy
our tools, ensure our actions are calibrated for maximum
impact, and measure our effectiveness and inform follow-on
strategies and actions. For example, the Office of Foreign
Assets Control (OFAC) uses this information to inform our
sanctions targeting, and to track, trace, and disrupt illicit
financial flows. Likewise, FinCEN uses this information in
actions it takes pursuant to section 311 of the USA PATRIOT
Act.
I defer to my colleagues at the Department of Justice as to
their views on what tools or resources are most useful and
needed to strengthen their toolkit.
Q.3.a. Current law allows bank information-sharing only in
cases of terrorism or money laundering. Some have advocated for
expanding banks' ability to share information, and to broaden
the current liability safe harbor to cover a range of other
suspected violations of law. Others--including witnesses who
have come before the Committee--have sounded an alarm about the
need to strengthen privacy safeguards around bank-to-bank
information-sharing, particularly where an individual's access
to financial services may be at risk if negative but inaccurate
information on them gets into the system, as with inaccurate
credit reporting.
With this in mind, what additional steps do you think are
needed to ensure that expanding information-sharing among banks
doesn't put customers at greater risk of data theft, or of
unjustified exclusion from the financial system because of
inaccurate information being shared?
A.3.a. Effective information-sharing between financial
institutions is a critical element of our fight against illicit
financing. Money launderers are sophisticated. They move across
borders and financial institutions, and financial institutions
are better able to keep pace and effectively combat them when
they communicate with each other.
Some institutions have started forming consortia to share
information more dynamically under Section 314(b) of the USA
PATRIOT Act, which provides safe harbor for financial
institutions to voluntarily share information related to money
laundering or
terrorist activities. We are supportive of the private sector's
willingness to engage in this type of exchange. By working
together, these groups of financial institutions are directly
assisting our efforts to identify and disrupt streams of
financing for North Korea and other top illicit finance
threats.
We also recognize the critical issues of data protection
and
privacy. We believe existing controls on SAR confidentiality
and information-sharing sufficiently protect the privacy
interests of
consumers and would not be significantly degraded if
information-sharing was expanded. Greater information-sharing
among financial institutions is expected to improve financial
institutions' risk management processes overall. Better risk
management is an important element in combating the de-risking
phenomenon.
Q.3.b. In particular, should we consider implementing a system
of redress or information correction for such individuals, and
if so how would you envision that process working?
A.3.b. Creating systems for individuals to access and correct
information connected with a financial institution's compliance
with its SAR obligations could undermine the purpose of SAR
confidentiality and Congress's explicit prohibition of
notifying ``any person involved in the transaction that the
transaction has been reported.'' (31 U.S.C. 5318(g)(2)). SAR
confidentiality is a foundational element of the BSA framework.
Without SAR confidentiality, financial institutions may be less
open in what they report, omitting information critical to
national security or public safety. Further, a SAR is just one
part of a broader investigation and law enforcement does not
rely exclusively on a SAR when building a case.
Q.4.a. As financial institutions have sought to comply with
Know Your Customer (KYC) rules and other important protections
against terrorist financing, in recent years many have opted to
shed accounts of customers with personal or commercial links to
parts of the world where it can be difficult to ascertain the
final recipient of a financial transaction--an especially
important concern to Somali communities in Ohio and elsewhere.
Whether we are talking about family remittances, or funds
transfers for humanitarian purposes, this de-risking has
presented hurdles to efforts to get resources to some of the
most at-risk populations on Earth. I worked for many months
with your predecessor Under Secretary Adam Szubin to address
these issues.
Can you describe Treasury's current efforts to mitigate
this problem, and to provide technical assistance to Somalia's
central bank to strengthen their control systems?
A.4.a. Treasury recognizes the importance of remittances to the
Somali economy and to the many American citizens whose families
depend on the flow of these funds. Estimates indicate that
between 25 to 40 percent of Somalia's GDP comes from
remittances from abroad, with the single largest source of this
money coming from the United States. Despite banking access
challenges, we understand that remittances continue to Somalia.
However, we have seen a number of terrorist financing cases
from the United States to Somalia involving companies that
provide remittances to Somalia, which presents an ongoing and
serious terrorist financing risk. In addition, Somalia's weak
regulation and supervision of financial institutions and the
continuing lack of security and governance in many regions
elevate the risk of money transfer to Somalia. We carry out
regular engagement with external stakeholders, including
financial institutions, remittance
companies, representatives of the Somali-American community,
Federal banking agencies, the Somali government, and technology
firms to better understand the drivers of the bank risk
aversion toward money transmitters serving the Somalia corridor
and potential ways to mitigate the risks related to the
transfer of funds to Somalia.
Treasury is also engaged in technical assistance and
outreach to enhance the regulation and supervision of financial
institutions, including money transmitters, in Somalia. The
development of a well-regulated and supervised financial system
in Somalia will reduce the risks of fund flows to and from
Somalia and reduce banks' risk aversions related to fund
transfers and Somalia. Treasury's primary effort is a multi-
year capacity-building program sponsored by the Department of
State and run by Treasury's Office of Technical Assistance
(OTA) to support the Central Bank of Somalia (CBS) in
strengthening its capacity to supervise the banking sector. To
date, OTA has conducted eight training sessions for the CBS on
the regulation and supervision of commercial banks and expects
to conduct another session this summer. Due to security
conditions in Somalia, to date the training seminars have been
held at the Kenya School of Monetary Studies in Nairobi, Kenya.
Treasury also participates in the World Bank-led Somalia
Remittances Stakeholders Advisory Council, a forum for
engagement and coordination of work on this issue, which
includes the Somali government. Finally, Treasury has provided
assistance in other areas on an ad hoc basis. For example, last
year we gave the Somali government advice on the drafting of
financial provisions of a new counterterrorism law, following
similar work on their anti-money laundering laws, to help them
create a legal framework for regulating and supervising
financial institutions. This program led to the completion of
onsite supervisory exams of the largest money transmitters in
Somalia in 2018, among other improvements, which we hope will
improve the long term outlook for both safeguarding the
financial system from abuse and promoting financial inclusion.
Q.4.b. How can U.S. banks better ensure compliance with
important protections against terrorism, while still enabling
the flow of legitimate family remittances, and the legitimate
work of charities and humanitarian organizations abroad?
A.4.b. Remittances, and the money transmitters that many
senders use, play an essential role in financial inclusion.
However, the unfortunate reality is that money transmitters
have been abused in the past by human traffickers, drug
traffickers, fraudsters, and even terrorists.
Treasury recognizes and strongly supports the essential
role of charities and humanitarian organizations in communities
worldwide. Nonetheless, charities and humanitarian
organizations delivering critical assistance in conflict zones
abroad have been, in some cases, exploited by terrorist
organizations and their support networks in the past. As a
result, for money transmitters, Treasury has helped develop
international standards on AML/CFT that help to mitigate the
risks of funds transfers. We have also worked at the Financial
Action Task Force (FATF) to improve the standards relating to
supervision of financial institutions, including those that
provide money transfer services, and engaged with charities so
they can better understand the terrorist financing risk and
appropriate, risk-based mitigation measures. More broadly, we
have worked both domestically and at the FATF to convey the
importance of both safeguarding the financial system from abuse
and promoting financial inclusion.
Q.5.a. The Panama Papers and other similar document leaks
revealed the widespread systematic use of shell corporations by
wealthy bad actors seeking to not only evade lawful tax
collection, but also to facilitate all kinds of financial
crime.
How would you characterize the urgency of the threat to the
U.S. financial system posed by anonymous shell companies, and
by the lack of a coherent national framework for identifying
beneficial ownership at the point of company formation?
A.5.a. There is no question that vulnerabilities exist in
corporate formation without the disclosure of beneficial
ownership information. Illicit actors may more easily hide
illicit funds and avoid detection through business entities
because the true owner is masked. The collection of beneficial
ownership information is critical both at the time of account
opening and when a company is being incorporated. FinCEN's
Customer Due Diligence (CDD) rule, which is set to be
implemented by covered financial institutions in May 2018,
requires those institutions to identify and verify the identity
of the beneficial owners of their legal entity customers. This
change will assist financial institutions in managing risks and
law enforcement in pursuing criminals who launder illicit
proceeds through legal entities. This is an important step
forward.
We are committed to further increasing the transparency and
accountability in our financial system, and we look forward to
working with Congress to support legislation that addresses
this issue.
Q.5.b. Can you give us concrete examples you have seen in your
work of bad actors using shell companies for money laundering,
terror finance and other illicit purposes?
A.5.b. U.S. companies with hidden beneficial owners have been
used by arms dealers, narco-traffickers, proliferators of
weapons of mass destruction, and facilitators of massive health
care and mortgage frauds, among other abuses. Viktor Bout, a
Russian arms dealer used at least 12 companies incorporated in
the United States to carry out his arms dealing. In February
2017, Tareck El Aissami, the current Venezuelan executive vice
president was designated pursuant to the Foreign Narcotics
Kingpin Designation Act by the Office of Foreign Assets Control
(OFAC) for playing a significant role in international
narcotics trafficking, and his frontman, Samark Lopez Bello,
was designated for providing financial and material support to
El Aissami. Five companies blocked by OFAC in Florida were used
to hold real estate and other assets in Lopez Bello's name.
These cases illustrate the importance of obtaining and
verifying beneficial ownership information both at the time of
company formation and account opening, so that we can be even
more effective in countering these threats.
Q.5.c. Can you give us a sense of the scope of entities and
persons you think we ought to have in mind, beyond the banking
sector, when contemplating an update to our current anti-money
laundering framework and its underlying authorities, including
with respect to beneficial ownership?
Who should we be looking at that we are not currently
regulating--real estate firms, escrow agents, company formation
lawyers, others?
A.5.c. We are constantly working to maintain our understanding
of the money laundering risks that exist in different sectors.
One sector we continue to monitor is real estate. Starting in
2006, we have published assessments of the money laundering
risks in the real estate sector. In 2012, to address our
assessment of money laundering vulnerabilities, FinCEN extended
BSA coverage to resident mortgage lenders and originators.
Currently, we continue to collect information and assess the
risks in this sector. FinCEN has issued Geographic Targeting
Orders (GTOs) that focus on all-cash luxury residential real
estate purchases by legal entities. The GTOs require U.S. title
insurance companies in seven metropolitan areas to identify the
natural persons behind the companies used to buy high-end real
estate when certain forms of payment are used.
In 2017, following the enactment of the Countering
America's Adversaries through Sanctions Act, FinCEN revised the
GTOs to capture a broader range of transactions and include
transactions involving wire transfers. FinCEN is analyzing the
findings from the GTOs to understand the extent of the
vulnerability associated with the misuse of legal entities to
acquire real estate and whether additional regulation should be
considered. Based partially on findings from the GTO, on August
22, 2017, FinCEN issued an advisory to financial institutions
and real estate firms and professionals highlighting risks in
the real estate industry, including the use of shell companies
to reduce transparency in transactions. In March 2018, FinCEN
extended the GTO in response to the useful information that we
have been receiving under the new authority to include wire
transfers, and we continue to define methods to address the
vulnerabilities of this sector. Although real estate
professionals do not currently have an obligation to report
suspicious activity to FinCEN, FinCEN is using FinCEN
advisories and industry outreach to encourage real estate
professionals to report voluntarily.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM SIGAL
MANDELKER
Q.1.a. In your testimony you referenced the Treasury
Department's ongoing evaluation of when anti-money laundering
(AML) measures, particularly Suspicious Activity Reports
(SARs), are most helpful to law enforcement.
Has the Treasury Department identified information from
SARs or other AML measures that are consistently valuable for
law enforcement purposes? If so, what?
A.1.a. We know through our own analysis that SARs and other BSA
data are a vital source of financial intelligence for law
enforcement investigations of North Korea, terrorist financing,
drug trafficking, fraud, tax evasion, cybercrime, and sanctions
evasions, among other crimes. I am committed to better
understanding the value of individual elements of the SAR data
to inform our overall view of changes that may be necessary to
modernize the BSA. To that end, Treasury is issuing an RFP to
conduct a thorough, data-driven analysis of BSA reporting
requirements to inform its decisionmaking processes. We would
be pleased to brief the Committee and its Members as that
analysis progresses.
Q.1.b. Has the Treasury Department identified information from
SARs or other AML measures that are consistently not valuable
for law enforcement purposes? If so, what?
A.1.b. See above.
Q.1.c. Does the Treasury Department expect to recommend
altering the reporting requirements for SARs or other AML
measures? Do you expect that any of the changes will require
legislative authorization?
A.1.c. As discussed in my testimony, I am taking a careful look
at the current regulatory and statutory construct surrounding
the BSA and AML/CFT regime, which was originally adopted in the
1970s. Treasury is prepared to pursue changes, whether
regulatory or statutory in nature, upon completion of our
analysis. However, it is premature to predict any specific
changes at this time.
Q.1.d. Will you commit to keeping me informed of any
conclusions reached by the Treasury Department regarding the
scope of AML measures such as SARs?
A.1.d. Yes. Treasury would be happy to brief the Committee and
its Members as our analysis progresses.
Q.2.a. I'd like to understand better the law enforcement
context for the United State's efforts to fight money
laundering.
Does the U.S. financial system substantially--even if
inadvertently--facilitate human trafficking?
A.2.a. Human traffickers, like other criminals, move their
illicit proceeds using a number of methods and vectors: through
cash movements, through trade, and through the U.S. and global
financial system. Human traffickers are often particularly
difficult to stop because their fund transfers tend to be very
low-value and their networks are often small and/or
decentralized.
Treasury is engaged in both domestic and international
efforts, to combat human traffickers and their illicit flows.
FinCEN published an advisory on human trafficking to assist
financial institutions in identifying the movement of human
traffickers' funds and supports law enforcement investigations
that use financial intelligence generated as a result of this
advisory. In 2017, FinCEN launched a human trafficking project
with their global counterparts through the Egmont Group of
FIUs. The human trafficking project team applies existing, as
well as new approaches/processes/tools for enhanced bilateral
information sharing to produce actionable information and
disrupt the financial movement related to human trafficking
across borders.
We continue to use our intelligence capabilities to
identify and track the activities of human traffickers. This
includes information from the intelligence community as well as
data made available through the Bank Secrecy Act and the USA
PATRIOT Act.
In addition, OFAC works to designate human traffickers and
other transnational criminal organizations pursuant to
Executive Order 13581 (Blocking Property of Transnational
Criminal Organizations). For example, on April 18, OFAC
designated Syrian national Nasif Barakat and the Barakat
Transnational Criminal Organization (TCO) pursuant to Executive
Order 13581. The Barakat TCO is a human smuggling organization
based in Homs, Syria, that facilitates the smuggling of Syrian
and Lebanese nationals to the United States border using a
variety of travel routes. Since 2013, the Barakat TCO has
facilitated the smuggling of hundreds of individuals to the
Southwest border of the United States.
Q.2.b. Last, Treasury's Office of Terrorist Financing and
Financial Crimes (TFFC) is leading U.S. involvement in a global
typology study of the problem at the Financial Action Task
Force. If so, how?
A.2.b. See above.
Q.2.c. What about terrorism, such as organizations like
Hezbollah?
A.2.c. The U.S. Government's efforts to counter the financing
of terrorism (CFT) are focused on disrupting the monetary and
material support terrorist groups need to sustain themselves
and to plot and carry out attacks against innocent civilians.
This approach focuses on the interrelated objectives of (1)
cutting off terrorists and terrorist organizations from their
sources of revenue and (2) denying them access to the
international financial system so they cannot use their money.
Given Hezbollah's global presence, our efforts to cutoff
financing for Hezbollah have focused on imposing costs on its
main financier--Iran--as well as taking actions within Lebanon.
These actions include constraining Hezbollah financially
through extensive cooperation with Lebanese authorities and
banks, centering on its procurement agents, facilitators, and
financiers in Europe, Latin America, Asia, and the Middle East,
including by identifying and sanctioning Hezbollah's Iranian
sponsors, and enabling law enforcement and foreign partner
actions.
Treasury has demonstrated a relentless commitment to
targeting Hezbollah, designating over 120 Hezbollah-linked
individuals and entities, including 13 individuals and entities
as recently as February 2, 2018, and using Section 311 of the
USA PATRIOT Act to identify as entities of primary money
laundering concern three Lebanese financial institutions
engaged in illicit activity.
Treasury has also targeted Hezbollah's supporters,
including Iran, which is the largest state sponsor of
terrorism. We have sanctioned over 100 targets in the Middle
East, Africa, Asia, and Europe in connection with the Islamic
Revolutionary Guard Corps and Iran's support for terrorism,
ballistic missile programs, human rights abuses, censorship,
cyberattacks, counterfeiting, and transnational criminal
activity.
Q.2.d. What about drug cartels and violent gangs such as MS-13?
A.2.d. As noted in the 2015 National Money Laundering Risk
Assessment published by Treasury, the size and diversity of our
financial sector makes our system attractive to drug cartels
and gangs looking for ways to move and store their illicit
proceeds. Treasury oversees a number of efforts to combat TCOs
and also actively provides support to law enforcement efforts
to identify, target, and dismantle this activity. Using all-
source intelligence analysis and in partnership with law
enforcement, Treasury maps out the financial networks of
cartels and uses its unique authorities to combat those
threats. This includes personnel from FinCEN, with access to
unique datasets of BSA and PATRIOT Act-derived information, and
the Office of Intelligence Analysis.
In addition, OFAC works continuously to target and
designate TCOs and their facilitators under its unique
authorities, including E.O. 13581 and the Foreign Narcotics
Kingpin Designation Act. For instance, on December 22, 2017,
OFAC designated the ``Thieves-in-Law'' TCO, a crime syndicate
operating in Russia, Europe, and the Unites States, along with
10 associated individuals and two entities for their
involvement in serious transnational criminal activities,
including money laundering, extortion, robbery and bribery.
Likewise, on April 18, 2018, OFAC designated Syrian national
Nasif Barakat and the Barakat TCO pursuant to Executive Order
13581. The Barakat TCO is a human smuggling organization based
in Homs, Syria, that facilitates the smuggling of Syrian and
Lebanese nationals to the United States border using a variety
of travel routes. Since 2013, the Barakat TCO has facilitated
the smuggling of hundreds of individuals to the Southwest
border of the United States.
In addition to its contribution of intelligence, FinCEN
also acts through its role as a regulator to impose and
supervise AML/CFT obligations in the United States that help to
narrow vulnerabilities that criminals use. FinCEN has published
advisories to help financial institutions detect and stop
criminal activity and used its authority under the USA PATRIOT
Act to take 311 actions against institutions and jurisdictions
that criminals use to launder money.
Q.2.e. How can law enforcement officials use anti-money
laundering tools to target specific groups such as MS-13 or
Hezbollah?
A.2.e. Treasury actively uses its existing authorities and
engages with foreign partners to create a hostile operating
environment for Hezbollah by denying Hezbollah access to the
U.S. and international financial systems, disrupting and
exposing its activities around the world, and isolating the
group from its support network.
OFAC has designated more than 120 Hezbollah-linked
individuals and entities, including 13 individuals and entities
as recently as February 2, 2018, pursuant to our
counterterrorism authorities and authorities to counter the
Assad regime. OFAC uses its sanctions authorities to
aggressively target Hezbollah leadership, operatives, and
facilitators around the world. We have also aggressively
targeted Hezbollah's financiers and commercial investors as
well as key procurement networks. These actions are often
conducted jointly with law enforcement in order to ensure an
effective whole-of-Government approach to countering Hezbollah.
Treasury has also targeted Hezbollah's supporters, including
Iran, which is the largest state sponsor of terrorism. We have
sanctioned over 100 targets in the Middle East, Africa, Asia,
and Europe in connection with the Islamic Revolutionary Guard
Corps and Iran's support for terrorism, ballistic missile
programs, human rights abuses, censorship, cyberattacks,
counterfeiting, and transnational criminal activity.
FinCEN has also used Section 311 of the USA PATRIOT Act to
identify Lebanese financial institutions that facilitate money
laundering activities as foreign financial institutions of
primary money laundering concern. This included the Lebanese
Canadian Bank (2011), Rmeiti Exchange (2013), and Halawi
Exchange (2013). These actions served to further expose
Hezbollah's involvement with and benefiting from illicit
activities.
In December, Treasury participated in a workshop on law
enforcement approaches to countering Hezbollah. The workshop
was hosted by Interpol and more than 25 governments
participated in this session, along with Europol. This session
built on a similar workshop that Treasury hosted in May, where
participants from over 20 governments discussed approaches to
combating Hezbollah's financial, commercial, and procurement
activities and how financial information and measures can
support law enforcement action. FinCEN is also providing direct
support to law enforcement officials focused on gang-related
activity such as that pertaining to MS-13.
Q.2.f. Are there particular criteria of suspiciousness
associated with transactions conducted for the benefit of
groups such as MS-13 or Hezbollah?
A.2.f. Treasury uses financial intelligence to map the networks
of organizations such as Hezbollah and create typologies for
specific underlying activities of individual actors or
transaction types. By doing so, we understand that Hezbollah
receives the majority of its funding, estimated at $700 hundred
million annually, from Iran, as well as millions of dollars
from a global network of supporters and businesses, many of
which transact through the international financial system.
Hezbollah also uses a global network of companies and brokers
to procure weapons and equipment and launder funds, many of
which Treasury has publicly identified and designated. For
example, Hezbollah-affiliated individuals and companies
facilitate commercial investments on behalf of Hezbollah.
Types of activities include individual commercial investors
and fund managers, organized fundraising from diaspora
communities, donations from individual diaspora supporters, and
networks to transfer funds and launder money. Procurement
activities identified include purchase of weapons and military
equipment and purchase of technologies, including electronics
for communications, surveillance, and weapons development.
These networks have historically operated in the Middle East,
West Africa, and South America.
Q.2.g. Can you walk me through a typical case where law
enforcement officials used financial intelligence, such as
suspicious activity reports, to fight terrorism or
transnational criminal organizations such as MS-13?
A.2.g. Financial intelligence is a regular component of all law
enforcement investigations. Multiple law enforcement agencies
use Bank Secrecy Act reporting, FinCEN analytical reports, and
other financial intelligence to initiate and support criminal
investigations. FinCEN regularly publishes examples of how
Federal, State, and local law enforcement use the financial
intelligence that FinCEN collects. In one example, BSA reports
from 26 financial institutions assisted law enforcement in
uncovering a criminal network in the United States and Canada
with proceeds of $100 million to $300 million annually. Law
enforcement liaised with fraud investigators at several banks
to investigate suspected money laundering activity being
conducted through a series of businesses and trust accounts
located in several countries. This investigation, supported by
financial intelligence, identified a major money launderer for
a transnational organized crime syndicate known as the Black
Axe Group. Working closely with foreign and domestic law
enforcement partners, authorities arrested and indicted the
targets on various money laundering, fraud, and conspiracy
charges. Several suspects pled guilty, while others were
convicted at trial.
Q.3.a. I'd like to understand better how technological
innovation is transforming the fight against money laundering
and how Government policy can help or hurt these efforts. In
the healthcare context, I hear about how researchers have used
machine learning and artificial intelligence to identify
diseases and predict when they will occur, using data points
that humans would have never put together.
How have financial institutions or law enforcement
officials been able to use of similar techniques to identity
money laundering and how much more progress can be made in this
front?
A.3.a. Technological innovation holds great promise for both
financial institutions and Government agencies. We have
recently been engaged in extensive outreach with the financial
community to better understand trends in this area as well as
identify any appropriate changes to the AML regulatory
framework to better encourage the use of technological
advances.
Q.3.b. Outside of AI and machine learning, how can recent
FinTech innovations such as blockchain fight money laundering?
A.3.b. At Treasury, we are exploring ways to work more closely
with financial institutions, in particular to foster innovation
or leverage financial or regulatory technology (FinTech/
RegTech) to fight money laundering. Treasury has been
conducting extensive outreach with financial institutions and
innovators in the FinTech/RegTech space to solicit their
perspectives and suggestions.
The financial services sector continues to drive a range of
innovations in FinTech that could help combat money laundering.
Blockchain is being applied in fields as diverse as finance,
health care, and logistics. FinTech startups have promoted the
use of blockchain, and large financial institutions in a
variety of partnerships and consortia are actively exploring
this technology. These groups continue to test different
blockchain implementations that could have varying implications
for AML/CFT programs. For example, blockchain could allow
financial institutions to more effectively share data and allow
better identification of suspicious activity spread across many
institutions through a real-time distributed ledger. Such a
system could create a much larger dataset spanning
participating institutions that would allow AI and machine
learning technologies to be even more effective.
Q.3.c. How much does bitcoin, blockchain, and other crypto-
currencies facilitate money laundering?
A.3.c. Virtual currency payments present money laundering,
terrorist financing, and sanctions evasion risks that must be
assessed and mitigated. Absent effective regulation and
supervision, virtual currencies are vulnerable to abuse by
illicit actors because they may provide for anonymity by users,
instantaneous and borderless reach, and irrevocable settlement,
and because they may not require the involvement of an
institution or intermediary, and lack decentralized records. We
remain concerned about its use by illicit actors, such as
Venezuela and terrorist organizations. For this reason, we are
making it a top priority to encourage global regulation of
virtual currency, including through efforts at the G-20 and
during our term as President of the FATF beginning in July
2018.
Q.3.d. How can law enforcement officials best stop this newer
form of money laundering?
A.3.d. Treasury closely tracks digital currency financial
services-particularly virtual currency payments products and
services and related technology innovations, and aggressively
targets bad actors who exploit them for illicit purposes. We
also work in close partnership with law enforcement officials,
including collaboration with law enforcement officials on
dozens of cases at all levels, and we have seen that
traditional investigative techniques combined with expert
knowledge and appropriate tools can be highly effective in
detecting and prosecuting this type of money laundering.
Critical to Treasury's efforts are the regulatory framework
and enforcement authorities we have in place to govern the use
of digital currencies or other emerging payments systems.
Through FinCEN, Treasury regulates convertible virtual currency
exchangers as money transmitters and requires them to abide by
a range of Bank Secrecy Act obligations. Virtual currency
businesses are subject to comprehensive, routine AML/CFT
examinations, just like U.S. financial institutions. Treasury
also leverages its enforcement authorities to target illicit
actors who do not meet their AML/CFT responsibilities. Further,
OFAC uses sanctions in the fight against rogue regimes and
criminal and other malicious actors abusing digital currencies
and emerging payments systems as a complement to exiting tools,
including diplomatic outreach and law enforcement authorities.
The development of digital fiat currencies by rogue regimes
such as Venezuela further present money laundering, terrorist
financing, sanctions evasion, and other illicit finance risks
that must be assessed and mitigated. We are focused on
providing industry as well as law enforcement partners detail
and clarity to help them in their respective compliance and law
enforcement efforts. To that end, we regularly issue FAQs,
advisories, and guidance on key sanctions and AML developments,
including related to virtual currency. Recently, we issued
additional guidance on virtual currency and on prohibited
sectoral transactions in our Venezuela program. Additionally,
the President issued an Executive order that prohibits, as of
the effective date of the order, all transactions related to,
provision of financing for, and other dealings in, by a U.S.
person or within the United States, any digital currency,
digital coin, or digital token, including the Venezuelan Petro
on or after January 9, 2018.
We also convey our expectations through enforcement
actions. Each of our actions, whether by FinCEN, OFAC, or other
departments, provides an opportunity for industry to gain
insight into our compliance and enforcement priorities and
often demonstrate our close cooperation with interagency and
law enforcement partners. In the last year, for example,
Treasury has pursued actions against a number of non-U.S.
companies and individuals for violating U.S. laws related to
economic sanctions and money laundering, many of which occurred
in conjunction with our DOJ and law enforcement partners.
FinCEN assessed a $110 million fine against BTC-e, an internet-
based virtual currency exchanger located outside the United
States, which did substantial business in our country.
We are also making it a top priority to encourage global
regulation of virtual currency, including through efforts at
the G-20 and during our term as President of the FATF.
Q.4.a. I'd like to discuss Today, around 2 million Suspicious
Activity Reports (SARs) are filed each year. While every SAR
used to be read by law enforcement officials, that is no longer
the case today. Financial institutions often complain that they
rarely, if ever, receive feedback from law enforcement
officials on the utility of any particular suspicious activity
report that they file. This lack of feedback loops increases
the burdens on financial institutions, who continue to file
SARs that are of little utility to law enforcement officials.
It also prevents financial institutions from developing better
analytical tools to more precisely discern between the signal
and the noise.
What percentage of SARs are actually read by someone in law
enforcement?
A.4.a. FinCEN automatically searches the filings it receives,
targeting specific risks and challenges to support law
enforcement, as well as analyze them for patterns and trends.
FinCEN has created business rules and various automated tools
that search every filing and assist analysts and law
enforcement in identifying those records that are related to or
may be associated with open cases or support pattern or trend
analysis to identify subjects or areas of interest. The
greatest value in SAR data is often not found in a single SAR,
but in the aggregation of this critical information that can
demonstrate connections, patterns, and trends. That said, there
are more than 10,000 FinCEN Query users who conduct more than
30,000 searches each day whose investigations and analysis are
augmented by these technological tools.
Financial intelligence, including SARs, serves as a vital
resource for law enforcement investigations of North Korea,
terrorist financing, drug trafficking, fraud, tax evasion,
cybercrime, and sanctions evasion among other things. Federal,
State, and local agencies have access to FinCEN's database,
this includes SAR Review Teams covering the 94 Federal judicial
districts, as well as 55 task forces led by IRS-CI.
As an example of how law enforcement uses data, over 24
percent of IRS-CI's investigations are initiated from (not just
supported by) a BSA source.
Q.4.b. How often do financial institutions receive feedback
from law enforcement officials as to the utility of their SAR
filing?
A.4.b. Law enforcement is better suited to respond to a
specific question about feedback they are providing to
financial institutions. However, the Treasury Department
actively encourages greater law enforcement feedback to
financial institutions through initiatives such as FinCEN's Law
Enforcement Awards program to recognize successful
investigations and provide greater feedback on these success
stories to the financial industry. We have also recently
launched FinCEN Exchange, an initiative led by FinCEN that
brings law enforcement together with financial institutions to
facilitate greater information sharing between the public and
private sharing. As I discussed in my testimony, FinCEN
Exchange convenes regular briefings to exchange targeted
information on priority illicit finance threats and uses our
authorities under Section 314(a) of the USA PATRIOT Act to
provide financial institutions with broader typologies to help
them identify illicit activity.
Q.4.c. Some have proposed reducing the number of SARs and CTR
filings because they are often superfluous and are never read.
Others argue that this poses risks, because investigating minor
infractions may still lead to significant law enforcement
successes. How should we resolve this conflict?
A.4.c. We know through our own analysis that SARs and other BSA
data are a vital source of financial intelligence for law
enforcement investigations of North Korea, terrorist financing,
drug trafficking, fraud, tax evasion, cybercrime, and sanctions
evasions, among other crimes. We also need to ensure that
financial institutions are devoting their resources toward high
value activities. I am committed to better understanding the
value of individual elements of the SAR data to inform our
overall view of changes that may be necessary to modernize the
BSA. To that end, Treasury is issuing an RFP to conduct a
thorough, data-driven analysis of BSA reporting requirements to
inform its decisionmaking processes. We would be pleased to
brief the Committee and its Members as that analysis
progresses.
Q.4.d. How could regulators (1) set up better feedback loops
between financial institutions and law enforcement officials
that could help financial institutions better identify money
laundering; and (2) empower financial institutions to act upon
their improved ability to distinguish between useful and
superfluous reports, including by filing fewer unnecessary
SARs, without fearing regulatory consequences for doing so?
A.4.d. I believe that public-private information sharing is
critical to enhancing our ability to safeguard the financial
system and combat illicit financing activity. For that reason,
we recently launched FinCEN Exchange. FinCEN Exchange is a
public-private information sharing program in which FinCEN, in
consultation with law enforcement as appropriate, provides
information to financial institutions to efficiently focus
their resources on priority areas. This
information sharing provides financial institutions with better
insight into the Government priorities and, in some cases, how
the Government utilizes information received from financial
institutions. Another key element is to foster responsible
innovation to better harness technological innovation.
Q.4.e. Would a better feedback loop system exist if financial
institutions employed more people with security clearances? If
so, what, if anything, can the Federal Government do to
facilitate this?
A.4.e. We are happy to consider the matter and review it in
consultation with our law enforcement partners.
Q.5. Often, financial institutions will de-risk by refusing to
serve customers that could be involved in illegal activity. As
financial institutions start to share more information with
each other, this practice could become more prominent and
potential criminals could more frequently lose access to the
United States' financial system altogether.
Q.5.a. Are there instances in which de-risking is actually
unhelpful for law enforcement purposes, because it drives these
criminals underground and makes it more difficult to track
them?
Q.5.b. At the moment, do the regulators that evaluate and
enforce financial institutions compliance with our Federal
money laundering take this into account?
Q.5.c. Are there promising ways to increase cooperation between
financial institutions, regulators, and law enforcement
officials, so that financial institutions can make a more
informed decision about when and how to de-risk?
Q.5.d. Would financial institutions need to hire more employees
with a top security clearance and/or a law enforcement
background for this coordination to be effective?
A.5.a.-d. Protecting the integrity of the U.S. financial system
and preventing its use for criminal purposes is of paramount
importance. It is our responsibility at Treasury and within the
law enforcement community to detect and prevent illicit use of
the U.S. financial system. Financial institutions play a
critical role in safeguarding the international system from
abuse by illicit actors, which at times includes making risk-
based decisions about with whom, where, and how they conduct
business.
At the same time, we take concerns about de-risking
seriously. We value the importance of preserving access to the
U.S. financial system to support economic growth, financial
inclusion, and financial transparency while continuing to
enforce U.S. laws and regulations. Financial inclusion and
financial transparency are complementary and mutually
reinforcing objectives. Keeping legitimate transactions in the
regulated financial systems improves financial transparency.
Treasury has worked with the Federal regulators to issue
guidance and clarify the importance to financial institutions
of implementing risk-based approaches that assist in preventing
overcorrections that might exclude legitimate banking
customers.
In the last few years, Treasury has led the U.S.
Government's efforts related to de-risking. These efforts have
included Treasury-led engagements and dialogues with
stakeholders from the public sector and industry, in addition
to Treasury's ongoing open line of communication with U.S.
financial institutions. Further, Treasury's work on this issue
involves close coordination with global bodies and multilateral
organizations, including the Financial Action Task Force, the
Financial Stability Board, the World Bank, and the IMF.
Treasury recognizes that financial institutions' decisions
on whether and how to maintain customer relationships are
driven by multiple factors, including: profitability and
business strategy motives; current global economic conditions;
and real concerns about suspicions of illicit financial
activity, including money laundering and the financing of
terrorism.
In terms of resource requirements within the financial
institutions, I believe that we can be most effective in
combating illicit finance and protecting the integrity of the
banking system by making sure that financial institutions are
devoting the resources they have to high value activities. As
discussed in my testimony, financial institutions have been
improving their ability to identify customers and monitor
transactions by experimenting with new technologies that rely
on artificial intelligence and machine learning. We laud and
encourage these innovations, which advance the underlying
purposes of the BSA. We are working closely with our
counterparts at the Federal Banking Agencies to discuss ways to
further incentivize financial institutions to be innovative in
combating financial crime.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM SIGAL
MANDELKER
Q.1.a. As we contemplate our current anti-money laundering
system, it's critical that we also understand the unintended
consequences of various policies. In a report issued last
April, the World Bank found that for the first time in recent
history, remittance flows to developing countries declined for
two straight years. Last July, the Financial Stability Board
issued a report which found that the number of correspondent-
banking relationships fell in all regions between 2011 and
2016. Hardworking men and women throughout the United States,
including many in my home State of New Jersey, use remittances
to send critical economic support to their families abroad. In
the United States and elsewhere, however, we've seen reports
that certain banks are terminating the accounts of nonbank
payment providers that offer these critical financial services
to consumers. In many cases, we've seen banks end outright
their relationships with firms, market segments, or countries
that are viewed as higher risk, instead of analyzing risks on a
case-by-case basis. The net impact of this behavior across
multiple countries could have staggering effects on financial
inclusion.
What are your views on the causes of this de-risking trend?
A.1.a. Protecting the integrity of the U.S. financial system
and preventing its use for criminal purposes is of paramount
importance. It is our responsibility at Treasury and within the
law enforcement community to detect and prevent illicit use of
the U.S. financial system. Financial institutions play a
critical role in safeguarding the international system from
abuse by illicit actors, which at times includes making risk-
based decisions about with whom, where, and how they conduct
business.
At the same time, we take concerns about de-risking
seriously. We value the importance of preserving access to the
U.S. financial system to support economic growth, financial
inclusion, and financial transparency while continuing to
enforce U.S. laws and regulations. Financial inclusion and
financial transparency are complementary and mutually
reinforcing objectives. Keeping legitimate transactions in the
regulated financial systems improves financial transparency.
Treasury has worked with the Federal regulators to issue
guidance and clarify the importance to financial institutions
of implementing risk-based approaches that assist in preventing
overcorrections that might exclude legitimate banking
customers.
In the last few years, Treasury has led the U.S.
Government's efforts related to de-risking. These efforts have
included Treasury-led engagements and dialogues with
stakeholders from the public sector and industry, in addition
to Treasury's ongoing open line of communication with U.S.
financial institutions. Further, Treasury's work on this issue
involves close coordination with global bodies and multilateral
organizations, including the Financial Action Task Force, the
Financial Stability Board, the World Bank, and the IMF.
Treasury recognizes that financial institutions' decisions
on whether and how to maintain customer relationships are
driven by multiple factors, including: profitability and
business strategy motives; current global economic conditions;
and real concerns about suspicions of illicit financial
activity, including money laundering and the financing of
terrorism.
An important way to ensure financial inclusion while
increasing transparency is by making sure financial
institutions are devoting the resources they have to high value
activities. As discussed in my testimony, financial
institutions have been improving their ability to identify
customers and monitor transactions by experimenting with new
technologies that rely on artificial intelligence and machine
learning. We laud and encourage these innovations, which
advance the underlying purposes of the BSA. We are working
closely with our counterparts at the Federal Banking Agencies
to discuss ways to further incentivize financial institutions
to be innovative in combating financial crime.
Q.1.b. What can FinCEN and the banking regulators do to
encourage banks to conduct case-by-case analysis as opposed to
wholesale termination of relationships with various market
segments?
A.1.b. Treasury has been heavily engaged on the issue of de-
risking over the last few years, including by focusing on
encouraging that banks make decisions that effectively assess
and manage risk on an individual, rather than indiscriminate
basis. This is one of the reasons why we encourage financial
institutions to share appropriate information under the Section
314(b) program, thereby allowing financial institutions to make
better-informed risk decisions on individual customers.
To help improve the overall supervisory environment, we
have taken an active role in supporting efforts to improve
multi-State and State-Federal supervisory coordination, notably
through State coordination vehicles like the multi-State Money
Service Business examination Task Force and the Conference of
State Banking Supervisors online system for streamlined data
reporting. We have also worked to promote State-Federal
coordination vehicles like the Federal Financial Institutions
Examination Council and the 2014 Money Remittances Improvement
Act. De-risking related work is also a major focus area at the
Bank Secrecy Act Advisory Group.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM SIGAL
MANDELKER
Q.1.a. Secretary Mandelker, Treasury is tasked with overseeing
the BSA regime and it has subsequently delegated aspects of
that authority--notably BSA exam authority--to various
regulatory agencies.
How is Treasury ensuring that regulators' evaluations of
financial institution AML programs are consistent with
Treasury's view of what makes our country more secure?
A.1.a. Treasury is working with its counterparts in the Federal
Financial Institutions Examination Council (FFIEC) to ensure
Treasury's principles for an effective AML framework are
integrated into their exam practices. I meet with the heads of
the regulatory agencies to ensure that we are working closely
together to make the exam process as effective and impactful as
possible, and incorporates key law enforcement and national
security priorities. Treasury also participates in regular
calls with FFIEC counterparts, coordinates and cooperates on
enforcement actions, and provides training and guidance to
examiners through a variety of mechanisms, including through
updates to the FFIEC AML exam manual. We also engage in a
similar fashion with the SEC and CFTC and frequently engage
with groups of State regulators.
Q.1.b. More generally, how do you oversee these industries?
A.1.b. While Treasury has delegated aspects of its exam
authority to other Federal functional regulatory agencies, we
retain the ability to examine financial institutions as needed.
We partner with the IRS on examinations of financial
institutions that are not under the jurisdiction of the Federal
banking agencies, the SEC or the CFTC and often lead the
examinations of virtual currency exchangers. We receive
statistical information and reports of examination related to
significant BSA deficiencies as well as referrals from
examiners when significant BSA compliance issues are identified
in examinations.
As part of a robust enforcement program, we also
independently investigate and take enforcement action against
financial institutions subject to the BSA. In addition to
holding individuals and companies accountable, enforcement
actions ensure that companies and financial institutions of all
types and sizes understand their obligations and take them
seriously. They serve as cautionary tales to inform the broader
community about the risks of engaging in prohibited activity.
Q.1.c. As of today, what 2017 or 2018 AML/CFT exam priorities
has the Treasury Department communicated to regulators?
A.1.c. I have been meeting with the heads of the regulatory
agencies to discuss our priorities and work with them to be
sure that the examination process reflects those priorities.
FinCEN also meets monthly with the delegated supervisors to
discuss areas of concern and examination focus related to BSA/
AML. These meetings are excellent opportunities for FinCEN, as
an expert on the money laundering risks facing financial
institutions, to engage and discuss priority areas with the
delegated examiners that have expertise in the operations and
risks specific to their covered entities. Also, FinCEN will
communicate money laundering risks for a specific institution
or geographic area to the appropriate regulator to incorporate
in an institution's upcoming examination. The specific
recommendations Treasury makes to its examiners are highly
sensitive and not appropriate to discuss publicly.
Q.1.d. Could you please reference any memoranda or other
evidence of that communication?
A.1.d. The referrals that Treasury makes to its delegated
examiners often contain information that is law enforcement
sensitive or considered confidential supervisory information.
Treasury takes very seriously protecting information that is
law enforcement sensitive to prevent any impact on ongoing
investigations that often involve matters of national security.
Additionally, Treasury and other regulatory agencies rely on
the protection and nonpublication of confidential supervisory
information as that ensures a high-level of candor between the
financial institutions and Treasury. Institutions would less
readily share information if there were concerns that it could
be made public.
Q.2. Secretary Mandelker, in your testimony you noted that
Treasury uses the Bank Secrecy Act Advisory Group (BSAAG) to
communicate with the private sector and provide guidance.
Q.2.a. Could you describe the membership of the group? Who sits
on the board and how is it selected?
A.2.a. The BSAAG is a statutorily mandated advisory group that
consists of representatives from Federal and State regulatory
and law enforcement agencies, financial institutions, and trade
groups with members' subject to the requirements of the Bank
Secrecy Act. Once per year, FinCEN solicits nominations from
the public for BSAAG membership in the Federal Register. In
making selections for membership, FinCEN will seek to
complement current BSAAG members in terms of affiliation,
industry, and geographic representation.
Q.2.b. Were there actionable results this group has produced?
A.2.b. In the last few years, BSAAG member suggestions have
contributed to several actions taken by FinCEN, including:
LInformation Sharing between the Government and
Financial Institutions: BSAAG discussions on the
importance of two-way, iterative information informed
FinCEN pilot information sharing sessions over the past
few years that evolved into the recently announced
FinCEN Exchange program.
LInformation Sharing Between Financial Institutions:
BSAAG feedback informed FinCEN actions to streamline
the 314(b) information sharing process by creating a
more user-friendly
registration process and one-click renewal, and
informed FinCEN's guidance on information sharing
related to money laundering predicate offenses.
LFinCEN Advisories: BSAAG feedback informed
improvements to FinCEN advisories to better communicate
actionable
information and regulatory expectations. BSAAG feedback
was particularly instrumental in FinCEN's development
of an advisory on establishing a Culture of Compliance
that highlighted general principles illustrating how
financial institutions and their leadership may improve
and strengthen compliance with the BSA.
Q.3.a. Secretary Mandelker, as a follow-up to the previous
question, the BSAAG has a statutory mandate to provide the
Treasury Secretary with ``advice on the manner in which'' BSA
and certain Internal Revenue Code reporting requirements
``should be modified to enhance the ability of law enforcement
agencies to use the information provided for law enforcement
purposes.''
In the last few years, what formal recommendations has this
group made on modifications to BSA reporting requirements to
enhance its utility to law enforcement?
A.3.a. Given its broad, diverse representation of the financial
industry, law enforcement, and regulatory communities, BSAAG
generally does not provide consensus formal recommendations,
but rather provides a forum for Treasury to understand views
from different impacted constituencies in order to balance
diverse stakeholder needs. As noted in my testimony, current
topics under
discussion within the BSAAG include identifying metrics for
determining effective financial reporting, streamlining the
reporting of money laundering ``structuring'' transactions, and
more efficient ways for industry to report cash transactions.
Q.3.b. Did Treasury either fully or partially adopted any of
the recommendations?
A.3.b. Although the BSAAG does not produce formal
recommendations, ongoing discussions within BSAAG are directly
contributing to Treasury's perspectives regarding potential
modifications in reporting requirements, including potential
opportunities to streamline the reporting of money laundering
``structuring'' transactions, and more efficient ways for
industry to report cash transactions.
Q.4. Secretary Mandelker, in the previous hearing on BSA/AML,
there was agreement amongst industry experts that regulators
have imposed ``check-the-box'' AML/CFT compliance requirements
on banks. I understand that some of this is driven by the
Federal Financial Institutions Examination Council's (FFIEC)
BSA/AML Examination Manual.
Q.4.a. Historically, how involved has Treasury been in writing
the exam manual given it is published by the FFIEC?
A.4.a. Treasury had considerable input into the scoping and
review of the first iterations of the manual and has since been
working collaboratively with the banking agencies with respect
to further updates. I have emphasized the importance of this
effort during my meetings with the regulatory agencies and am
ensuring Treasury's in-depth involvement in further development
of the manual.
Q.4.b. Is the exam manual consistent with Treasury's AML/CFT
priorities?
A.4.b. Treasury is working with its counterparts in the FFIEC
to ensure that Treasury's principles for an effective AML
framework are integrated into the updated manual.
Q.4.c. According to press reports, the manual is currently
being updated as it was last published in 2014. Will the public
be given the opportunity to comment on it?
A.4.c. The manual is published by the FFIEC. Treasury defers to
the FFIEC member agencies on the decision to open the manual to
public comment.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM SIGAL
MANDELKER
Q.1. What is the most effective action a consumer can take to
protect against identity theft if the consumer's information
has been compromised? Please include a detailed description of
the differences between credit freezes, credit locks, and fraud
alerts, including how long each takes to activate and de-
activate and the relative benefits and drawbacks of each.
A.1. We defer this question to our colleagues in the CFPB or
Federal Trade Commission.
Q.2. Many States have laws requiring credit bureaus to provide
credit freezes.
Can you describe what these laws generally require and
discuss whether it is appropriate for Congress to create a
Federal standard?
A.2. We defer this question to our colleagues in the CFPB or
Federal Trade Commission.
Q.3.a. I'm interested in the ways in which technology can aid
AML compliance efforts.
What are some of the innovative technologies that you've
seen that hold some promise for either the Government or the
private sector?
A.3.a. Financial institutions have been quite proactive over
the last few years in their AML/CFT approach, in some cases
building sophisticated internal financial intelligence units
and experimenting with new technologies that rely on artificial
intelligence and machine learning to identify strategic and
cross-cutting financial threats. The Treasury Department lauds
and supports these innovations and is exploring how innovative
technology could potentially be used to improve the
effectiveness and efficiency of the AML/CFT regime. We are
engaging the private sector to better understand the potential
of new and emerging technologies to support both private sector
compliance and smarter, more effective Government regulation
and supervision. These technologies include digital identity
solutions, which could potentially facilitate compliance with
Bank Secrecy Act requirements for customer identification and
verification for onboarding and transaction monitoring and
better enable law enforcement to identify, track, and target
those who abuse the financial system and to trace and recover
illicit proceeds.
Another promising area may be the emergence of innovative
regulatory technology solutions that leverage big data, complex
algorithms, and artificial intelligence/machine learning to
strengthen transaction monitoring and suspicious transaction
reporting while reducing compliance costs. We are paying close
attention to these and other new technologies in the AML/CFT
space, including their potential use by Government to advance
regulatory, supervisory, and law enforcement activities. In
this regard, we will continue to engage the private sector to
make sure that the regulatory regime keeps up with evolving
technology and most effectively supports public and private
efforts to achieve our shared objective of protecting the
financial system from abuse.
Q.3.b. What are the barriers to either the Government or the
private sector adopting these technologies?
A.3.b. We encourage financial institutions to innovate with new
technologies and approaches to better target their resources
toward high-value activities, while protecting the financial
system from abuse. To help us better understand emerging
technologies of relevance to our AML/CFT mission and the
potential barriers to private sector adoption, Treasury staff
is currently engaged in outreach to the private sector.
Treasury is also working closely with our counterparts at the
Federal Banking Agencies to discuss ways to further incentivize
financial institutions to be innovative in combating financial
crime.
Q.3.c. What can we be doing as legislators to ensure that we
promote technological innovation in this sector?
A.3.c. We encourage Congress to continue outreach to the
private sector to stay abreast of technological solutions that
can improve efficiency of the financial system, enhance
consumer choice, and protect the U.S. financial institutions.
We do not have any recommendations at this time related to
legislation and technological innovation.
Q.4. One proposal for modernizing the AML compliance regime
involves increased information sharing among private sector
entities.
Is there a way to increase private sector information
sharing while protecting consumer financial information?
A.4. All information sharing by private sector financial
institutions for AML purposes is already protected by Federal
privacy laws such as the Gramm-Leach-Bliley Act, the Fair
Credit Reporting Act, and the Right to Financial Privacy Act
(for sharing with the Federal Government), by Federal laws such
as the Federal Trade Commission Act that can be used to protect
privacy interests, and in many cases by State privacy laws as
well. While any expansion of information sharing for AML
purposes would have to take into account the requirements of
this existing privacy framework, the framework would operate to
protect from misuse the information that was in fact shared.
Q.5. The regulatory definition of ``financial institution'' has
been expanded several times over the years, both by the
Financial Crimes Enforcement Network rulemaking and by
legislation by Congress.
Should the definition of financial institutions be expanded
to include other sectors? If so, which sectors?
A.5. We assess risks and vulnerabilities of the United States
and international financial system on an ongoing basis. We are
constantly assessing whether specific gaps could be remedied by
expanding the definition of the term ``financial institution.''
Q.6. Could these changes be made via FinCEN rulemaking or
should legislation be passed?
A.6. The statutory definition of ``financial institution''
under the BSA, 31 U.S.C. 5312(a)(2), includes a wide variety of
entities touching all the major nodes of the international
financial system. In
addition, this provision gives the Secretary of the Treasury
the authority to designate by regulation as financial
institutions for
purposes of the BSA any other agency or business that performs
activities similar to, related to, or a substitute to any of
the activities engaged in by enumerated financial institutions.
The Secretary is also authorized to designate as a financial
institution any other business whose cash transactions have a
high degree of usefulness in criminal, tax, or regulatory
matters. This rulemaking authority has been delegated to
FinCEN, and as noted above, Treasury continuously assesses
whether specific gaps can be remedied by expanding the
definition of financial institution.
Q.7. In August 2017, FinCEN issued an advisory encouraging real
estate brokers to share information with them that could be
helpful in AML efforts, while noting they are not required to
do so under current law.
How do we increase information sharing between real estate
brokers and FinCEN?
A.7. Although real estate professionals do not currently have
an obligation to report suspicious activity to FinCEN, we are
using FinCEN advisories and industry outreach to encourage real
estate professionals to report voluntarily. The advisory issued
in August 2017, was not directed exclusively at real estate
brokers but any person ``involved in real estate closings and
settlements,'' a group identified by Congress as ``financial
institutions'' for purposes of the BSA. (31 U.S.C.
5312(a)(2)(U)). In that advisory, FinCEN outlined specific
vulnerabilities and typologies applicable to real estate
transactions. An example of industry outreach includes Treasury
participation in a conference hosted by the National
Association of Realtors in November 2017. Treasury served on a
panel to educate real estate agents about the money laundering
risks and vulnerabilities in their sector and to encourage
industry to report suspicious activity voluntarily to FinCEN
under a safe harbor provision. Treasury will continue to engage
in this type of outreach.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
SIGAL MANDELKER
Q.1. Gaming and tourism are some of Nevada's top sectors. In my
State, our gaming operators employ thousands of hard-working
Nevadans, and the industry as a whole domestically supports 1.7
million jobs across 40 States. Qualified casinos, like
financial institutions, are also subject to Banking Secrecy Act
requirements. Organizations within my State have suggested that
gaming operators would welcome a review of BSA requirements.
They look forward to this Committee's thoughtful, bipartisan,
review of BSA requirements that takes into account the security
imperative for robust anti-money laundering efforts, as well as
the impact those requirements have on depository and
nondepository regulated entities. I wanted to follow up on my
question in the Committee about the pros and cons of
eliminating the requirement that a detailed factual narrative
is required when filing a Suspicious Activity Report (SAR) form
for structuring situations. In your responses, you mentioned
that useful information is found in the detailed factual
narrative more generally which I understand but wonder how
useful this information is for structuring situations.
What are the pros and cons of eliminating the factual
narrative for just structuring situations?
A.1. Eliminating the SAR narrative for certain structuring
cases could significantly hamper important investigations. For
example, if a financial institution files transactional
information but does not include other related suspicious
activity that may exist in the narrative, there is a risk that
such additional and important information would not be
available to law enforcement during the course of an
investigation.
There are some significant investigations (in both
financial institutions and law enforcement) that were triggered
by simple structuring activity, where subsequent investigations
that drew on the SAR narrative led to the discovery of more
serious crimes. Eliminating the SAR narrative would hamper such
investigations. Further, even if the narrative is not highly
detailed, it could still help identify a network of individuals
where law enforcement may have been previously unaware.
We also recognize that financial institutions expend
tremendous amounts of resources each year on investigations and
SARs for possible structuring transactions and that eliminating
the narrative requirement would reduce these costs. Financial
institutions would also have greater flexibility to utilize
existing resources on more risk-relevant investigations that
may be of higher interest to law enforcement.
We continue to look at this issue carefully and look
forward to working with Congress on this topic.
Q.2. I wanted to follow up on my question about raising the
Currency Transaction and Suspicious Activity Reporting
thresholds. In the hearing, you mentioned concerns that small
dollar amounts can be used for criminal activities so there are
risks to raising the thresholds. Some recommend raising them to
either inflation or a lesser amount--from $5,000/$10,000 for
suspicious activity reports and $20,000 or $25,000 for currency
transaction reports.
Please expand on what we should consider if the threshold
amounts for CTRs and SARs were increased.
A.2. As part of a broader risk-based review of the efficacy and
value of the current AML/CFT regime, we are evaluating the
suspicious activity report (SAR) and currency transaction
report (CTR) requirements, including reporting thresholds. In
conducting this review, we are defining and measuring the value
both quantitatively and qualitatively of the data derived
through BSA reporting requirements.
We have identified some initial concerns, especially from
our law enforcement partners, that significant increases in the
respective thresholds could reduce the amount of valuable
financial intelligence available to Treasury, law enforcement,
and other key
domestic and international partners. For example, FinCEN
recently reviewed CTR filings to assess how much of that
financial intelligence we might lose if the threshold were
doubled to approximately $20,000. In that circumstance, FinCEN
would lose over 60 percent of CTR-based financial intelligence
on which FinCEN and law enforcement, in particular, currently
rely to support investigations and analysis. The more the
threshold is increased, the more data would be potentially
lost. For example, increasing the threshold to $30,000 would
result in a loss of close to 80 percent of currently provided
data--in this case the type of data points that enable the
identification of illicit networks and the initiation or
expansion of investigations. In addition, it is important to
consider how changing practices can highlight the
suspiciousness of a cash transaction, even in low amounts. For
example, because customers often rely on wire transfers instead
of cash deposits and withdrawals, a cash deposit of $10,000 can
be a valuable source of information.
The value of the reporting that could be lost as a result
of threshold increases is not simply a reduction in the number
of SARs, CTRs, FBARs or other required BSA reporting. This
reporting has significant tactical value that supports, among
other efforts, existing law enforcement and sanctions
investigations or provides new leads and information to start
those efforts. This reporting also provides significant
strategic value, ranging from studies of trends to
identification of typologies associated with new illicit
finance schemes, such as crypto-currencies, that are used to
develop and implement risk mitigation responses. Financial
reporting also supports operations, including through the
sharing of information with international partners to support
efforts related to terrorist financing, proliferation
financing, political corruption, drug or human trafficking,
human rights abuses and corruption, and many other important
illicit finance and national security issues.
We continue to conduct a broader and deeper data-driven
analysis of BSA reporting requirements to inform decisionmaking
processes and recommendations. As we review the factors
discussed above we may need to focus our attention on the
relative value of the SARs and CTRs being filed, instead of
merely on thresholds. We will also continue to discuss the
threshold issue and BSA value with law enforcement and other
relevant stakeholders within the BSAAG and other fora to
consider their input.
Q.3. In 2014, FinCEN issued an advisory with human trafficking
red flags, to aid financial institutions in detecting and
reporting suspicious activity that may be facilitating human
trafficking or human smuggling.
Do you think institutions are taking advantage of those red
flags, in order to better assess whether their banks are being
used to finance human trafficking?
A.3. Based on feedback received from our engagement with
stakeholders, we do believe that financial institutions have
benefited from relying on the red flags identified in the
advisory to better assess such activity. In fact, according to
FinCEN's internal metrics, the advisory focused on human
trafficking red flags is one of its most viewed advisories.
Q.4.a. Secretary Mandelker, I believe the FinCEN Exchange is a
great idea.
Following up on my question, will you provide similar
occasional briefings for nondepository entities that also
comply with BSA/AML?
A.4.a. We created FinCEN Exchange to provide a range of
financial institutions with additional information about
priority issues on a more regularized and frequent basis. In
the past, FinCEN has invited nonbank financial institutions to
similar discussions when it believes that the financial
institution may have information relevant to an issue specific
briefing or other ability to support the law enforcement
priorities within the scope of the particular engagement. Such
exchanges are important and we will work with our law
enforcement partners to provide briefings for nondepository
entities.
Q.4.b. Would you commit to hosting briefings at least bi-
annually for gaming establishments, money services businesses,
currency exchanges and others that are not currently included
in FinCEN Exchange events?
A.4.b. We envision robust participation in FinCEN Exchange by a
variety of private sector entities. The invitation list of
participating private sector entities for a particular briefing
will be driven by the specific illicit finance or national
security threat topic as prioritized by FinCEN and law
enforcement.
Q.5. In 2015, FinCEN signed a Memorandum of Understanding with
the State Regulatory Registry/CSBS Board to obtain access to
all State MSB licensing data contained in the Nationwide Multi-
State Licensing System (NMLS).
What has FinCEN learned from the MOU regarding MSB
registration data about the scope and risks within the MSB
sector? Has this information been shared with the IRS, State
regulators and Congress? Could you share any analysis with my
office?
A.5. FinCEN has obtained information on money transmitter
agents from the NMLS. FinCEN is using this data to identify
higher risk agents that engage in MSB activity beyond their
work as an agent and may need to be independently licensed.
Under a new feature of NMLS and the ensuing data package,
FinCEN will now also obtain information on transaction monetary
volumes at the company and State-specific level, as well as
volumes and destinations of transactions going to foreign
jurisdictions. This will enhance FinCEN's ability to identify
MSBs that need enhanced supervision of their money transmitting
activities. FinCEN meets with State regulators regularly to
discuss upcoming examinations and better ways to more
effectively and efficiently manage the MSB sector.
Q.6.a. Since the Money Remittances Improvement Act (MRIA)
became law, FinCEN has worked with the IRS and State
examination authorities to coordinate exam scheduling.
How many States currently register in the NMLS system?
A.6.a. According to the NMLS, there are 40 States managing
their MSB licensing through NMLS. Of these States, at least 28
mandate that MSBs use the NMLS system for registration and this
number continues to grow.
Q.6.b. What has been the impact of MRIA and the coordination
that resulted from the passage of that law?
A.6.b. The MRIA has improved FinCEN's collaboration and
coordination with its State partners. As discussed in a prior
answer, FinCEN uses information collected by the States through
the NMLS system to partially evaluate potential risks in the
MSB industry. FinCEN regularly communicates with the States on
coordinating examinations and efficiencies in the supervision
process. FinCEN has also coordinated directly with the States
when crafting agreements between the State regulator and the
institution to bring the institution into compliance.
Q.6.c. Which States permit Money Services Businesses to share
certain State exam findings with banks or credit unions?
A.6.c. FinCEN is aware of certain States that allow financial
institutions to share State examination findings based on
specific conditions and consultations. However I would refer
you to the Conference of State Bank Supervisors for more
information on this issue.
Q.7. I served as Attorney General of Nevada for 8 years. I know
that investigations of organized crime, terrorist financing and
money laundering rely on collaboration with leaders and
governments of other nations.
As the Under Secretary for Terrorism and Financial Crimes,
how does your office collaborate with African nations to curb
terrorist financing and money laundering?
A.7. Treasury's Office of Terrorist Financing and Financial
Crimes heads the U.S. delegation to the Financial Action Task
Force Regional Style bodies in Africa. Through both the Eastern
and Southern Africa Anti-Money Laundering Group and the Inter-
Governmental Action Group Against Money Laundering in West
Africa, we collaborate with African nations to strengthen their
anti-money laundering and countering the financing of terrorism
regimes. Further, through other multilateral fora and the World
Bank/IMF bi-yearly Bank Fund meetings and other bilateral
engagements, we also share information critical to stemming
illicit financial flows. Finally, when discrete matters arise,
we engage with local embassies on a bilateral basis on issues
related to terrorist financing and money laundering.
Q.8. Secretary Mandelker, Treasury's Office of Technical
Assistance has been a critical resource to collaborate and
strengthen other nations. I would like to better understand how
the Office of Technical Assistance works.
Q.8.a. Which nations did the Office of Technical Assistance
serve in 2016 and 2017? How many nations requested assistance
but have been denied?
Q.8.b. Please detail why the assistance was denied: lack of
U.S. funding, diplomatic considerations, another nation was
better suited to provide the information, etc.?
Q.8.c. Please provide annual OTA funding levels from 2010 until
today?
A.8.a.-c. Treasury's Office of Technical Assistance (OTA) falls
under the Under Secretary for International Affairs. OTA
provided the following information in response to your
questions about its activities.
Please see OTA's 2016 and 2017 Operating Plans (attached)
for a complete list of OTA projects.
In 2016 to 2017, OTA received 20 requests for assistance
from jurisdictions that did not result in a new Treasury
technical assistance engagement. There are many reasons that a
request for assistance would not result in an engagement. Most
commonly, OTA requires additional information prior to
conducting an in-country needs assessment, such as more
detailed information as to the type of assistance requested. If
additional information is not received, OTA will not move
forward with an in-country needs assessment.
For those engagements that do proceed to an in-country
needs assessment, OTA management may determine that there is
insufficient commitment to reform and/or the counterparts are
not positioned at the time of the assessment to use OTA
assistance well. In these circumstances, OTA communicates
necessary pre-conditions for OTA assistance to have the best
opportunity for success. Pre-conditions vary, but can include
the requesting jurisdiction committing additional resources to
or hiring of additional staff at the counterpart agency or the
need for a demonstration of political will to implement reform
through the issuance of a decree or regulations.
In rarer circumstances, OTA management may determine that
other nations or international institutions are better
positioned to provide the necessary technical assistance.
Q.9. For years, Treasury relied on supplemental fund transfers
from the State Department, USAID and other Government agencies.
Q.9.a. How much did OTA receive from State and USAID in 2014,
2015, 2016, and 2017?
Q.9.b. How is the OTA working with the International Monetary
Fund and the World Bank to prevent terrorist financing and
money laundering?
A.9.a.-b. Treasury's Office of Technical Assistance falls under
the Under Secretary for International Affairs. OTA provided the
following information in response to your questions about its
activities.
The chart below provides OTA's annual funding levels by source
of funding from 2010 to 2017 (last complete fiscal year).
The table below provides the funding OTA received from State
and USAID from 2014 to 2017.
OTA regularly coordinates its anti-money laundering/counter
financing of terrorism assistance with other assistance donors
and providers, including the International Monetary Fund (IMF)
and the World Bank. This collaboration occurs both at
headquarters in Washington, DC, and in the field with the goal
of ensuring that assistance efforts are aligned and to prevent
redundancy. OTA communicates with other providers about its
current assistance efforts as well as prospects for future
assistance. For example, in a country where more than one
assistance provider may operate, these efforts prevent
unnecessary overlap, identify synergies, and maximize
absorptive capacity of recipient counterparts.
For example, as part of OTA's holistic approach to engaging
the full range of AML/CFT stakeholders, OTA usually seeks to
work with supervisory as well as enforcement authorities. If
the IMF plans to work with the banking sector supervisor to
develop supervisory tools, OTA may seek to work in parallel
with the supervisor of money remitters or may concentrate its
activities on other parts of the framework, such as the
financial intelligence and law enforcement authorities.
Alternately, if the IMF concludes its supervision assistance
with the drafting of a supervision tools such as an examination
manual, OTA may provide follow-on assistance on the application
and implementation of those tools.
Q.10. Kenya's M-Pesa is an electronic system that captures
every transaction. All M-Pesa customers must identify
themselves with their original identification document. There
is three-factor authentication: SIM card, ID and the PIN. The
Central Bank of Kenya receives regular reports on transactions.
What can we learn from Kenya and other nations about how to
use mobile banking to provide access to financial services and
also avoid terrorist and other forms of illicit financing?
A.10. Kenya's M-Pesa mobile payments system is often cited as
an example of how innovative financial products and services
can leverage technology and new business models to support
financial
inclusion. M-Pesa demonstrates the importance of encouraging
responsible, regulated innovation in the financial sector that
includes robust digital identification built into the FinTech
product/service. M-Pesa's use of three-factor authentication,
including the use of mobile phone technology (SIM card and
other cell phone data), to supplement official Government
identity documentation for customer identification and
verification, and for transaction authorization, helps combat
fraud and protect against abuse by money launderers and
terrorists and their financiers.
Q.11. The Office of the Comptroller of the Currency mentioned
in its 2018 Banking Operating Plan that financial institutions
should not inadvertently impair financial inclusion. But, as of
September 2017, the OCC has not identified any specific issues
they plan to address. We know that de-risking has become
epidemic in some communities, such as communities along the
Southwest border, remittances providers serving fragile nations
like Somalia and humanitarian groups. In your testimony, you
mention Treasury's efforts to ensure humanitarian remittances
reach Venezuela as you work to stem financial corruption in
that nation.
Please explain what steps the Treasury Department is taking
in Venezuela to stabilize humanitarian remittances?
A.11. We share your concern regarding the humanitarian and
economic catastrophe in Venezuela. As part of our ongoing
efforts to address this issue, Secretary Mnuchin hosted Finance
Ministers from the Western Hemisphere, Europe, and Japan on
April 19 to discuss the humanitarian situation, which has
consequences that extend beyond Venezuela's borders,
threatening regional stability and national security. Ministers
reviewed population flows out of Venezuela to destination
countries around the world, including a sharp acceleration in
departures as Venezuelans flee the lack of security and
economic opportunity. Ministers took note of the call by the
United Nations High Commissioner for Refugees to assist
countries in the region that are absorbing the Venezuelan
outflow, to which Vice President Pence announced a significant
United States contribution.
Maduro and his regime have led Venezuela to ruin and are
solely responsible for the immense human suffering occurring in
Venezuela today. The Maduro regime has continued to undermine
democracy, impoverish its citizens, and loot the country to
line its pockets. Essential goods, such as food and medicine,
have become increasingly scarce. During the meeting on
Venezuela hosted by the Secretary, participants reviewed how
the government's control over food distribution is a mechanism
for social control and a vehicle for corruption. Participating
countries agreed to strengthen international cooperation to
curb Venezuelan corruption that is worsening the humanitarian
situation.
Over the last year, Treasury has taken a number of actions
to counter the Maduro's regime assault on democracy and its own
people. Since 2015, OFAC has designated over 50 current and
former Government of Venezuela officials, including Maduro
himself, and denied them access to the U.S. financial system.
This year, we have announced the designation of eight
individuals, including four current or former senior military
officers on January 5 and four additional current or former
officials on March 19. These designations shine a spotlight on
current and former officials who continue to benefit from a
corrupt system, even as Venezuela's citizens, economy, and
constitutionally enshrined democratic institutions languish.
On August 24, 2017, President Trump issued an Executive
order which imposed a carefully calibrated set of prohibitions
that deny the regime critical sources of financing, protect the
U.S. financial system, and aim to shield Venezuelans from
punishingly expensive debts. In addition, on March 19, the
President issued an Executive order that prohibits all
transactions related to and dealings in, by U.S. persons or
within the United States, any digital currency, digital coin,
or digital token, including the Venezuelan ``Petro'' and
``Petro-gold.'' The Petro is a desperate effort by a corrupt
government to circumvent existing U.S. sanctions. At face
value, the Petro is a scam ripe for exploitation by corrupt
regime insiders seeking to defraud investors and ordinary
Venezuelans.
To aid financial institutions in identifying transactions
that may be linked to Venezuelan corruption, FinCEN issued an
advisory in September 2017 informing financial institutions of
widespread public corruption in Venezuela and the methods
senior Venezuelan political figures--as well as their
associates and front persons--may use to move and hide
corruption proceeds. Combined with our financial sanctions on
debt and equity as well as our targeted designations, this
advisory put financial institutions on watch for possible
illicit fund flows.
Our sanctions related to Venezuela are narrowly tailored to
deny the Maduro regime access to critical sources of financing,
but they do not otherwise prohibit financial transactions with
Venezuela, including the provision of humanitarian remittances.
To avoid any disruption to the provision of humanitarian
goods to the Venezuelan people, OFAC issued a General License
that authorizes all debt financing related to exports to
Venezuela of agricultural commodities, food, medicine, and
medical devices. OFAC routinely engages with the private sector
and others to prevent confusion from hindering lawful activity,
including with respect to humanitarian aid and remittances.
Q.12. How will the Treasury Department work with the other
banking regulators--OCC, FinCEN, FDIC, and the Federal
Reserve--along with the IRS to help banks meet the banking
needs of legitimate consumers and businesses that are at risk
of losing access--or have already lost access?
LHas Treasury been able to stem the decline in
correspondent banking relationships that have limited
financial access to many?
LIf so, how?
LIf not, what policies could restore and expand
correspondent banking relationships?
A.12. Protecting the integrity of the U.S. financial system and
preventing its use for criminal purposes is of paramount
importance. It is our responsibility at Treasury and within the
law enforcement community to detect and prevent illicit use of
the U.S. financial system. Financial institutions play a
critical role in safeguarding the international system from
abuse by illicit actors, which at times includes making risk-
based decisions about with whom, where, and how they conduct
business.
At the same time, we take concerns about de-risking
seriously. We value the importance of preserving access to the
U.S. financial system to support economic growth, financial
inclusion, and financial transparency while continuing to
enforce U.S. laws and regulations. Financial inclusion and
financial transparency are complementary and mutually
reinforcing objectives. Keeping legitimate transactions in the
regulated financial systems improves financial transparency.
Treasury has worked with the Federal regulators to issue
guidance and clarify the importance to financial institutions
of implementing risk-based approaches that assist in preventing
overcorrections that might exclude legitimate banking
customers.
In the last few years, Treasury has led the U.S.
Government's efforts related to de-risking. These efforts have
included Treasury-led engagements and dialogues with
stakeholders from the public sector and industry, in addition
to Treasury's ongoing open line of communication with U.S.
financial institutions. Further, Treasury's work on this issue
involves close coordination with global bodies and multilateral
organizations, including the Financial Action Task Force, the
Financial Stability Board, the World Bank, and the IMF.
Treasury recognizes that financial institutions' decisions
on whether and how to maintain customer relationships are
driven by multiple factors, including: profitability and
business strategy motives; current global economic conditions;
and real concerns about suspicions of illicit financial
activity, including money laundering and the financing of
terrorism.
An important way to ensure financial inclusion while
increasing transparency is by making sure financial
institutions are devoting the resources they have to high value
activities. As discussed in my testimony, financial
institutions have been improving their ability to identify
customers and monitor transactions by experimenting with new
technologies that rely on artificial intelligence and
machine learning. We laud and encourage these innovations,
which advance the underlying purposes of the BSA. We are
working closely with our counterparts at the Federal Banking
Agencies to
discuss ways to further incentivize financial institutions to
be innovative in combating financial crime.
Q.13. Last year, the Countering Iran's Destabilizing Activities
Act of 2017 (Public Law 115-44) was enacted. In Section 271, it
required the Treasury Department to publish a study by May 1,
2018, on two issues: 1. Somali Remittances. The law required
Treasury to study if banking regulators should establish a
pilot program to provide technical assistance to depository
institutions and credit unions that wish to provide account
services to money services businesses serving individuals in
Somalia. Such a pilot program could be a model for improving
the ability of U.S. residents to make legitimate funds
transfers through easily monitored channels while preserving
strict compliance with BSA. Sharing State Banking Exams. 2. The
law also required Treasury to report on the efficacy of money
services businesses being allowed to share certain State exam
information with depository institutions and credit unions to
increase their access to the banking system.
Q.13.a. What is the status of this study?
A.13.a. The Treasury Department submitted this report to
Congress in fulfillment of its obligations under CAATSA on
Friday, April 27, 2018.
Q.13.b. Are you contacting other organizations in your
research?
A.13.b. Treasury contacted other governmental and multilateral
bodies that have studied this problem, Federal banking
agencies, and private sector financial institutions.
Q.13.c. Which ones--or types of groups--have you met with?
A.13.c. As noted above, these include other governmental and
multilateral bodies that have studied this problem, Federal
banking agencies, and private sector financial institutions
with which we are engaging.
Q.13.d. Will the Treasury Department meet the deadline of May
1, 2018, to publish the report?
A.13.d. Yes. The Treasury Department submitted this report to
Congress in fulfillment of its obligations under CAATSA on
Friday, April 27, 2018.
Q.13.e. Anonymous incorporation is not difficult for
criminals--virtually no States require corporate applications
provide the identity of the corporation's ultimate owner. Law
enforcement has said it needs to know the owners of firms in
order to investigate financial crimes and terrorism.
How should Congress and/or Treasury tailor these proposed
requirements so as not to be overly burdensome on either
incorporating entities or the States themselves?
A.13.e. There is no question that vulnerabilities exist in
corporate formation without the disclosure of beneficial
ownership information. Illicit actors may more easily hide
illicit funds and avoid detection through business entities
because the true owner is masked. The collection of beneficial
ownership information is
critical both at the time of account opening and when a company
is being incorporated. FinCEN's Customer Due Diligence (CDD)
rule, which is set to be implemented by covered financial
institutions in May 2018, requires those institutions to
identify and verify the identity of the beneficial owners of
their legal entity customers. For purposes of the CDD Rule,
covered financial institutions are federally regulated banks
and federally insured credit unions, mutual funds, brokers or
dealers in securities, futures commission merchants, and
introducing brokers in commodities, as defined in 31 CFR
1010.605(e)(1). This change will assist financial institutions
in managing risks and law enforcement in pursuing criminals who
launder illicit proceeds through legal entities. This is an
important step forward.
We are committed to further increasing the transparency and
accountability in our financial system, and we look forward to
working with Congress to support legislation that addresses
this issue.
Q.13.f. Should Congress exempt any firm already regulated by
Federal banking regulators and companies with over 20
employees?
A.13.f. We are aware of options in proposed legislation to
allow for various business types and sizes to be exempt from
reporting beneficial ownership information. We are reviewing
the various legislative proposals and look forward to working
with Congress on the issue of enhancing the transparency of
beneficial owners.
Q.13.g. Some argue that those types of companies are very
unlikely to open bank accounts to hide or move criminal funds
or to hold illegal assets, do you agree?
A.13.g. We are aware of options in proposed legislation to
allow for various business types and sizes to be exempt from
reporting beneficial ownership information. Many business types
and sizes can be used to hide or move illicit assets. We are
reviewing the various legislative proposals and look forward to
working with Congress on the issue of enhancing the
transparency of legal entities by requiring the reporting of
beneficial ownership information at the time of company
formation.
Q.13.h. Does the Treasury Department need legislation to issue
regulations requiring corporations and limited liability
companies formed in any State that does not already require
ownership disclosure to file information about their beneficial
ownership with Treasury as well?
A.13.h. We are not aware of any Federal law that currently
authorizes the Treasury Department to impose such a disclosure
requirement on companies in general. Legislation granting
Treasury the authority to impose such a disclosure requirement
would be required.
Q.13.i. What type of disclosure should be required: name,
current address, non-expired passport or State-issued driver's
license, identification of any affiliated legal entity that
will exercise control over the incorporated entity, etc.?
A.13.i. Access to unique identifiers of the beneficial owners
of legal entities is crucial for law enforcement to investigate
money laundering, terrorist financing, and other financial
crimes. We look forward to working with Congress and law
enforcement to propose identifiers that should be disclosed
about the beneficial owners of legal entities during the
incorporation process.
Q.13.j. Should the rules require that beneficial owners be
updated no later than 60 days after any change in ownership?
A.13.j. It is important that beneficial ownership information
be accurate and up-to-date to assist law enforcement in
identifying the true owners of companies whenever that
information changes.
Q.13.k. Should the rules provide civil penalties for anyone who
submits false or fraudulent beneficial ownership information,
does not provide complete or updated information; and/or
knowingly discloses subpoena, summons, or other requests for
beneficial ownership information without authorization?
A.13.k. Any legislation that requires the disclosure of
beneficial ownership information at the time of company
formation should have appropriate penalties. We are supportive
of civil penalties for anyone who submits false or fraudulent
beneficial ownership information; does not provide complete or
updated information; and/or knowingly discloses subpoena,
summons, or other requests for beneficial ownership information
without authorization. We believe the availability of civil
penalties provides a significant deterrent to individuals and
companies providing false information.
Q.14. Author and reporter David Cay Johnston reports in his
book, The Making of Donald Trump, that public records show
highly suspicious money from Russia is behind Trump's
businesses. He alleges that ``over the past three decades, at
least 13 people with known or alleged links to Russian mobsters
or oligarchs have owned, lived in, and even run criminal
activities out of Trump Tower and other Trump properties. Many
used his apartments and casinos to launder untold millions in
dirty money. Some ran a worldwide high-stakes gambling ring out
of Trump Tower--in a unit directly below one owned by Trump.
Others provided Trump with lucrative branding deals that
required no investment on his part. Taken together, the flow of
money from Russia provided Trump with a crucial infusion of
financing that helped rescue his empire from ruin, burnish his
image, and launch his career in television and politics.''
Q.14.a. Please provide a list of convicted criminals who had
business dealings with the Trump Corporation?
A.14.a. It would not be appropriate for Treasury to comment on
matters of potential investigative interest, or in a way that
may confirm or deny the existence of such interest.
Q.14.b. Please list the condominiums and their owners that the
Federal Government seized from Russian emigres who were
convicted of crimes such as money laundering, violence, etc.?
A.14.b. The Department of the Treasury does not maintain this
type of information.
Q.14.c. What is the size of Russian mob money laundering in the
United States? What do you recommend we do to limit money
laundering from international and domestic organized crime
syndicates?
A.14.c. Although FinCEN supports law enforcement efforts to
investigate Russian Organized Crime money laundering, and has
conducted analysis of BSA filings related to this topic, FinCEN
does not have an estimate of the extent of this activity from
that data. Treasury continues to support increasing
transparency for all kinds of financial vehicles, including
shell companies, to limit money laundering from organized crime
syndicates. Shoring up this vulnerability, as FinCEN is doing
with the soon-to-be-effective Customer Due Diligence rule, will
prevent the ease with which these syndicates can profit off of
their illicit activity.
Q.15. Like many corporate executives, President Donald Trump
takes advantage of more corporate-friendly businesses laws.
Analysis of his FEC filings finds he registered 659 businesses.
Despite defining himself as a New Yorker, only 19 percent of
his businesses are chartered in New York. Only 11 percent of
his businesses were chartered in Florida where he has a second
home. Instead, more than two-thirds of his corporations were
chartered in Delaware (48 percent) or Nevada (23 percent).
President-elect Donald Trump filed a Federal Election Committee
(FEC) filing in July 2016 listing 515 corporations for which he
serves on the Board of Directors. Of these, 263 of the
corporations begin with ``Trump.'' A number of the other
corporations contain some combination of his initials ``DT'' or
``DJT.'' 2 Quartz. ``A List of Everything Donald Trump Runs
That Has His Name On It.'' Looking only at corporations which
included ``Trump,'' which did not include another family member
(i.e., his father or his children), and which could be
reasonably determined to be one of Donald Trump's companies
(i.e., excluding initialed companies and companies containing
Trumpe, Trumpf, Trumpy, etc.), it seems: 315 companies are
incorporated in Delaware. Of which, Trump self-reported as a
board member of at least 182. The New York online corporate
registry does not provide an immediately obvious status of the
companies so we cannot analyze current versus dissolved
corporations. One hundred forty-nine companies are incorporated
in Nevada. Of which, only 15 are currently active. A few have
been formally dissolved; however, the remainder are in a
progressively permanent state of revocation for failure to keep
up with filings and fees. Of the 15 active corporations, Trump
self-reported as a board member of at least 9. One hundred
twenty-nine companies are incorporated in New York. Of which,
Trump self-reported as a board member of at least 60. The New
York online corporate registry does not provide an immediately
obvious status of the companies so we cannot analyze current
versus dissolved corporations. Seventy companies are
incorporated in Florida. Of which, 22 are currently listed as
active. Of the active corporations, Trump self-reported as a
board member of at least 3. Five companies are incorporated in
Wyoming; only 1 is active.
Q.15.a. Can you confirm that these figures about President
Trump's business locations are accurate?
A.15.a. Treasury does not generally maintain comprehensive
corporate registry information and is not in a position to
opine on the information presented in this question.
Q.15.c. Have any of President Trump's current or former
businesses been indicted or convicted for money laundering or
other financial crimes?
A.15.c. The Department of the Treasury does not maintain this
type of information.
------
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM M. KENDALL
DAY
Q.1. There has been a lot of discussion around expanding
information sharing authorities under Section 314 of the USA
PATRIOT Act.
How would you expand 314(b) authorities in a way that is
both useful to all financial institutions and able to protect
sensitive law enforcement information?
A.1. Information sharing is crucial to law enforcement
investigations and prosecutions. Financial institutions are
often the first line of defense against money laundering, and
the information they collect--on their own and as part of the
314(b) process--can ultimately help law enforcement by
providing critical leads in existing investigations and
spurring new ones. These leads help law enforcement detect and
deter criminal activity and, in some cases, may help law
enforcement stop crimes in progress before they cause greater
harm.
Under the existing 314(b) authorities, financial
institutions may share information with one another for
purposes of identifying and reporting activities that may
involve terrorist activity or money laundering. Statutory
authority allowing information sharing on a broader range of
activity would expand and enhance the information reported to
law enforcement and give it greater insight into the financial
activities of criminals. That, in turn, would strengthen our
efforts to detect and deter criminal activity of all kinds.
Existing 314(b) authorities already contain a number of
important safeguards designed to protect sensitive law
enforcement information, and these safeguards could be extended
to any broadening of the activities covered by 314(b).
Financial institutions that wish to participate in 314(b)
sharing must first file a notice with the Department of the
Treasury's (Treasury) Financial Crimes Enforcement Network
(FinCEN). Before sharing information, institutions must also
take reasonable steps to verify that other financial
institutions have filed a notice under 314(b). In addition,
financial institutions must establish and maintain procedures
to safeguard the security and confidentiality of the shared
information, and they may only use the information for specific
purposes. Critically, 314(b) does not authorize participating
financial institutions to share a Suspicious Activity Report
(SAR) itself or disclose the existence of a SAR.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM M. KENDALL
DAY
Q.1. During the hearing, I asked you whether the independent
monitor installed as part of HSBC's 2012 deferred prosecution
agreement (DPA) with DOJ had certified that HSBC had complied
with the letter and spirit of its obligations under DPA. You
provided a partial answer, stating only that HSBC generally
complied with its obligations under the DPA. You described
HSBC's
satisfaction of all of the independent monitor's
recommendations as ``a different issue.'' However, the DPA
provides that ``HSBC Holdings shall adopt all recommendations
in the [monitor's] report.'' (Unless the monitor signs off on
an alternative proposed by HSBC, within 30 days, to meet the
same purpose or objective). Thus, one of HSBC's obligations
under the DPA is to implement the monitor's recommendations.
HSBC cannot skirt this obligation without a ``determination''
by the monitor or DOJ that some ``alternative proposal'' is
appropriate. Accordingly, I have three further questions about
HSBC's implementation of the monitor's recommendations:
Q.1.a. Did the monitor certify that HSBC implemented and
adhered to all his recommendations and other remedial measures
specified in the DPA?
Q.1.b. Did DOJ overrule any of the monitor's recommendations,
or make a determination with respect to any of his
recommendations that an alternative proposal was appropriate?
If so, how many? Please provide the number of overruled
recommendations, or determinations that an alternative proposal
was appropriate, both as a raw quantity and as a percentage of
all the monitor's recommendations.
Q.1.c. For each overruled recommendation, or determination that
an alternative proposal was appropriate, please explain (i) the
nature and content of the recommendation, or alternative
proposal; (ii) why DOJ overruled the recommendation, or
determined that an alternative proposal was appropriate; and
(iii) describe the alternative proposal(s) that DOJ allowed
HSBC to implement instead, and whether each such alternative
proposal has been fully and effectively implemented.
A.1.a.-c. The U.S. Government Accountability Office has noted
that some $5 billion in fines, penalties, and forfeitures was
collected from financial institutions for violations of the
Bank Secrecy Act (BSA) between 2009 and 2015. Those numbers
underscore that the Department of Justice (Department) and
other agencies do not hesitate to hold financial institutions
accountable when they do not comply with their BSA and
sanctions obligations. HSBC was one of a number of examples of
such efforts.
The Department has considered that, since the Department
and HSBC entered into the 2012 Deferred Prosecution Agreement
(DPA), HSBC worked to address the monitor's recommendations
and, more broadly, strengthen its anti-money laundering (AML)
program to avoid engaging in the types of willful criminal
violations that led to the DPA. While the monitor's
recommendations are a highly useful benchmark, the Department
assesses the overall efforts of a company when exercising its
discretion in deciding whether to extend a DPA or let it sunset
as defined by its terms. Consistent with longstanding
Department policy, we do not comment on the circumstances of
individual cases. However, on April 5, 2018, we were pleased to
provide a comprehensive briefing to your staff regarding DPAs.
We hope this briefing was helpful in providing some background
and context to address some of the issues raised by your
questions above.
Q.2. In your testimony you described BSA information as
critical to DOJ efforts to combat crime and terrorism.
Q.2.a. Can you describe in greater detail, from your experience
in the Department of Justice's criminal division, the role that
BSA-generated financial intelligence plays in counterterrorism
and other law enforcement investigations--in developing
investigative leads, sharpening focus on certain criminal
players and their banks, or otherwise?
A.2.a. Effective AML programs--including accurate and timely
SARs--play a critical role in the fight against criminal
activity, and often serve as an important source of information
for law enforcement investigations into money laundering,
terrorist financing, and other crimes. Prosecutors and agents
routinely use the information generated by BSA filings,
including SARs and Currency Transaction Reports (CTRs), on both
a proactive and reactive basis. Law enforcement, for example,
often uses SARs, CTRs, and other BSA reporting to identify the
leads necessary to launch an investigation. Law enforcement
also uses BSA reporting to obtain information on known targets
and their illicit transactions to advance investigations
already underway. Additionally, law enforcement and regulators
rely on BSA information to identify broader trends and risks.
Further, effective AML programs help financial institutions
detect efforts to launder illicit proceeds, which can, in turn,
prevent those funds from ever entering the U.S. financial
system. Domestic collection of AML information also improves
the United States' ability to respond to similar requests from
foreign law enforcement for investigative assistance, thus
increasing our ability to fight financial crime on the global
stage.
Q.2.b. What financial intelligence tools are currently most
useful to prosecutors, sanctions overseers and others who
combat money laundering, and where do we need to strengthen
DOJ's tool kit?
A.2.b. Because most criminals are motivated by financial gain,
they must find ways to use the proceeds of their crimes. For
the most sophisticated criminal actors and organizations--who
are often generating substantial amounts in illicit proceeds--
it is impractical, inefficient, and simply dangerous to move
their money in hard currency. As a result, many criminals--and
especially the most sophisticated among them--must bring their
proceeds into the financial system in order to launder them.
Successful introduction and laundering of illicit proceeds
through the financial system allows criminals to purchase
goods, reinvest in the criminal enterprise, or fund additional
criminal conduct, all of which cause further harm to our
communities--not just through the promotion of the underlying
criminal conduct itself, but also through the distorting
effects that criminal proceeds can have on our markets.
Financial intelligence is critical to law enforcement's
efforts to thwart these illicit money flows because it allows
law enforcement to see the full criminal network. By reviewing
information from SARs, CTRs, and other BSA reporting, for
example, law enforcement may be able to trace money flowing to
different parts of the network--those that generate the illicit
proceeds and those used to redistribute them. Because this data
is so essential to law enforcement's work, the Department
believes that any proposals to alter such reporting
requirements should take into account the significant value of
this information and the effects--particularly the
potential harms--such changes might have on law enforcement
investigations and prosecutions.
Other tools are also important to law enforcement's money
laundering investigations and prosecutions. As this Committee
is aware, the pervasive use of front companies, shell
companies, nominees, or other means to conceal the true
beneficial owners of assets is one of the greatest loopholes in
this country's AML regime. The lack of beneficial ownership
information can significantly slow investigations because
determining the true ownership of bank accounts and other
assets often requires that law enforcement undertake a time-
consuming and resource-intensive process. For example,
investigators may need grand jury subpoenas, witness
interviews, or foreign legal assistance to unveil the true
ownership structure of shell or front companies associated with
serious criminal conduct. This process can take years--
information obtained on a particular entity, for example, may
show that it is a shell company owned by yet another shell
company, requiring additional subpoenas or other information-
gathering efforts. In some cases, law enforcement may not be
able to determine the owners of illicit proceeds at all.
Treasury's Customer Due Diligence Final Rule--and its
requirement that financial institutions collect and verify the
personal information of certain beneficial owners when the
companies they own, control, or profit from open accounts--is a
critical step that will make it more difficult for criminals to
circumvent the law by using opaque corporate structures. But we
must do more. Other steps are needed to ensure that criminals
cannot hide behind nominees, shell corporations, and other
legal structures to frustrate law enforcement. More effective
legal frameworks would reduce the United States' vulnerability
to criminals seeking access to our financial system, facilitate
law enforcement investigations, and bring the United States
into compliance with international AML and counter-terrorist-
financing (CTF) standards. The Department looks forward to
continued discussions with its interagency partners, Congress,
and industry regarding stronger laws that target individuals
who seek to mask the ownership of companies, accounts, and
sources of funds, as well as proposals to require the
collection and maintenance of beneficial ownership information.
Another important law enforcement tool is the information
it obtains from its foreign partners. Because money often moves
across multiple jurisdictions in the global economy, U.S. law
enforcement depends on the cooperation of overseas counterparts
to obtain evidence and to trace, freeze, and seize assets
wherever they are located. However, existing authorities do not
fully address the complexities of these international
investigations. Specifically, under the existing authority in
31 U.S.C. 5318(k), foreign banks are not required to produce
records in a manner that would establish their authenticity and
reliability for evidentiary purposes. The statute also does not
contain any anti-tip-off language, meaning that foreign banks
who receive subpoenas from U.S. law enforcement could disclose
the subpoenas to account holders or others, thereby
compromising an ongoing investigation. The only sanction
provided under current law is the closure of the correspondent
account, which, in most cases, will not result in the
production of the records, and may in fact impede law
enforcement investigations. There is no procedure to seek to
compel compliance with subpoenas to foreign banks, nor any
explicit authority to impose sanctions for contempt. Finally,
the current statute provides that no effort can be taken by the
Attorney General or the Secretary of Treasury to close the
correspondent account or a foreign bank when the foreign bank
has brought proceedings to challenge enforcement of the
subpoena. The Administration continues to discuss proposed
amendments to address these problems, and looks forward to
working with Congress on these issues.
Q.3. The Panama Papers and other similar document leaks
revealed the widespread systematic use of shell corporations by
wealthy bad actors seeking to not only evade lawful tax
collection, but also to facilitate all kinds of financial
crime.
Q.3.a. How would you characterize the urgency of the threat to
the U.S. financial system posed by anonymous shell companies,
and by the lack of a coherent national framework for
identifying beneficial ownership at the point of company
formation?
A.3.a. The pervasive use of front companies, shell companies,
nominees, and other means to conceal the beneficial owners of
assets is one of the greatest loopholes in this country's AML
regime. We consistently see bad actors using these entities to
disguise the ownership of the dirty money derived from criminal
conduct.
Indeed, the Financial Action Task Force's (FATF) 2016
review of our AML/CTF system highlighted this issue as one of
the most critical gaps in the United States. The FATF rated the
United States ``noncompliant'' on the FATF standard covering
transparency and beneficial ownership of legal persons, noting
the United States' ``generally unsatisfactory measures for
ensuring that there is adequate, accurate, and updated
information'' on beneficial ownership, as defined by FATF, that
``can be obtained or accessed by competent authorities in a
timely manner.'' The result, FATF said, is that U.S. law
enforcement authorities ``must often resort to resource-
intensive and time-consuming investigative and surveillance
techniques.''
More effective legal frameworks are accordingly needed to
ensure that criminals cannot hide behind nominees, shell
corporations, and other legal structures to frustrate law
enforcement. When law enforcement is able to obtain information
on the identities of the persons who ultimately own or control
these legal entities, it can better see the full network of
criminal proceeds as bad actors try to bring money into our
financial system. With proper law enforcement access to
beneficial ownership information, the Department could bring
more cases, more quickly, with more impact.
Q.3.b. Can you provide the Committee with concrete examples you
have seen of how bad actors use shell companies for money
laundering, terror finance and other illicit purposes?
A.3.b. Below are several illustrative examples of the use of
shell or front companies to facilitate illicit conduct:
LIn 2017, Ebong Tilong, the owner of a Houston home
health agency, was sentenced by a U.S. District Judge
in the Southern District of Texas to 80 years in prison
for his role in a $13 million Medicare fraud scheme and
for filing false tax returns. In November 2016, after
the first week of trial, Tilong pleaded guilty to one
count of conspiracy to commit healthcare fraud, three
counts of healthcare fraud, one count of conspiracy to
pay and receive healthcare kickbacks, three counts of
payment and receipt of healthcare kickbacks, and one
count of conspiracy to launder monetary instruments. In
June 2017, Tilong pleaded guilty to two counts of
filing fraudulent tax returns. According to the
evidence presented at trial and his admissions to the
tax offenses, from February 2006 to June 2015, Tilong
received more than $13 million from Medicare for home
health services that were not medically necessary or
not provided to Medicare beneficiaries. In connection
with his guilty plea to the tax offenses, Tilong
admitted that to maximize his gains from the Medicare
fraud scheme, he created a shell company to limit the
amount of tax that he paid to the IRS on the proceeds
that he and his co-conspirators stole from Medicare.
LIn April 2018, Nicholas A. Borgesano, Jr. was
sentenced to 15 years in prison and ordered to pay $54
million in restitution in connection with a $100
million compounding pharmacy fraud scheme. In November
2017, Borgesano pleaded guilty in the Middle District
of Florida to one count of conspiracy to commit
healthcare fraud and one count of conspiracy to engage
in monetary transactions involving criminally derived
property. According to admissions made in his plea
agreement, Borgesano owned and operated numerous
pharmacies and shell companies that he and his co-
conspirators used to execute a fraud scheme involving
prescription compounded medications. The scheme
generated over $100 million in fraud proceeds.
Borgesano admitted that he disbursed proceeds of the
fraud scheme through a variety of methods, including by
check and wire transfer to co-conspirators' shell
companies and through the purchase of assets. Seven
other defendants previously pleaded guilty to
conspiracy to commit health care fraud for their roles
in the scheme. Real properties, vehicles, and a 50'
Cigarette racing boat purchased with proceeds from the
fraud scheme were forfeited as part of the sentencing
of Borgesano and others. Those assets totaled over $7.6
million.
LIn August 2017, the United States filed two civil
complaints in the U.S. District Court for the District
of Columbia seeking the imposition of a civil money
laundering penalty and to civilly forfeit more than $11
million from companies that allegedly acted as
financial facilitators for North Korea. One complaint
seeks nearly $7 million associated with Velmur
Management Pte. Ltd., a Singapore-based company, and
the other seeks more than $4 million from Dandong
Chengtai Trading Co. Ltd., a company in Dandong, China.
The complaints allege that the companies have
participated in schemes to launder U.S. dollars on
behalf of sanctioned North Korea entities. According to
the complaints, the companies participated in financial
transactions in violation of the International
Emergency Economic Powers Act, the North Korea
Sanctions and Policy Enhancement Act of 2016, and
Federal conspiracy and money laundering statutes. One
of the complaints alleges that Velmur and Transatlantic
Partners Pte. Ltd. laundered U.S. dollars on behalf of
sanctioned North Korean banks that were seeking to
procure petroleum products from a designated entity.
According to the complaint, designated North Korean
banks use front companies, including Transatlantic, to
make U.S. dollar payments to Velmur. The second
complaint alleges that Dandong Chengtai and associated
front companies controlled by Chi Yupeng, a Chinese
national, comprise one of the largest financial
facilitators for North Korea.
LIn 2016, Thomas Davanzo and Robert Fedyna were
sentenced to 121 months and 135 months in prison,
respectively, for their participation in a multi-State
scheme to defraud biofuel buyers and U.S. taxpayers by
fraudulently selling biofuel credits and fraudulently
claiming tax credits. Both defendants were also ordered
to forfeit ill-gotten gains from the conspiracy of over
$46 million and other items to the Government,
including gold coins, jewelry and Rolex watches,
thoroughbred horses, vehicles, and properties. Davanzo
and Fedyna operated several shell companies that were
used to facilitate the scheme. As part of the scheme,
Davanzo and Fedyna operated entities that purported to
purchase renewable fuel, on which credits had been
claimed and which was ineligible for additional
credits, produced by their co-conspirators at Gen-X
Energy Group (Gen-X), headquartered in Pasco,
Washington, and its subsidiary, Southern Resources and
Commodities (SRC), located in Dublin, Georgia. They
then used a series of false transactions to transform
the fuel back into feedstock needed for the production
of renewable fuel, and sold it back to Gen-X or SRC,
allowing credits to be claimed again. This cycle was
repeated multiple times.
Q.3.c. Can you give us a sense of the scope of entities and
persons you think we ought to have in mind, beyond the banking
sector, when contemplating an update to our current anti-money
laundering framework and its underlying authorities?
A.3.c. Money can be laundered in a wide variety of ways outside
the financial sector. For example, company formation agents,
investment advisors, real estate agents, lawyers, and other
professionals can be exploited by criminal actors seeking to
conceal or otherwise move illicit proceeds. These professionals
may--knowingly or unknowingly--help disguise the identity of
the criminal actors behind the movement of illicit funds. They
may do this by helping the bad actors hide the true owners of
asset. That, in turn, can significantly slow an investigation
and sometimes grind it to a halt altogether.
Lawyers and law firms, for example, routinely hold funds on
behalf of clients to cover things like retainer payments. But
when the funds are in limited amounts or held on a short-term
basis, a dedicated client bank account can be cumbersome.
Interest on lawyer accounts (IOLAs) allow lawyers to pool these
funds on behalf of multiple clients. But IOLA accounts can
present heightened money laundering risks because financial
institutions do not have information on a law firm's many
clients.
The Department's ongoing civil asset forfeiture action to
recover more than a billion dollars allegedly stolen from the
Malaysian sovereign wealth fund, lMDB, demonstrates the ways in
which bad
actors may use other entities and persons, including lawyers,
to facilitate money laundering. Our publicly filed complaint in
that matter alleges that nearly $370 million in stolen funds
was diverted by the defendants over a 7-month period in 2010
from a 1MDB joint venture into an IOLA account held by a law
firm in the United States. The money was then allegedly used by
one of the defendants to fund his opulent lifestyle, including
the purchase of luxury real estate, a Beverly Hills hotel, and
a private jet, as well as the production of the movie ``The
Wolf of Wall Street.'' In other words, $370 million passed
through financial institutions where, unless the bank asked
additional questions, the financial system saw these transfers
as on behalf of the law firm--not on behalf of the underlying
individual allegedly involved in the 1MDB scheme.
In addition to highlighting the role of lawyers, the lMDB
case also underscores how criminals use the real estate sector
to launder and hide their ill-gotten gains. FinCEN has issued
and expanded Geographic Targeting Orders (GTOs) in recent years
focusing on the real estate sector to learn more about
individuals who may be attempting to hide their assets and
identity by purchasing residential properties with cash and/or
through limited liability companies and other opaque
structures. The Department looks forward to more discussions on
additional steps that may be warranted to address the money
laundering risks emanating from this sector.
Q.3.d. Who should we be looking at that we are not currently
regulating--real estate firms, escrow agents, company formation
lawyers, others?
A.3.d. Please see above.
Q.4. As banks have racked up huge fines in recent years for
skirting sanctions and violating money laundering regulations,
the sector as a whole has begun to wake up to AML obligations
in place for many years, and many have made big investments to
strengthen compliance.
Q.4.a. Do you believe that AML laws and regulations on the
books now offer a sufficient deterrent to such behavior?
A.4.a. In recent years, the Department has resolved numerous
AML and sanctions-based violations with major financial
institutions. These resolutions have involved Commerzbank,
Citigroup, BNP Paribas, Standard Chartered, HSBC, UBS, RBS, and
Barclays, to name just a few. While the Department believes
these resolutions have a deterrent effect on willful
violations, they also demonstrate that institutions still face
challenges in creating and encouraging a culture of
compliance--meaning, in some cases, financial institutions
still struggle to see managing compliance risk as equally
important as managing credit risk or liquidity risk.
Q.4.b. Are there specific steps you would urge Congress to
consider to strengthen the current regime?
A.4.b. The Department supports continued discussion of methods
to better target financial institution reporting, as that will
increase efficiencies for both law enforcement and industry.
However, financial institutions play a critical role in the
fight against money laundering and terrorist financing;
therefore, from a law enforcement perspective, any regulatory
reform to existing reporting requirements for financial
institutions must be done with caution, following careful
analysis of the existing regime.
For example, law enforcement relies extensively on SARs and
CTRs in civil and criminal investigations and prosecutions,
including those involving money laundering and terrorist
financing. The Department uses the information contained in
these filings--on both a proactive and reactive basis--to carry
out investigations of specific individuals and entities and to
identify leads, connect the dots, and otherwise advance
investigations in their early stages. Law enforcement and
regulators also use aggregated information from this reporting
to identify trends and risks.
Proposed increases in the monetary thresholds for SARs and
CTRs would decrease filing, and correspondingly, reduce law
enforcement's access to information. Such changes could also
eliminate an array of data that provides critical leads and
information for law enforcement when pursuing investigations
and prosecutions. The Department believes that any proposals to
alter such reporting requirements should accordingly take into
account the significant value of this information and the
effects--particularly the potential harms--such changes could
have on law enforcement investigations and prosecutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE FROM M. KENDALL
DAY
Q.1. Mr. Day, your testimony estimated that money laundering
reaches around $2 trillion annually, $300 billion of which is
in the United States and $64 billion of which is generated by
drug trafficking sales. I'd like to get a further breakdown of
this number.
Q.1.a. Can you provide a geographic breakdown of where the
money laundering takes place within the United States?
A.1.a. Because money laundering is a necessary consequence of
nearly all profit-generating crime, it can occur anywhere in
the world. Moreover, criminals always work to exploit gaps and
vulnerabilities in existing laws and regulations to find new
ways to conduct illicit transactions. It is therefore difficult
to say precisely how much money laundering takes place within
the United States, and whether money laundering activity is
concentrated in any particular geographic area.
Q.1.b. Can you provide a more precise breakdown of where the
money laundering generally takes place by criminal industry,
beyond drug trafficking to also include fraud, tax evasion,
human smuggling, organized crime or terrorist organizations
such as Hezbollah, and public corruption?
A.1.b. Treasury's National Money Laundering Risk Assessment
(2015) (NMLRA) analyzed more than 5,000 law enforcement cases,
financial reporting by U.S. financial institutions, and reports
from across the Government and private sector to define key
money laundering and terrorist financing risks to the United
States. According to the NMLRA:
LApproximately 20 percent of the estimated $300
billion generated in illicit activity annually in the
United States--$64 billion--is associated with drug
trafficking.
LFraud accounts for most financial crime in the
United States. This includes healthcare fraud, identity
theft, tax fraud, mortgage fraud, retail and consumer
fraud, and security fraud, with healthcare fraud
accounting for the largest dollar volume of fraud
losses to the Federal Government--approximately $80
billion annually.
LDirect and indirect losses from identity theft
totaled $24.7 billion in 2012.
LThe Internal Revenue Service found $6.5 billion in
attempted fraudulent tax refunds in 2010, and the
Treasury Inspector General for Tax Administration found
potentially $5.2 billion more.
Q.2. You testified that a ``large amount that isn't included in
the $300 [b]illion would touch the U.S. financial system . . .
through U.S. dollar clearing or other services that our
financial system provides . . . to the global economy.''
Can you provide a more precise figure for how much money
laundering annually at least touches the U.S. financial system?
A.2. Little empirical evidence exists to determine precisely
how much dirty money flows through the U.S. financial system.
According to the U.N. Office of Drugs and Crime, however, best
estimates show that criminal proceeds totaled $2.1 trillion in
2009, and of that, close to $1.6 trillion was laundered. Given
the size, sophistication, and stability of the U.S. financial
system, and the number of products and services offered by U.S.
financial institutions, bad actors continuously seek to launder
their illicit proceeds through our financial system.
Q.3. I'd like to understand better the law enforcement context
for the United State's efforts to fight money laundering.
Q.3.a. Does the U.S. financial system substantially--even if
inadvertently--facilitate human trafficking?
Q.3.b. If so, how?
Q.3.c. What about terrorism, such as organizations like
Hezbollah?
Q.3.d. What about drug cartels and violent gangs such as MS-13?
Q.3.e. How can law enforcement officials use anti-money
laundering tools to target specific groups such as MS-13 or
Hezbollah?
Q.3.f. Are there particular criteria of suspiciousness
associated with transactions conducted for the benefit of
groups such as MS-13 or Hezbollah?
Q.3.g. Can you walk me through a typical case where law
enforcement officials used financial intelligence, such as
suspicious activity reports, to fight terrorism or
transnational criminal organizations such as MS-13?
A.3.a.-g. Criminals will always work to exploit gaps and
vulnerabilities in existing laws and regulations to find new
methods to conduct their illicit transactions, whether those
transactions are related to human trafficking, drug
trafficking, terrorism, gang activity, and other crimes. New
methods are always being devised, as the criminal underworld
seeks to take advantage of emerging technologies and to outpace
the development of new detection and investigation tools by law
enforcement. Moreover, the United States has the deepest, most
liquid, and most stable markets in the world. These features of
the U.S. financial system bring many benefits, but they also
attract criminals and their illicit funds. Criminals will
continue to use every available money laundering method
available to them, exploiting opportunities wherever they find
them.
To combat these criminals and criminal organizations, as
well as their efforts to launder money through our financial
system, law enforcement routinely relies on AML tools.
Prosecutors and investigators use the information generated
by BSA fillings, including SARs and CTRs, to identify the leads
necessary to launch an investigation. They also use BSA
reporting to advance investigations already underway. Moreover,
law enforcement and regulators rely on BSA information to
identify broader trends and risks. For criminal groups, this
financial intelligence is particularly important because it
allows law enforcement to see the full criminal network. By
reviewing information from SARs, CTRs, and other BSA reporting,
for example, law enforcement may be able to trace money flowing
to different parts of the network--those that generate the
illicit proceeds and those used to redistribute them.
The Department, in coordination with our colleagues from
other agencies and international law enforcement partners, has
had numerous recent successes in thwarting criminals who sought
to move, hide, or otherwise shelter their criminal proceeds
using the U.S. financial system. Financial intelligence has
played--and will continue to play--a critical role in many such
prosecutions. Some examples of investigations and prosecutions
that have relied on BSA data from financial institutions
include the cases chosen by FinCEN for its annual ``Law
Enforcement Awards.'' Summaries of the cases that won the award
in 2017 can be found at https://www.fincen.gov/sites/default/
files/2018-01/LE%20Awards%20
2017%20FINAL%20May9%20cases.pdf.
Q.4.a. I'd like to understand better how technological
innovation is transforming the fight against money laundering
and how Government policy can help or hurt these efforts. In
the healthcare context, I hear about how researchers have used
machine learning and artificial intelligence to identify
diseases and predict when they will occur, using data points
that humans would have never put together.
How have financial institutions or law enforcement
officials been able to use of similar techniques to identity
money laundering and how much more progress can be made in this
front?
A.4.a. Technological innovations, including artificial
intelligence, can be useful tools for financial institutions
and other organizations in identifying patterns and detecting
anomalies. These innovations have the potential to not only
improve the detection of suspicious transactions and
activities, but to allow for such detection with greater
efficiency. It is important to note, however, that these
sophisticated technological tools do not eliminate the need for
human interaction and detection. Human instincts and analysis
are vital in law enforcement's fight against all types of
crime, including money laundering.
The Department supports technological innovations that will
enable financial institutions to better identify, prevent, and
report on money laundering, terrorist financing, and other
crimes. To better understand these innovations, and their
potential implications for investigations and prosecutions of
illicit finance, the Department routinely participates in
discussions with Treasury, Federal banking regulators,
financial institutions, and international partners on these
topics.
Q.4.b. Outside of AI and machine learning, how can recent
FinTech innovations such as blockchain fight money laundering?
A.4.b. As noted above, the Department routinely participates in
discussions with regulators, the private sector, and foreign
counterparts to better understand the potential implications of
these fast-emerging technological innovations for the
investigation and prosecution of money laundering and other
crimes.
Q.4.c. How much does bitcoin, blockchain, and other crypto-
currencies facilitate money laundering?
A.4.c. Criminals use cryptocurrencies to conduct illicit
transactions because they offer potential anonymity, since
cryptocurrency transactions are not necessarily tied to a real-
world identity and enable criminals to quickly move criminal
proceeds among countries. Virtual currencies thus offer an
alternative to cash. The Department continues to see the use of
bitcoin by criminals but has also noted an increase in the use
of alternative cryptocurrencies. As with any criminal behavior,
the Department can and does draw on its full complement of law
enforcement tools to investigate and prosecute this activity,
when supported by the evidence.
As just one example, in 2013, the Government shut down
Liberty Reserve, which allowed users around the world to send
and receive payments using cryptocurrencies--and which was used
by online criminals to launder the proceeds of Ponzi schemes,
credit card trafficking, stolen identity information, and
computer hacking schemes. Liberty Reserve's founder built and
operated Liberty Reserve expressly to facilitate large-scale
money laundering for criminals by providing them near-anonymity
and untraceable financial transactions. In 2016, Liberty
Reserve's founder pleaded guilty to money laundering charges
and was sentenced to 20 years in prison.
The Department announced in July 2017 that it had seized
the largest criminal marketplace on the internet, AlphaBay.
AlphaBay operated for over 2 years on the dark web and was used
to sell deadly illegal drugs, stolen and fraudulent
identification documents and access devices, counterfeit goods,
malware and other computer hacking tools, firearms, and toxic
chemicals throughout the world. AlphaBay operated as a hidden
service on the ``Tor'' network, and utilized cryptocurrencies
including Bitcoin, Monero, and Ethereum to hide the locations
of its underlying servers and the identities of its
administrators, moderators, and users. Based on law
enforcement's investigation of AlphaBay, authorities believe
the site was also used to launder hundreds of millions of
dollars deriving from illegal transactions on the website.
As illustrated by these examples, the laundering of illicit
proceeds through cryptocurrencies knows no borders. And some
countries, unlike the United States, do not currently regulate
virtual currencies--and therefore have limited oversight and
few AML controls. The assistance of our interagency and
international partners is an important element of the
Department's success in its AML efforts. Because money often
moves across multiple countries in the global economy, U.S. law
enforcement depends on the cooperation of foreign counterparts
to aggressively investigate money laundering cases touching the
United States. Domestic and international law enforcement
partners must work together to obtain evidence and to trace,
freeze, and seize assets wherever they are located.
Q.4.d. How can law enforcement officials best stop this newer
form of money laundering?
A.4.d. Please see answer above.
Q.5. I'd like to discuss Suspicious Activity Reports (SARs).
Today, around 2 million SARs are filed each year. While every
SAR used to be read by law enforcement officials, that is no
longer the case today. Financial institutions often complain
that they rarely, if ever, receive feedback from law
enforcement officials on the utility of any particular
suspicious activity report that they file. This lack of
feedback loops increases the burdens on financial institutions,
who continue to file SARs that are of little utility to law
enforcement officials. It also prevents financial institutions
from developing better analytical tools to more precisely
discern between the signal and the noise.
Q.5.a. What percentage of SARs are actually read by someone in
law enforcement?
A.5.a. Law enforcement relies extensively on SARs in civil and
criminal investigations and prosecutions, including those
involving money laundering and terrorist financing. The
Department uses the information contained in these filings--on
both a proactive and reactive basis--to carry out
investigations of specific individuals and entities and to
identify leads, connect the dots, and otherwise advance
investigations in their early stages. Law enforcement and
regulators also use aggregated information from this reporting
to identify trends and risks. A key component of these efforts
are SAR Review Teams, which cover all 94 Federal judicial
districts. Through their review and analysis of SARs, these
teams aim to prevent future terrorist attacks, disrupt and
dismantle criminal enterprises, combat money laundering,
strengthen the U.S. financial system through the enforcement of
the BSA, facilitate interagency cooperation and information
sharing, gather intelligence, and improve communications among
law enforcement agencies and the financial community.
Q.5.b. How often do financial institutions receive feedback
from law enforcement officials as to the utility of their SAR
filing?
A.5.b. The Department cannot comment on open investigations,
and therefore often cannot comment on the usefulness of any
particular information shared by financial institutions with
law enforcement. Moreover, a Federal statute prohibits the
disclosure of certain information regarding grand jury
subpoenas for financial institution records. However, the
Department actively participates in Treasury's Bank Secrecy Act
Advisory Group (BSAAG), which consists of representatives of
Federal regulatory and law enforcement agencies, financial
institutions and trade groups with members subject to the BSA's
requirements. Through this group, Treasury obtains advice on
the operation of the BSA, including the SAR process. The
Department also supports further study of SARs, CTRs, and other
reporting requirements, and believes that gathering data about
these reports will enable Congress and the Administration to
better assess whether to amend the existing regime.
Further, Treasury's recently launched FinCEN Exchange
program brings together law enforcement, financial
institutions, and FinCEN in regular briefings--which the
Department has attended--to facilitate information sharing on
cases, typologies, and threats. This initiative will not only
help financial institutions build their systems and algorithms
to better identify risks and prioritize targets, but it will
also help achieve our broader shared goal of a strong and
effective AML regime. The FinCEN Exchange program is an
addition to other efforts designed to foster cooperation
between the public and private sectors, including the BSAAG.
Q.5.c. Some have proposed reducing the number of SARs and CRT
filings because they are often superfluous and are never read.
Others argue that this poses risks, because investigating minor
infractions may still lead to significant law enforcement
successes. How should we resolve this conflict?
A.5.c. Proposed increases in the monetary thresholds for SARs
and CTRs would decrease filing, and correspondingly, reduce law
enforcement's access to information. Such changes could also
eliminate an array of data that provides critical leads and
information for law enforcement when pursuing investigations
and prosecutions.
There are many crimes that do not involve the movement of
significant amounts of money. One potential disadvantage of
raising the CTR and SAR reporting thresholds without careful
consideration and study of the existing data is that law
enforcement may lose visibility into those crimes. The lone
wolf terrorist is an apt example--those cases typically do not
involve large transfers of money. Therefore, these transactions
may not hit upon one of the CTR or SAR thresholds, were
Congress to increase those thresholds. Figures from FinCEN, for
example, show that 79 percent of CTR filings in 2017 were for
amounts below $30,000--one of the thresholds that has been
proposed. Increasing the $10,000 threshold for CTRs--also the
current threshold for CMIRs at the borders--could thus reduce
CTR filing significantly, hurting law enforcement's access to
information regarding the use of cash.
Increasing SAR reporting thresholds would similarly decrease
SAR filings, leaving law enforcement with less information on
suspicious activity generally.
The Department supports continued discussion of methods to
better target financial institution reporting, as that will
increase efficiencies for both law enforcement and industry. At
the same time, the Department believes that any proposals to
alter such reporting requirements should take into account the
significant value of this information and the effects--
particularly the potential harms--such changes could have on
law enforcement investigations and prosecutions.
Q.5.d. How could regulators (1) set up better feedback loops
between financial institutions and law enforcement officials
that could help financial institutions better identify money
laundering; and (2) empower financial institutions to act upon
their improved ability to distinguish between useful and
superfluous reports, including by filing fewer unnecessary
SARs, without fearing regulatory consequences for doing so?
A.5.d. As noted above, Treasury's recently launched FinCEN
Exchange program brings together law enforcement, financial
institutions, and FinCEN in regular briefings--which the
Department has attended--to facilitate information sharing on
cases, typologies, and threats.
This initiative will not only help financial institutions
build their systems and algorithms to better identify risks and
prioritize targets, but it will also help achieve our broader
shared goal of a strong and effective AML regime.
Q.5.e. Would a better feedback loop system exist if financial
institutions employed more people with security clearances? If
so, what, if anything, can the Federal Government do to
facilitate this?
A.5.e. The Department supports continued discussion of methods
to enhance information sharing and better target financial
institution reporting, and looks forward to continued
discussions with its interagency partners, Congress, and
industry on these topics.
Q.6.a. Often, financial institutions will de-risk by refusing
to serve customers that could be involved in illegal activity.
As financial institutions start to share more information with
each other, this practice could become more prominent and
potential criminals could more frequently lose access to the
United States' financial system altogether.
Are there instances in which de-risking is actually
unhelpful for law enforcement purposes, because it drives these
criminals underground and makes it more difficult to track
them?
A.6.a. Yes, in some circumstances, de-risking by closing some
customers' financial accounts in order to reduce the risk
exposure of financial institutions to certain categories of
high-risk customers and jurisdictions may hinder ongoing law
enforcement investigations.
Q.6.b. At the moment, do the regulators that evaluate and
enforce financial institutions compliance with our Federal
money laundering take this into account?
A.6.b. The Department defers to its colleagues at the Federal
banking regulators to respond to this question.
Q.6.c. Are there promising ways to increase cooperation between
financial institutions, regulators, and law enforcement
officials, so that financial institutions can make a more
informed decision about when and how to de-risk?
A.6.c. As noted above, the Department actively participates in
Treasury's BSAAG, through which Treasury obtains advice from
Federal regulatory and law enforcement agencies, financial
institutions, and trade groups on the operation of the BSA.
Treasury's recently launched FinCEN Exchange program also
brings together law enforcement, financial institutions, and
FinCEN in regular briefings--which the Department has
attended--on cases, typologies, and threats.
Q.6.d. Would financial institutions need to hire more employees
with a top security clearance and/or a law enforcement
background for this coordination to be effective?
A.6.d. The Department supports continued discussion of methods
to enhance information sharing and better target financial
institution reporting, and looks forward to continued
discussions with its interagency partners, Congress, and
industry on these topics.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM M.
KENDALL DAY
Q.1. Mr. Day--in your testimony and at the hearing, you site
figures that the U.N. Office on Drug and Crime estimates that
annual illicit proceeds total more than $2 trillion globally.
Additionally, you site that number to be around $300 billion in
2010.
Q.1.a. In terms of how DOJ (Department) allocates its
resources, does the Department allocate resources based on the
predicate offense and/or the most prevalent source of illicit
activity?
A.1.a. The Department has a dedicated section in the Criminal
Division, the Money Laundering and Asset Recovery Section
(MLARS), leading its asset forfeiture and AML efforts. MLARS
handles significant cases in these areas and also works closely
with other components of the Criminal Division and U.S.
Attorneys' Offices across the country on such matters. MLARS'
Bank Integrity Unit investigates and prosecutes complex, multi-
district, and international criminal cases involving financial
institutions and individuals who violate various Federal
statutes, including the Money Laundering Control Act, the BSA,
and economic and trade sanctions programs authorized by the
International Emergency Economic Powers Act. The Unit's
prosecutions generally focus on banks and other financial
institutions, including their officers, managers, and
employees, whose actions threaten the integrity of the
individual institution, the wider financial system, or both.
MLARS' Money Laundering and Forfeiture Unit investigates
and prosecutes professional money launderers and gatekeepers
who provide their services to serious criminal organizations,
such as Mexican drug cartels, as well as individuals and
entities using the latest and most sophisticated money
laundering tools and techniques. The Money Laundering and
Forfeiture Unit also litigates civil forfeiture cases for the
Criminal Division and, in appropriate cases, in partnership
with United States Attorneys' Offices. It also provides support
to the Division in cases involving significant or complex
criminal forfeiture allegations. The Unit also serves as the
Division's experts on domestic forfeiture and, in this role,
provides advice to other Division attorneys and United States
Attorneys' Offices.
In addition, MLARS recently added a lawyer in the role of
Digital Currency Counsel in MLARS's Special Financial
Investigations Unit. That attorney focuses on providing support
and guidance to investigators, prosecutors, and Government
agencies on cryptocurrency prosecutions and forfeitures;
expanding and implementing cryptocurrency-related training to
encourage and enable more investigators, prosecutors, and
Department agencies to pursue such cases; developing and
disseminating policy guidance on various aspects of
cryptocurrency; advising Assistant U.S. Attorneys (AUSAs) and
Federal agents on complex questions of law related to
cryptocurrencies; and identifying additional actors--including
professional money launderers, money transmitters, gatekeepers,
and financial institutions--who use cryptocurrencies to
facilitate illicit finance.
Also instrumental in the Department's AML efforts are the
Criminal Division's Fraud Section, Computer Crimes and
Intellectual Property Section, Narcotic and Dangerous Drug 24
Section, Organized Crime and Gang Section; the Tax Division;
the Civil Rights Division's Human Trafficking Prosecution Unit;
the Organized Crime Drug Enforcement Task Forces; and the
Department's investigative agencies, including the Federal
Bureau of Investigation and the Drug Enforcement Agency. These
prosecutors and investigators lend critical expertise in the
predicate offenses involved in money laundering.
Q.1.b. What does this filter system look like?
A.1.b. In addition to the knowledge and resources available
through MLARS, described above, the Department also deploys
prosecutors as warranted in those jurisdictions facing
particular criminal threats. For example, in August 2017, the
Department announced the formation of the Opioid Fraud and
Abuse Detection Unit, a pilot program specifically focused on
opioid-related healthcare fraud. As part of that initiative,
the Department funded 12 experienced AUSAs for a three-year
term to focus solely on investigating and prosecuting
healthcare fraud related to prescription opioids, including
pill mill schemes and pharmacies that unlawfully divert or
dispense prescription opioids for illegitimate purposes.
Q.1.c. Can you overview this system for me in terms of how the
Department looks at illicit activity, filters this activity,
and then concurrently using this information decides how or how
not to bring criminal charges for BSA violations?
A.1.c. The Department follows the specific facts and evidence
where they lead for each individual case. Where these facts and
evidence support doing so, the various components of the
Department mentioned above may take action for BSA violations,
as demonstrated by a number of recent cases.
Q.2. Mr. Day--in follow up to a question I asked you at the
hearing, I referenced a ``working group'' that Secretary
Mnuchin is forming at FSOC to study and evaluate issues related
to digital currencies. I appreciate that fact that DOJ and
others are also
continually working on issues regarding digital currencies, but
my question relates to the nature of FSOC.
Q.2.a. Specifically, since DOJ is not a member of FSOC, and as
such, I want to know if you or others have been in
communication with FSOC or Secretary Mnuchin to discuss the
value that might be present in having someone from DOJ
participate in the aforementioned ``working group''?
A.2.a. Yes. John Cronan, the former Acting Assistant Attorney
General for the Department's Criminal Division, attended a
March 2018 meeting of Treasury's Financial Stability Oversight
Council (FSOC). At that meeting, he discussed the role of
cryptocurrency in illicit finance and the Department's
efforts--in coordination with other Government agencies--to
attack the challenges posed by cryptocurrencies.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM M.
KENDALL DAY
Q.1. Is there a way to maintain a top-shelf effective anti-
money laundering/combating the financing of terrorism (AML/CFT)
policy while maintaining a commitment to increase access to
financial products for the underbanked and immigrants who rely
on remittance services?
A.1. The Department defers to its colleagues at the Federal
banking regulators to respond to this question.
Q.2. Cryptocurrency exchanges are money services businesses
supervised by State regulators and subject to Federal AML/CFT
laws.
Q.2.a. What additional tools could we give regulators and law
enforcement to enhance AML/CFT supervision?
A.2.a. The Department defers to its colleagues at Treasury to
respond to this question.
Q.3. How prevalent is money laundering in cryptocurrency
markets?
A.3. Criminals use cryptocurrencies to conduct illicit
transactions because they offer potential anonymity, since
cryptocurrency transactions are not necessarily tied to a real-
world identity and enable criminals to quickly move criminal
proceeds among countries. Virtual currencies thus offer an
alternative to cash. The Department continues to see the use of
bitcoin by criminals but has also noted an increase in the use
of alternative cryptocurrencies. As with any criminal behavior,
the Department can and does draw on its full complement of law
enforcement tools to investigate and prosecute this activity,
when supported by the evidence.
As just one example, in July 2017, the Department announced
that it had seized the largest criminal marketplace on the
internet, AlphaBay. AlphaBay operated for over 2 years on the
dark web and was used to sell deadly illegal drugs, stolen and
fraudulent identification documents and access devices,
counterfeit goods, malware and other computer hacking tools,
firearms, and toxic chemicals throughout the world. AlphaBay
operated as a hidden service on the ``Tor'' network, and
utilized cryptocurrencies including Bitcoin, Morrero, and
Ethereum to hide the locations of its underlying
servers and the identities of its administrators, moderators,
and users. Based on law enforcement's investigation of
AlphaBay, authorities believe the site was also used to launder
hundreds of millions of dollars deriving from illegal
transactions on the website.
In 2013, meanwhile, the Government shut down Liberty
Reserve, which allowed users around the world to send and
receive payments using cryptocurrencies--and which was used by
online criminals to launder the proceeds of Ponzi schemes,
credit card trafficking, stolen identity information, and
computer hacking schemes. Liberty Reserve's founder built and
operated Liberty Reserve expressly to facilitate large-scale
money laundering for criminals by providing them near-anonymity
and untraceable financial transactions. In 2016, Liberty
Reserve's founder pleaded guilty to money laundering charges
and was sentenced to 20 years in prison.
As illustrated by these examples, the laundering of illicit
proceeds through cryptocurrencies knows no borders. And some
countries, unlike the United States, do not currently regulate
virtual currencies--and therefore have limited oversight and
few AML controls. The assistance of our interagency and
international partners is an important element of the
Department's success in its AML efforts. Because money often
moves across multiple countries in the global economy, U.S. law
enforcement depends on the cooperation of foreign counterparts
to aggressively investigate money laundering cases touching the
United States. Domestic and international law enforcement
partners must work together to obtain evidence and to trace,
freeze, and seize assets wherever they are located.
Q.4. Are there instances in which a failure to maintain an
adequate AML program should result in legal consequences for
individuals instead of corporations? If so, what are those
circumstances?
A.4. Yes, where the facts and evidence support doing so, the
Department does not hesitate to take action against individuals
in connection with inadequate AML compliance programs. In
December 2017, for example, a former vice president of Rabobank
National Association (Rabobank) entered into a DPA the United
States for his role in aiding and abetting Rabobank's failure
to maintain an AML program that met BSA requirements. In
February 2018, Rabobank, the California subsidiary of
Netherlands-based Cooperative Rabobank U.A., pleaded guilty to
a felony conspiracy charge for impairing, impeding, and
obstructing its primary regulator by concealing deficiencies in
its AML program and for obstructing the regulator's examination
of Rabobank. Rabobank agreed to forfeit more than $368 million
as a result of allowing illicit funds to be processed through
the bank without adequate BSA or AML review. Additionally, in
2013, the head manager and the designated AML compliance
officer of a Los Angeles check cashing store were sentenced to
5 years and 8 months in prison, respectively, for failing to
follow Federal reporting and AML requirements in relation to
more than $8 million in transactions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM M.
KENDALL DAY
Q.1. Gaming and tourism are some of Nevada's top sectors. In my
State, our gaming operators employ thousands of hard-working
Nevadans, and the industry as a whole domestically supports 1.7
million jobs across 40 States. Qualified casinos, like
financial institutions, are also subject to Banking Secrecy Act
requirements. Organizations within my State have suggested that
gaming operators would welcome a review of BSA requirements.
They look forward to this Committee's thoughtful, bipartisan,
review of BSA requirements that takes into account the security
imperative for robust anti-money laundering efforts, as well as
the impact those requirements have on depository and
nondepository regulated entities. I wanted to follow up on my
question in the Committee about the pros and cons of
eliminating the requirement that a detailed factual narrative
is required when filing a Suspicious Activity Report (SAR) form
for structuring situations. In your responses, you mentioned
that useful information is found in the detailed factual
narrative more generally which I understand but wonder how
useful this information is for structuring situations.
What are the pros and cons of eliminating the factual
narrative for just structuring situations?
A.1. Like all BSA-generated financial intelligence, information
in SAR filings--both in the reporting fields and in the factual
narrative--is of great value to law enforcement investigations
and prosecutions of money laundering, terrorist financing, and
other crimes. The Department uses the information contained in
SAR filings to carry out investigations of specific individuals
and entities and to identify leads, connect the dots, and
otherwise advance investigations in their early stages, among
other things. Eliminating any portion of SAR data--even for a
subset of the SAR filings--would decrease the amount of
information available to law enforcement. Thus, while the
Department welcomes discussions on how BSA reporting can be
improved, it believes that such discussions should take into
account the significant value of this information and the
effects such changes could have on law enforcement
investigations and prosecutions.
Q.2. I wanted to follow up on my question about raising the
Currency Transaction and Suspicious Activity Reporting
thresholds. In the hearing, you mentioned concerns that small
dollar amounts can be used for criminal activities so there are
risks to raising the thresholds. Some recommend raising them to
either inflation or a lesser amount--from $5,000/$10,000 for
suspicious activity reports and $20,000 or $25,000 for currency
transaction reports.
Please expand on what we should consider if the threshold
amounts for CTRs and SARs were increased.
A.2. Proposed increases in the monetary thresholds for SARs and
CTRs would decrease filing, and correspondingly, reduce law
enforcement's access to information. Such changes could also
eliminate an array of data that provides critical leads and
information for law enforcement when pursuing investigations
and prosecutions. The Department believes that any proposals to
alter such
reporting requirements should accordingly take into account the
significant value of this information and the effects--
particularly the potential harms--such changes could have on
law enforcement investigations and prosecutions.
Moreover, there are many crimes that do not involve the
movement of significant amounts of money. One potential
disadvantage of raising the SAR and CTR reporting thresholds
without careful consideration and study of the existing data is
that law enforcement may lose visibility into those crimes. The
lone wolf terrorist is an apt example--those cases typically do
not involve large transfers of money. Therefore, these
transactions may not hit upon one of the CTR or SAR thresholds,
were Congress to increase those thresholds. Figures from
FinCEN, for example, show that 79 percent of CTR filings in
2017 were for amounts below $30,000--one of the thresholds that
has been proposed. Increasing the $10,000 threshold for CTRs--
also the current threshold for Currency and Monetary Instrument
Reports (CMIRs) at the borders--could thus reduce CTR filing
significantly, hurting law enforcement's access to information
regarding the use of cash. Increasing SAR reporting thresholds
would similarly decrease SAR filings, leaving law enforcement
with less information on suspicious activity generally.
Accordingly, the Department believes that any discussion of
amending these reporting thresholds should be analyzed against
existing reporting data, and balanced against law enforcement's
need to maintain visibility into these types of criminal
activity.
Q.3. In 2014, FinCEN issued an advisory with human trafficking
red flags, to aid financial institutions in detecting and
reporting suspicious activity that may be facilitating human
trafficking or human smuggling.
Do you think institutions are taking advantage of those red
flags, in order to better assess whether their banks are being
used to finance human trafficking?
A.3. Law enforcement relies extensively on SARs and CTRs in
civil and criminal investigations and prosecutions to identify
and trace illicit proceeds for a range of crimes. With respect
to financial institutions' use of the red flags laid out in the
FinCEN advisory, the Department defers to its colleagues at
Treasury to respond to this question.
Q.4. I served as Attorney General of Nevada for 8 years. I know
that investigations of organized crime, terrorist financing and
money laundering rely on collaboration with leaders and
governments of other nations.
As the Under Secretary for Terrorism and Financial Crimes,
how does your office collaborate with African nations to curb
terrorist financing and money laundering?
A.4. The Department defers to its colleagues at Treasury to
respond to this question.
Q.5. Secretary Mandelker, Treasury's Office of Technical
Assistance has been a critical resource to collaborate and
strengthen other nations. I would like to better understand how
the Office of Technical Assistance works.
Q.5.a. Which nations did the Office of Technical Assistance
serve in 2016 and 2017? How many nations requested assistance
but have been denied?
Q.5.b. Please detail why the assistance was denied: lack of
U.S. funding, diplomatic considerations, another nation was
better suited to provide the information, etc.?
Q.5.c. Please provide annual OTA funding levels from 2010 until
today?
A.5.a.-c. The Department defers to its colleagues at Treasury
to respond to these questions.
Q.6. For years, Treasury relied on supplemental fund transfers
from the State Department, USAID and other Government agencies.
Q.6.a. How much did OTA receive from State and USAID in 2014,
2015, 2016, and 2017?
Q.6.b. How is the OTA working with the International Monetary
Fund and the World Bank to prevent terrorist financing and
money laundering?
A.6.a.-b. The Department defers to its colleagues at Treasury
to respond to these questions.
Q.7. Kenya's M-Pesa is an electronic system that captures every
transaction. All M-Pesa customers must identify themselves with
their original identification document. There is three-factor
authentication: SIM card, ID and the PIN. The Central Bank of
Kenya receives regular reports on transactions.
What can we learn from Kenya and other nations about how to
use mobile banking to provide access to financial services and
also avoid terrorist and other forms of illicit financing?
A.7. The Department defers to its colleagues at Treasury to
respond to this question.
Q.8. The Office of the Comptroller of the Currency mentioned in
its 2018 Banking Operating Plan that financial institutions
should not inadvertently impair financial inclusion. But, as of
September 2017, the OCC has not identified any specific issues
they plan to address. We know that de-risking has become
epidemic in some communities, such as communities along the
Southwest border, remittances providers serving fragile nations
like Somalia and humanitarian groups. In your testimony, you
mention Treasury's efforts to ensure humanitarian remittances
reach Venezuela as you work to stem financial corruption in
that nation.
Please explain what steps the Treasury Department is taking
in Venezuela to stabilize humanitarian remittances?
A.8. The Department defers to its colleagues at Treasury to
respond to this question.
Q.9. How will the Treasury Department work with the other
banking regulators--OCC, FinCEN, FDIC and the Federal Reserve--
along with the IRS to help banks meet the banking needs of
legitimate consumers and businesses that are at risk of losing
access--or have already lost access?
Q.9.a. Has Treasury been able to stem the decline in
correspondent banking relationships that have limited financial
access to many?
Q.9.b. If so, how?
Q.9.c. If not, what policies could restore and expand
correspondent banking relationships?
A.9.a.-c. The Department defers to its colleagues at Treasury
to respond to these questions.
Q.10. Last year, the Countering Iran's Destabilizing Activities
Act of 2017 (Public Law 115-44) was enacted. In Section 271, it
required the Treasury Department to publish a study by May 1,
2018, on two issues: 1. Somali Remittances. The law required
Treasury to study if banking regulators should establish a
pilot program to provide technical assistance to depository
institutions and credit unions that wish to provide account
services to money services businesses serving individuals in
Somalia. Such a pilot program could be a model for improving
the ability of U.S. residents to make legitimate funds
transfers through easily monitored channels while preserving
strict compliance with BSA. Sharing State Banking Exams. The
law also required Treasury to report on the efficacy of money
services businesses being allowed to share certain State exam
information with depository institutions and credit unions to
increase their access to the banking system.
Q.10.a. What is the status of this study?
Q.10.b. Are you contacting other organizations in your
research?
Q.10.c. Which ones--or types of groups--have you met with?
Q.10.d. Will the Treasury Department meet the deadline of May
1, 2018 to publish the report?
A.10.a.-d. The Department defers to its colleagues at Treasury
to respond to these questions.
Q.10.e. Anonymous incorporation is not difficult for
criminals--virtually no States require corporate applications
provide the identity of the corporation's ultimate owner. Law
enforcement has said it needs to know the owners of firms in
order to investigate financial crimes and terrorism.
Q.10.f. How should Congress and/or Treasury tailor these
proposed requirements so as not to be overly burdensome on
either incorporating entities or the States themselves?
Q.10.g. Should Congress exempt any firm already regulated by
Federal banking regulators and companies with over 20
employees?
Q.10.h. Some argue that those types of companies are very
unlikely to open bank accounts to hide or move criminal funds
or to hold illegal assets, do you agree?
Q.10.i. Does the Treasury Department need legislation to issue
regulations requiring corporations and limited liability
companies formed in any State that does not already require
ownership disclosure to file information about their beneficial
ownership with Treasury as well?
Q.10.j. What type of disclosure should be required: name,
current address, nonexpired passport or State-issued driver's
license, identification of any affiliated legal entity that
will exercise control over the incorporated entity; etc.?
Q.10.k. Should the rules require that beneficial owners be
updated no later than 60 days after any change in ownership?
Q.10.l. Should the rules provide civil penalties for anyone who
submits false or fraudulent beneficial ownership information,
does not provide complete or updated information; and/or
knowingly discloses subpoena, summons, or other request for
beneficial ownership information without authorization?
A.10.e.-l. The Department defers to its colleagues at Treasury
to respond to the questions directed to Treasury. As discussed
above, the pervasive use of front companies, shell companies,
nominees, and other means to conceal the beneficial owners of
assets is one of the greatest loopholes in this country's AML
regime. We consistently see bad actors using these entities to
disguise the ownership of the dirty money derived from criminal
conduct. Indeed, FATF's 2016 review of our AML/CTF system
highlighted this issue as one of the most critical gaps in the
United States. The FATF rated the United States
``noncompliant'' on the FATF standard covering transparency and
beneficial ownership of legal persons, noting the United
States' ``generally unsatisfactory measures for ensuring that
there is adequate, accurate, and updated information'' on
beneficial ownership, as defined by FATF, that ``can be
obtained or accessed by competent authorities in a timely
manner.'' The result, FATF said, is that U.S. law enforcement
authorities ``must often resort to resource-intensive and time-
consuming investigative and surveillance techniques.''
More effective legal frameworks are accordingly needed to
ensure that criminals cannot hide behind nominees, shell
corporations, and other legal structures to frustrate law
enforcement. When law enforcement is able to obtain information
on the identities of the persons who ultimately own or control
these legal entities, it can better see the full network of
criminal proceeds as bad actors try to bring money into our
financial system. With proper law enforcement access to
accurate, up-to-date, and detailed beneficial ownership
information, the Department could bring more cases, more
quickly, with more impact.
The Department looks forward to continued discussions with
its interagency partners, Congress, and industry regarding
stronger laws that target individuals who seek to mask the
ownership of companies, accounts, and sources of funds, as well
as proposals to require the collection and maintenance of
beneficial ownership information.
Q.11. Author and reporter David Cay Johnston reports in his
book, The Making of Donald Trump, that public records show
highly suspicious money from Russia is behind Trump's
businesses. He alleges that ``over the past three decades, at
least 13 people with known or alleged links to Russian mobsters
or oligarchs have owned, lived in, and even run criminal
activities out of Trump Tower and other Trump properties. Many
used his apartments and casinos to launder untold millions in
dirty money. Some ran a worldwide high-stakes gambling ring out
of Trump Tower--in a unit directly below one owned by Trump.
Others provided Trump with lucrative branding deals that
required no investment on his part. Taken together, the flow of
money from Russia provided Trump with a crucial infusion of
financing that helped rescue his empire from ruin, burnish his
image, and launch his career in television and politics.''
Q.11.a. Please provide a list of convicted criminals who had
business dealings with the Trump Corporation?
A.11.a. The Department does not track the information you have
requested in the format you have requested.
Q.11.b. Please list the condominiums and their owners that the
Federal Government seized from Russian emigres who were
convicted of crimes such as money laundering, violence, etc.?
A.11.b. The Department does not track the information you have
requested in the format you have requested.
Q.11.c. What is the size of Russian mob money laundering in the
United States? What do you recommend we do to limit money
laundering from international and domestic organized crime
syndicates?
A.11.c. As to the first question, the Department does not track
the information you have requested in the format you have
requested.
As to the second question, the Department will continue to
draw on its full complement of law enforcement tools to
investigate and prosecute money laundering by all types of
actors, including international and domestic crime syndicates.
One tool that is vital to this effort is BSA reporting,
including SARs and CTRs. Information from BSA reporting not
only helps to generate leads and advance investigations already
underway, but it also plays a particularly important role in
the investigation and prosecution of criminal groups, as this
reporting can help law enforcement see the full criminal
network. By reviewing information from SARs, CTRs, and other
BSA reporting, for example, law enforcement may be able to
trace money flowing to different parts of the network--those
that generate the illicit proceeds and those used to
redistribute them. The Department also welcomes further
dialogue with Congress about the tools most helpful to its
enforcement efforts.
Q.12. Like many corporate executives, President Donald Trump
takes advantage of more corporate-friendly businesses laws.
Analysis of his FEC filings finds he registered 659 businesses.
Despite defining himself as a New Yorker, only 19 percent of
his businesses are chartered in New York. Only 11 percent of
his businesses were chartered in Florida where he has a second
home. Instead, more than two-thirds of his corporations were
chartered in Delaware (48 percent) or Nevada (23 percent).
President-elect Donald Trump filed a Federal Election Committee
(FEC) filing in July 2016 listing 515 corporations for which he
serves on the Board of Directors. Of these, 263 of the
corporations begin with ``Trump.'' A number of the other
corporations contain some combination of his initials ``DT'' or
``DJT.'' 2 Quartz. ``A List of Everything Donald Trump Runs
That Has His Name On It.'' Looking only at corporations which
included ``Trump,'' which did not include another family member
(i.e., his father or his children), and which could be
reasonably determined to be one of Donald Trump's companies
(i.e., excluding initialed companies and companies containing
Trumpe, Trumpf, Trumpy, etc.), it seems: 315 companies are
incorporated in Delaware. Of which, Trump self-reported as a
board member of at least 182. The New York online corporate
registry does not provide an immediately
obvious status of the companies so we cannot analyze current
versus dissolved corporations. One hundred forty-nine companies
are incorporated in Nevada. Of which, only 15 are currently
active. A few have been formally dissolved; however, the
remainder are in a progressively permanent state of revocation
for failure to keep up with filings and fees. Of the 15 active
corporations, Trump self-reported as a board member of at least
9. One hundred twenty-four companies are incorporated in New
York. Of which, Trump self-reported as a board member of at
least 60. The New York online corporate registry does not
provide an immediately obvious status of the companies so we
cannot analyze current versus dissolved corporations. Seventy
companies are incorporated in Florida. Of which, 22 are
currently listed as active. Of the active corporations, Trump
self-reported as a board member of at least 3. Five companies
are incorporated in Wyoming; only 1 is active.
Q.12.a. Can you confirm that these figures about President
Trump's business locations are accurate?
A.12.a. We are unable to confirm this information.
Q.12.b. Have any of President Trump's current or former
businesses been indicted or convicted for money laundering or
other financial crimes?
A.12.b. The Department does not track the information you have
requested in the format you have requested.
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