Hearing of the Senate Banking, Housing, and Urban Affairs Committee - Enforcement of the Bank Secrecy Act
Federal News Service
HEADLINE: HEARING OF THE SENATE BANKING, HOUSING, AND URBAN AFFAIRS COMMITTEE
SUBJECT: ENFORCEMENT OF THE BANK SECRECY ACT
CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)
WITNESSES PANEL I: SUSAN S. BIES, GOVERNOR, FEDERAL RESERVE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM;
JOHN D. HAWKE, JR., COMPTROLLER OF THE CURRENCY, DEPARTMENT OF TREASURY; DONALD E. POWELL, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION;
JAMES E. GILLERAN, DIRECTOR, OFFICE OF THRIFT SUPERVISION;
JOANN JOHNSON, MEMBER, BOARD OF DIRECTORS, NATIONAL CREDIT UNION ADMINISTRATION;
WILLIAM J. FOX, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK;
PANEL II:
DAVI M. D'AGOSTINO, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENTS, GENERAL ACCOUNTING OFFICE; GASTON L. GIANNI, JR., INSPECTOR GENERAL, FEDERAL DEPOSIT INSURANCE CORPORATION
LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.
BODY:
SEN. RICHARD SHELBY (R-AL): The hearing will come to order. The purpose of today's hearing is to examine the record of the federal government in examining-in enforcing this nation's laws against money laundering and terrorist financing. The high profile case of Riggs Bank, which was recently fined $25 million for repeated-I emphasize repeated-failures to comply with the Bank Secrecy Act, the basic anti-money laundering statutes requiring the reporting of large cash transactions and suspicious financial activities, has highlighted possible deficiencies in the governmental structure for enforcing these laws.
The Riggs case could be seen as unique. It involved that bank's near monopoly on foreign embassy banking. It involved an oil rich country for which the movement of large amounts of cash was as routine as writing a check to pay bills is for many Americans. Whatever cultural, political or economic factors resulted in Riggs' failure to comply with the law, despite repeated assurances to its federal overseers that it would improve in that regard, this case cannot be seen really as unique.
As the General Accounting Office will testify later today before this committee, the problem runs deeper than we may care to admit. There does appear, on the basis of a number of recent money laundering cases as well as the case of UBS Investment Bank of Switzerland, about which this committee held a hearing on May 20, to be serious deficiencies on the part of the federal regulatory agencies vested with authority and responsibility to enforce this nation's laws against money laundering.
I mention the UBS case for a reason. In that case the Federal Reserve Bank of New York, responsible for ensuring that U.S. currency transferred to countries sanctioned for their support of terrorist activities, or for their poor human rights records, failed to provide adequate oversight of the banks with which it had contracted to serve as depositories of billions of U.S. dollars in cash. The Federal Reserve Bank trusted that the self-generating reports provided it by UBS were an accurate reflection of the latter's conduct. The Fed was wrong to the tune of $5 billion.
Similarly, the Riggs case showed a deference toward the client financial institution that undermined the integrity of the oversight process. Trust that Riggs would comply not just with the terms of the law but with the agreements intended to bring it into compliance with the law proved the undoing of a process that's essential to the war against terrorism. The war against terrorism cannot be won without serious efforts at impeding the very types of criminal activity that seems to be going on-went on at the Riggs Bank, as well as the UBS case. And Riggs, as we all know, is not just about their bank's relationship to the Embassy of Saudi Arabia. As disturbing are the business transactions with the government of Equatorial Guinea, a country known for its corruption, human rights abuses and desperately poor population despite vast oil wells.
The Riggs case, as well as that of Banco Popular, Delta National Bank and Trust of New York and others, clearly point to underlying problems in the approach of federal regulatory agencies to properly carry out their mandate to enforce the Bank Secrecy Act. How long banks are given to comply with the law before the government acts with sufficient force so as to compel compliance is one of the issues to be addressed here today. Others include the ability and the willingness of the agencies represented here today to execute their enforcement function with regard to money laundering with the same competence with which they execute their apparently more ingrained safety and soundness function; their relationship to each other, to the Financial Crimes Enforcement Network, also represented here today, and to law enforcement; and the degree to which information essential for enforcing anti-money laundering laws is shared among themselves in a timely manner.
For example, was the FBI informed about cease-and-desist orders or did it have to read about them in the papers? What about FinCEN? Does the examination process need repair? These are the questions that demand attention here.
Testifying here today, and hopefully addressing these questions, are the Honorable Susan Schmidt Bies, Board of Governors of the Federal Reserve System; the Honorable John D. Hawke, Comptroller of the Currency, and a frequent guest; the Honorable Donald Powell, chairman of the Federal Deposit Insurance Corporation; the Honorable James Gilleran, director of the Office of Thrift Supervision; the Honorable JoAnn Johnson, chairman of the National Credit Union Administration; and Mr. William Fox, director Financial Crimes Enforcement Network.
After we hear testimony from these officials, we have a second panel comprised of the Honorable Gaston Gianni, Inspector General of the Federal Deposit Insurance Corporation; and Ms. Davi D'Agostino, director Financial Markets and Community Investment Division of the General Accounting Office.
Senator Sarbanes.
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SEN. SHELBY: Thank you, Senator Sarbanes.
Senator Reed.
SEN. JACK REED (D-RI): Mr. Chairman, I simply want to associate myself with Senator Sarbanes' comments and remarks, and I look forward to hearing the testimony of the witnesses. Thank you.
SEN. SHELBY: Senator Allard, do you have an opening statement?
SEN. WAYNE ALLARD (R-CO): I do, Mr. Chairman, have an opening statement. I'll just submit it for the record.
SEN. SHELBY: Without objection, so ordered.
SEN. ALLARD: I would like to thank the panel for taking time to testify before the committee, and you for holding the hearing.
SEN. SHELBY: Thank you. All of your written testimony will be made part of the hearing record.
We'll start with you, Governor Bies.
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SEN. SHELBY: Thank you, Governor.
Mr. Hawke.
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SEN. SHELBY: Mr. Powell.
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SEN. SHELBY: Mr. Gilleran.
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SEN. SHELBY: Thank you.
Ms. Johnson.
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SEN. SHELBY: Thank you.
Mr. Fox.
MR. WILLIAM J. FOX: Thank you, Mr. Chairman, Senator Sarbanes and distinguished members of the committee. I appreciate the opportunity to appear before you here today to discuss the role of the Financial Crimes Enforcement Network and what that role can and should play in Bank Secrecy Act compliance and enforcement matters. It's truly an honor for me to appear with this distinguished panel. As I stated the last time I appeared before this committee --
SEN. SARBANES: Mr. Fox, would you pull that microphone --
SEN. SHELBY: Pull the mike up close to you, thanks.
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SEN. SHELBY: Thank you. I thank all of you. We've all heard former President Reagan's statement, trust but verify. What I fear here is there has been a lot of trust and no verification for many years, Mr. Hawke.
For the record's sake here would you indicate, Mr. Hawke, the first BSA compliance issue at Riggs, when it was noted by an OCC examiner and when was final action taken with respect to the particular BSA compliance problems? In other words, the gap there?
MR. HAWKE: I've --
SEN. SHELBY: Beginning to the end?
MR. HAWKE: I've reviewed the record back to 1997, Mr. Chairman --
SEN. SHELBY: Ninety-seven.
MR. HAWKE: -- and in 1997 we --
SEN. SHELBY: Seven years ago?
MR. HAWKE: We noted certain shortcomings in their compliance program.
SEN. SHELBY: What did you do about it?
MR. HAWKE: First of all we graded their program satisfactory, which in retrospect was clearly not warranted in view of --
SEN. SHELBY: So in other words, you didn't do anything?
MR. HAWKE: No, we oversaw the-we told them that they had to make certain changes in their-and improvements in their Bank Secrecy Act compliance. They went through the motions of making those changes and --
SEN. SHELBY: Did you go through the motions of checking them too?
MR. HAWKE: We did. And in subsequent examinations we found that they had not fully complied, and we continued to push them to do it.
SEN. SHELBY: What did you do about it when you knew they hadn't complied? Nothing?
MR. HAWKE: Not until-as I said in my oral statement, Mr. Chairman, we didn't take swift enough action and strong enough action.
SEN. SHELBY: Could you just for a minute discuss the procedures for routine BSA examinations? Just give us a scenario.
MR. HAWKE: Well, we have about 40 full-time Bank Secrecy Act compliance examiners and a team of about three specialists in the Washington headquarters who set policies. In our large banks, Bank Secrecy Act compliance is a regular part of the ongoing responsibilities of the resident teams at those large banks. In those banks where we don't have full-time resident teams, Bank Secrecy Act compliance is part of their regular onsite examination.
SEN. SHELBY: How many, if you can quantify-if you can't do it here, do it for the record. How many violations did you pick up at Riggs? It had to be a lot of them?
MR. HAWKE: There were plenty of violations at --
SEN. SHELBY: Over many, many years, right?
MR. HAWKE: Well, there were violations in the-at the beginning of that process the violations were inadequate control systems, inadequate training and the like. As we developed further familiarity with that program, it was clear that the violations included failure to file suspicious activity reports in situations where they were called for.
SEN. SHELBY: Would it be fair to say that the scrutiny of BSA was in name only? In other words, there's not a lot of verification, there's not a lot of compliance, there's not a-seven years worth of violations and nothing really happened?
MR. HAWKE: I'm not sure I would characterize it quite that way. I --
SEN. SHELBY: Close to it, is it not?
MR. HAWKE: I think the problem, Mr. Chairman, was not that we weren't identifying shortcomings in their compliance program; we were. We were insufficiently robust in assuring that they were correcting those.
SEN. SHELBY: In other words, you didn't do anything about it? Just plain English.
MR. HAWKE: Well, we --
SEN. SHELBY: Is that right?
MR. HAWKE: We didn't take swift enough action or strong enough action.
SEN. SHELBY: Okay. If we know this has gone on at Riggs under the supervision of the comptroller-you as the Comptroller of the Currency, how many other hundreds of thousands perhaps of exam reports in your files which document serious and unaddressed BSA compliance issues at national banks throughout the country?
MR. HAWKE: Well, I don't --
SEN. SHELBY: Does that concern you?
MR. HAWKE: It certainly is an appropriate question. I don't have any reason to think that Riggs represents a systemic problem. But I have directed --
SEN. SHELBY: But you don't know that, do you?
MR. HAWKE: I have directed our Quality Management Division to make exactly that kind of inquiry and to report back to me on that.
SEN. SHELBY: Mr. Hawke, in addition to the Saudi and Equatorial Guinea accounts, Riggs held numerous other foreign accounts, including many characterized as what we'd call high risk by FinCEN and OFAC. They include, among others, Burma, Cuba, the Sudan, Iraq, Iran, Syria and Nigeria. If Riggs' BSA/AML internal controls were so deficient, which is a given, should we be concerned-in other words, should you be concerned that many of these other embassy and special interest accounts could suffer inadequacies and violations?
MR. HAWKE: That is certainly a concern and we have been addressing that concern in a number of ways over the last year-and-a- half.
SEN. SHELBY: Will you give us a report to the committee on what you've done, especially in these particular ones we've raised?
MR. HAWKE: I'd be happy to, Mr. Chairman.
SEN. SHELBY: Senator Sarbanes.
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SEN. SHELBY: We'll have another round.
Senator Reed, thank you for your indulgence.
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SEN. SHELBY: Thank you, Senator Reed.
MR. GILLERAN: Just to respond further to Senator Reed, on page 17 of my written statement I've made some recommendations for increased communications and better flow of information from law enforcement back to the institutions we regulate, because I think one of the problems here is the institutions don't know to what end a lot of the information that they are providing results in. And I think that would help them to better focus on their problem if they had more feedback. At the same time, I'd like to see-and I think my fellow regulators agree that we ought to have a working group set up at the Federal Financial Institution Council focusing on Bank Secrecy Act. And I'd like to have FinCEN be part of that. I think that's the appropriate forum under which we can all communicate. But I think enhanced communication of information is very important in this process.
SEN. REED: Thank you, Mr. Chairman.
SEN. SHELBY: Mr. Hawke, as I understand it from talking with you yesterday, if someone withdraws-we'll just use a million dollars because these-at Riggs Bank, a million dollars in cash, then the bank files a notice of that review with --
MR. HAWKE: Currency transaction report.
SEN. SHELBY: Transaction report.
Now, is there a second step that has to be done to deal with the Bank Secrecy Act? In other words, it is a two step process?
MR. HAWKE: The --
SEN. SHELBY: Would that be a little suspicious, a million dollars?
MR. HAWKE: I think a million dollar cash transaction would inherently raise --
SEN. SHELBY: Should have set off an alarm somewhere at the Comptroller of the Currency, if you'd have known?
MR. HAWKE: It should have set off alarms at the bank, which is the first place that the transaction --
SEN. SHELBY: Unless the bank perhaps was maybe not filing that second report? Were they-was it incumbent upon them to file two reports, one the transaction itself, the withdrawal?
MR. HAWKE: There are statutory and regulatory standards that define the circumstances for filing suspicious activity reports and it's the bank's obligation in the first instance to make sure that they are filing suspicious activity reports where there's a suspicious transaction.
SEN. SHELBY: So it's a second-it's a two step process, was it not?
MR. HAWKE: Yes, sir.
SEN. SHELBY: That's what I'm getting at. The first one they filed-and they did file, as I understand?
MR. HAWKE: That's right.
SEN. SHELBY: But they didn't file the suspicious activity report, although in some cases there was a million dollars in cash withdrawn. Is that correct?
MR. HAWKE: That's correct.
SEN. SHELBY: Now, Mr. Fox, I know there's ongoing investigations, but does it look-it suggests to me maybe there's a conspiracy or something going on at Riggs. They file one report and don't file the others. You know, something is going on in the bank? Does that trigger anything with you?
MR. FOX: Senator, I agree that a million dollar cash transaction generally should set off alarms. You know, and I think it does at most institutions if they-if such transactions occur. I really can't comment on --
SEN. SHELBY: I know.
MR. FOX: On what --
SEN. SHELBY: Not on an ongoing investigation.
MR. FOX: Yes, sir.
SEN. SHELBY: Mr. Hawke, are you full confident as we speak today, after looking back in the Comptroller of the Currency's office, that your examiners fully understand the significance of BSA compliance?
MR. HAWKE: We have --
SEN. SHELBY: I know they understand the safety and soundness compliance, which is important.
MR. HAWKE: Senator, if they don't understand it today, we've got a very serious problem. I think they do, and we have emphasized it repeatedly. We are in the process of revising our examination procedures, our examination handbook for Bank Secrecy Act. I directed our Committee on Bank Supervision to send out a very strong message to all of our examination personnel to reemphasize the importance of Bank Secrecy Act compliance and the need for transaction testing and the need to be extremely cautious and sensitive about identifying transactions that raise questions.
SEN. SHELBY: Governor Bies, how many cases, if any, has the Federal Reserve referred to FinCEN in the past year?
MS. BIES: Total number of cases I may have to get back to you, Senator.
SEN. SHELBY: I've heard it was zero. Do you know-that there was no referrals.
MS. BIES: No, that is not true.
SEN. SHELBY: That's not correct?
MS. BIES: That is not true. We have a good working relationship. We have a history-of the 25 cases I cited, we actually referred more cases to FinCEN and in some cases they took formal action.
SEN. SHELBY: Will you furnish that --
MS. BIES: We will get --
SEN. SHELBY: -- for the committee's record?
MS. BIES: We will get you a list, yes, sir.
SEN. SHELBY: Okay. What criteria is used in determining whether to refer a case to FinCEN from the Board of Governors?
MS. BIES: When we go in and do the testing as part of the examination procedure, we will look at the facts that we find and determine the violations. Sometimes-also I want to emphasize that the tests we perform, and since they're samples we may not have all of the-we may not detect the errors, but that's why it's so important we work with FinCEN and law enforcement, because like in Banco Popular, they gave us a heads up on particular customers that we could then target for this testing and were able to work with them to prove the case. So the information sharing is critical with law enforcement, both Department of Justice as well as FinCEN to make sure we're effective jointly, because together we can find more than individually working.
SEN. SHELBY: Mr. Fox, do you recall any referrals from the Federal Reserve to FinCEN?
MR. FOX: Senator, I would like to get back to you with that number. I-particularly based on the governor's comments, I just would like to get back and make sure that we don't --
SEN. SHELBY: That what you told us before is right?
MR. FOX: Yes. (Laughter.) I want to be right, sir.
SEN. SHELBY: Mr. Fox, has FinCEN ever encountered resistance from bank regulators to the kind of communication you believe is essential to your mission of law enforcement?
MR. FOX: Sir, since I've been at FinCEN, absolutely not. In fact, one of the gratifying things that has occurred for me since I've been at FinCEN since December of 2003 is the willingness of the staff of the regulators to engage in this way. I think we're working on these issues and working on them hard, and I think this is getting better. That's my perception. I can't speak about the past.
SEN. SHELBY: To all of you as regulators, since September 11, 2001, what's changed? Have you become more aware of the importance of terrorist financing and so forth? In other words, what have you done since September 11, 2001?
MR. HAWKE: Mr. Chairman, I think that the awareness of not only the regulators but everybody in government has been significantly heightened since September 11. There are a number of supervisory actions that have been taken in this area, including horizontal reviews of all our large bank compliance programs, as well as many of the midsize bank compliance programs.
As I said before, we revised our examination procedure, our examination handbook, we're creating a database of SARs. We're doing a lot of things that are-have really been-have commended themselves to us because of the heightened awareness that comes from --
SEN. SHELBY: Mr. Hawke, is there written guidance for examiners on when to refer violations to FinCEN?
And I'd ask Mr. Powell and the others the same --
MR. HAWKE: I believe there are referral guidelines, Mr. Chairman, and those guidelines generally provide for referral of systematic, serious violations to FinCEN.
SEN. SHELBY: Would this be true of the Board of Governors?
MS. BIES: Yes, sir.
MR. POWELL: Yes, sir.
SEN. SHELBY: Mr. Powell, FDIC?
MR. POWELL: Yes, sir. May I come in on your earlier question?
SEN. SHELBY: Absolutely.
MR. POWELL: Obviously we've-I think there is a heightened awareness. We've dedicated more personnel, we've adopted new policies, new procedures. Training has intensified. Let me make a couple of comments. I think policies, controls, oversight, testing, training are terribly important. I think it's important in the line of questioning that we fill in the box and that we make appropriate reference to law enforcement, all those critical input. But I don't think it's as important as a culture or the oversight of management. I think until management is committed, including the regulatory agencies --
SEN. SHELBY: At the top?
MR. POWELL: It's a mindset, proactive commitment. The procedures are important but not like the attitude in our culture at the top.
SEN. SHELBY: Governor Bies?
MS. BIES: Mr. Chairman, I would like to echo what Mr. Powell just said and emphasize that at the FED one of the things we really focus on in terms of the quality assurance around our examination procedures is when we do find breaks in controls, that we take it very seriously and go back and say, what could we have done better? And improve it. For example, after Banco Popular we went back and made significant changes in the way we were reviewing money laundering and Bank Secrecy Act and have put those in place.
When the PATRIOT Act has now been passed, there's different parts of it that the rules are made and we have already drafted new examination procedures. They're out in pilot being actively tested by our exam force now to make sure they will be effective and have the intended results. We will adjust them if they don't get the results we're expecting. We just view this as a continuous process that every one of these events reminds us there's new ways that people are finding to use the banking system for illicit purposes, and whenever we find another way it's done, it's our job to respond promptly and make sure that's added to the arsenal of information that our examiners have out in the field to deal with this promptly.
SEN. SHELBY: Mr. Fox, how can you be sure that the banking regulators are referring violations to you under consistent criteria? How do you do that?
MR. FOX: Mr. Chairman, I think we have an agreement that was signed in 1990. It may even have been signed before FinCEN became a bureau; certainly before it became the administrator of the act. Sir, that agreement needs to be revisited and, along with our colleagues at the table here, we need to come up with some pretty set criteria and guidelines so that we're all working from the same page. But I think again, sir, I would answer your question directly in saying that the best thing that we can do is engage these regulators. They're doing, from our perspective, very good work out there and I think it's our responsibility to keep-if anything, maybe even be annoying at times to keep reminding them that this is important and that we need to communicate and we need to do this in the right way. I think that's the best and most effective way to do it under this current system.
SEN. SHELBY: Senator Sarbanes.
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SEN. SHELBY: Is there a set number of warnings that a financial institution receives, Mr. Hawke? In other words, is there a number of years that generally pass between an initial warning regarding a BSA compliance and imposition of a penalty?
MR. HAWKE: No, not at all, Senator. I think it's an issue that has to be decided in each case. I mean, clearly in the Riggs case we gave them too much latitude over too long a period of time.
SEN. SHELBY: Trusted them too much?
MR. HAWKE: Well, it's not so much that we trusted them too much. We were --
SEN. SHELBY: Wait a minute now. You're saying you didn't trust them? I thought you told me before, and others have said, that a lot of the relationship with a bank is trust?
MR. HAWKE: In the Riggs case it was not a question of our trusting the management. We saw things that needed to be fixed, we told them that they had to be fixed. Where we were guilty of a shortfall was that we did not robustly and soon enough come in --
SEN. SHELBY: There was no follow through, in other words, by the Comptroller of the Currency's office?
MR. HAWKE: The follow through --
SEN. SHELBY: Is that correct?
MR. HAWKE: The follow through was not strong enough early enough.
SEN. SHELBY: Well, did it exist at all?
MR. HAWKE: Well, eventually we --
SEN. SHELBY: No, I mean from 1997 until recently did it exist?
MR. HAWKE: Eventually it did. In 2003 we issued a cease-and- desist order. We waited too long to do that.
SEN. SHELBY: Six years.
MR. HAWKE: We should have done-we should have taken stronger action earlier. There's no question about that.
SEN. SHELBY: Chairman Powell, briefly, the Hudson United Bank Corporation. One of the most recent BSA related cease-and-desist orders involves the Hudson United Bank in New Jersey. Would you briefly walk us through the history of this case? What was the FDIC's role in determining what measures would be taken in responding to information pointing to Hudson's failure to comply with the Bank Secrecy Act? What was your agency's assessment of Hudson's risk prior to detection of its failure to comply with the Bank Secrecy Act?
MR. POWELL: I'm not sure I can answer those specifically, Mr. Chairman. But I can tell you that that process-I've been briefed to that, on that particular issue, within the last 30 days. I think our folks were very aggressive in assessing the enforcement action against that particular institution after finding that had occurred over the last 12 to 24 months.
SEN. SHELBY: Mr. Fox, in the past here in the committee-and Senator Sarbanes has been here longer than I have and this is my 18th year. But I can tell you in the past we addressed the issue of regulatory forbearance as it related to the solvency of banks. That's safety and soundness. We learned the hard way right here, and the regulators learned too, that when regulators let banks that were in trouble get by, when those banks later failed it cost the U.S. taxpayers billions and billions of dollars. What's your view with respect to the dangers of regulatory forbearance in BSA compliance cases?
MR. FOX: It can't even enter the conversation, Mr. Chairman. I believe that the information that's collected under the Bank Secrecy Act is absolutely critical to the security of our country.
SEN. SHELBY: That's right.
MR. FOX: And I will tell you that I hope-I'll tell you something that I hope is heartening. It's been my perception since I've been at FinCEN, I have not seen any such regulatory forbearance since I've been at FinCEN among these regulators. But I don't think we could ever be in a situation where we would allow something like that to happen.
MR. POWELL: Senator, I think the --
SEN. SHELBY: Chairman Powell?
MR. POWELL: I'm concerned to some extent. I think bank regulators and the industry we supervise recognize this is national security. Safety and soundness is one issue, but this is equal or superior to safety and soundness, the national security of this country. And I think there is heightened oversight on the BSA. I think bankers --
SEN. SHELBY: High priority?
MR. POWELL: Absolutely. I think bankers-I wouldn't underestimate the seriousness of the BSA enforcement. It is a national security issue. It's lives and deaths. The other is dollars. And I think there is-I think clearly our resolve is very strong that we enforce the Bank Secrecy Act.
SEN. SHELBY: But when there's a six year lapse there, that's more than troubling.
Senator Sarbanes, do you have any other comments?
SEN. SARBANES: I don't think so.
SEN. SHELBY: I want to thank the panel, all of you, for your time and your participation. We have a number of questions for the record and we have some members that are tied up in other hearings, and we'll keep the record open for that.
Mr. Fox, all of you, thank you very much.
SEN. SARBANES: Mr. Chairman, I think as they depart we ought to leave them with the message that this is a matter which I presume the committee intends to follow very closely --
SEN. SHELBY: Absolutely.
SEN. SARBANES: -- (cross talk.)
SEN. SHELBY: We have no choice in our oversight, as you know. This is important and we're expecting Mr. Fox, and we believe in him, that he's going to be working with you very, very closely regarding this.
MR. FOX: We welcome that oversight, Mr. Chairman and Senator Sarbanes, thank you.
SEN. SHELBY: Thank you a lot, all of you.
Our second panel will be the Honorable Gaston Gianni Junior, Inspector General of the Federal Deposit Insurance Corporation; and Ms. Davi D'Agostino, director Financial Markets and Community Investment Division of the General Accounting Office.
I want to welcome the second panel. We appreciate your forbearance here today.
We had some very important witnesses here, as you people know well.
Mr. Gianni, we will start with you. Your written testimony has been made part of the record and, without objection, you proceed as you wish.
MR. GASTON GIANNI: Thank you, Mr. Chairman. Mr. Chairman, Senator Sarbanes --
SEN. SHELBY: Pull that mike up closer to you, if you would.
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SEN. SHELBY: Say that again.
MR. GIANNI: Four hundred and fifty-eight, 17 percent, had been cited for repeat violations. Our audit results raised concerns related to four general areas: the extent of regulatory action on significant and repeat violations; the consistency of reporting of deficiencies and violations; the timing of follow up and corrective actions taken by the institutions; and then handling of those referrals to the Treasury Department.
Our audit showed a high rate of significant and repeat violations, many of which were not subject to regulatory actions. Our sample included 27 institutions with repeat violations. Of those 27 institutions, 17 were -- 63 percent, were not subject to regulatory action for their repeat violations, although other supervisory efforts such as follow up correspondence to bank management and visitations may have been in progress. Of the 10 institutions that were subject to regulatory actions, only one was subject to cease-and-desist and the other nine were subject to informal actions.
Not all Bank Secrecy deficiencies, secondly, were-that the corporation examiners described in their reports were cited as violations of the reports and tracked into the FDIC information system. Such deficiencies may receive less attention from bank management or in FDIC's follow up system. In many instances, the corporation followed up or pursued regulatory action for certain violations before the next examination, or received evidence from bank management, FinCEN or others that the violation had been corrected.
However, for nearly one-third of the 82 reports that we reviewed, examiners waited until the next examination to follow up on some or all of the Bank Secrecy violations. In some cases, more than one year, up to five years, have passed before the bank management took corrective action that was effective or, secondly, that FDIC applied regulatory actions. About two-thirds of the violations sampled took longer than one year to correct. FDIC's policy of alternating examinations with state regulatory agencies also contributed to this timeline. Specifically, 45 of the 72 exam reports that we reviewed from state regulatory agencies did not address Bank Secrecy compliance. These were the institutions that had violations, we reviewed the state reports, they did not have any-cite any specific information regarding the Bank Secrecy violations. Therefore, the FDIC could not rely on those exams. Consequently, follow up by the FDIC did not occur until the next examination, generally two to three years after the violations were initially followed.
While many institutions had been cited for BSA violations, there were only 34 referrals to the Treasury Department during this period. Most of these referrals that were made were made by one FDIC regional office. We determined that when referral to the Treasury Department had been made, action on the part of Treasury was-had been taken place.
Based on our work and in light of the increased congressional interest in BSA compliance and emphasis on national security concerns, we made recommendations that the corporation reevaluate, update its examination guidance to help ensure adequate examiner follow up and timely corrective action by bank management, to discuss and update the referral policy with the Treasury Department, and to encourage state coverage of Bank Secrecy Act compliance, and to develop alternative procedures to compensate for the lack of state coverage.
Looking ahead, Mr. Chairman, there are key questions that FDIC should consider in conjunction with the Treasury Department and the other financial regulators as it looks to improve the Bank Secrecy program. First, is risk scoping Bank Secrecy examination and follow up still the most effective approach to determining money laundering and terrorism financing? Secondly, are the policies and procedures for reporting certain cash transactions and Bank Secrecy violations to the Treasury Department, some of which date to early 1990s, currently effective? And lastly, is the information reported to FinCEN by financial institutions and regulatory-regulators effectively evaluated, and does it ultimately result in timely preventive actions?
Mr. Chairman, we appreciate the opportunity to participate in these hearings. We are prepared to assist in addressing these issues and have additional audits planned in this area. I would be pleased to answer any questions that you may have at this time.
SEN. SHELBY: Thank you.
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SEN. SHELBY: The General Accounting Office has prepared a number of reports on money laundering terrorist financing over the years. Do you believe that there are systemic problems that resulted in Riggs case being unaddressed for so many years. You heard the testimony earlier, you know the case. A lot of years.
MS. D'AGOSTINO: Yes. It did seem to go on quite some time. I mean, by the pieces that were put in together from the testimonies of the OCC representative, it appears that OCC was trying to push a string at Riggs and the management. And you know, when you push a string, nothing much happens and you keep trying, if it fails. It seems like it did last a long time. Whether or not it's systemic, I don't think that we can say today. We hope that our work for you --
SEN. SHELBY: Would you say that it's lack of due diligence then?
MS. D'AGOSTINO: They were aware and they were trying to work with management --
SEN. SHELBY: They were aware and they were trying but were they --
MS. D'AGOSTINO: They were pushing the string.
SEN. SHELBY: I love your phrase.
MS. D'AGOSTINO: Yes. And it's very frustrating.
SEN. SHELBY: You tried to push one, haven't you?
MS. D'AGOSTINO: I know. Yes, sir.
SEN. SHELBY: Senator Sarbanes.
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SEN. SHELBY: Mr. Gianni.
MR. GIANNI: Yes, sir.
SEN. SHELBY: How could the FDIC better use its supervisory and enforcement authority, which they have a lot there, to address BSA violations? Is it deemed that-is BSA violations deemed an important mission in the FDIC and, if not, why not?
MR. GIANNI: I think, after today and today's hearing, I believe it is a priority within the corporation. I think that, clearly, the work of my office will lead me to say that the examiners-the evidence which show that the examiners were in fact identifying problems. The issue became what happened after identification, how hard did we push to get the problems resolved, what was the management support. The chairman this morning, Chairman Powell, said that if you don't have the culture and you don't have the tone at the top, if I might use a phrase, to say that this is important, you tend to try to go after the least-the approach that will have the least impact in disrupting the relationship with the institution. And so, you take the least aggressive action first and, if they don't follow through on that, then you go up a step. Well, that takes time. And then, if they don't take it a second time, you go up to the last or cease and desist. So it takes time to go through this process of increased regulatory action. And I think we-we, the corporation, needs to relook at that.
SEN. SHELBY: Is it troubling to both of you that, in the Riggs situation, the second that I talked about later was almost always ignored, the BSA, the bank's suspicious activity report. They filed the transaction report but they didn't do the other with the figures. You want to-is that troubling?
MS. D'AGOSTINO: Yes, it is because, although I do know that, from our previous work, banks spend a lot of time doing their own investigation before they put together one of these reports. And again, I'm not familiar with all the facts and circumstances surrounding, for example, the Saudi account case and whether or not this was unusual for the Saudi account or not. You know, it could have been a routine thing that they pull millions of dollars out every day. I just don't know enough about it.
SEN. SARBANES: But you're studying it closely.
MS. D'AGOSTINO: We are watching it every day and I think we are having-we are not going to be able to get at some of this until cases are closed. And so that makes our job a little more difficult in giving --
SEN. SHELBY: How often are banks, ma'am, examined? In other words, have the regulators adhered to their examination cycle with respect to Bank Secrecy Act enforcement?
MS. D'AGOSTINO: We haven't gotten that far yet in our work but we will --
SEN. SHELBY: Isn't that important --
MS. D'AGOSTINO: Sure. How often do you think I went in and looked --
SEN. SHELBY: Will you be addressing this in your ongoing study at the General Accounting Office?
MS. D'AGOSTINO: Sure. That will be one of the many factors.
MR. GIANNI: Mr. Chairman, I can report that the corporation, at least at the FDIC, we are complying with the statute of ensuring that banks are examined at least every 18 months and, in some cases, every year.
SEN. SHELBY: What about the information sharing with regard to the Federal Deposit Insurance Corporation, if you'd just briefly tell the committee the normal process which by FDIC information, the way they work the Bank Secrecy Act compliance is shared with the other agencies, like Treasury and anybody else.
MR. GIANNI: There are a number of committees and groups that address Bank Secrecy type issues. I don't think there is a process in place currently to share the information as it relates to bank secrecy and to pull all of this information together to see whether there are trends or anomalies or issues that need to be addressed. I think, first of all, all of the information that we accumulate within the corporation is not passed on to FinCEN. And so, with FinCEN's greater responsibility and the will to bring the regulators together, I think, is a good first step that the committee has achieved and they can begin to better share information to see whether information that is housed within the FDIC is similar to information that is housed in one of the other regulatory agencies. Again, it's not unlike what is going between the CIA and the FBI now as it relates to intelligence sharing.
SEN. SHELBY: It is very important in both instances to share information.
MR. GIANNI: I would agree with you, sir. And I think what happened, sir, is that when 9/11 occurred, tragically occurred, we had a sea change of priorities within our country and we had the passage of the PATRIOT Act. But I believe that the risks associated to that, or potential risks associated to that, were underestimated by the bank regulators. And this is now being recognized that it is a part of our national defense and that-I believe that the regulators will have the will and commitment to step up and to address these issues in a unified manner.
SEN. SHELBY: Both of you, you at the FDIC Inspector General and you at the General Accounting Office, continuing the work in this area, what are some of the steps into unfinished business?
MS. D'AGOSTINO: For the work that we're doing for you? Well, one of the major efforts we're doing relates to the systems that each of the regulators has a separate system and a separate set of data that are housed in their own IT systems. We're going to have to go through all five of them and luckily FDIC has done some work ahead of us on that and try to get a good fix on what's in and what's not in and try to design our work around the systems and the data available within them and check the reliability of them. That's the thing that we're involved in right now is doing-it's basically an audit within an audit to see how reliable the information is in there before we use it to feed you an information analysis. That's a big piece of our undertaking. Again, also looking at the authorities and the penalties and who's got what authority and how it all works in practice is another thing that we're working right now for you.
SEN. SHELBY: Thank you.
MR. GIANNI: Mr. Chairman, I think we're going to work closely with the GAO. We don't want to duplicate. We want to try to identify how we can complement the GAO in its efforts to try to address the request from the committee. There are several areas where I think we could make a contribution. Clearly, I think that this issue of risk focusing, risk focusing, it might be appropriate for the initial go- round, but risk focusing for follow-up action may not be the appropriate way. So I need to think a little more about risk re- scoping and how that applies to bank secrecy.
Secondly, I think that clearly, the agencies are concerned about regulatory burden. Now, having said that, I think that we have to think through how we have gone about implementing the various laws and regulations and to see whether there may be a streamlined way of still accomplishing the legislative objectives that were set out by the Congress but yet doing it in a much more efficient way. The corporation has a process working with the other regulators to look at that.
The last thing I'd like to talk about is-it was raised this morning-is I think I would like to look at the Hudson case to see the similarities that might exist and just pursue that from an intellectual standpoint to see if there are some lessons learned that we might be able to help the corporation on.
SEN. SHELBY: Well, you're in a position to do that.
MR. GIANNI: Yes, I am, sir.
SEN. SHELBY: And I hope you will. To both of you, will you hopefully finish your work in this area before the year is out? This is just the 1st of June. I know it's a big undertaking. But it's important, timely undertaking.
MS. D'AGOSTINO: Yes.
SEN. SHELBY: You can't put a calendar date on it.
MS. D'AGOSTINO: We have not yet committed to a date to the committee for issuing our final report. We're considering and kind of trying to figure out if there might be ways where we could report on an interim basis on different pieces of this fairly large request you've made of us so that you don't have to wait so long to hear something.
SEN. SHELBY: I appreciate that. Could you both briefly expand on comments regarding the vulnerability of the risk-based approach to the oversight process? For example, is it-when you determine what constitutes suspicious activity, is that pretty subjective? You know, you've got criteria to go by. You've got to have something that triggers something at the regulatory agencies, have you not?
MR. GIANNI: It is-there are certainly guidelines out that have been written to help the examiners but it is judgment. It comes down to judgment and when you have judgment being made --
SEN. SHELBY: Critical evaluation of something.
MR. GIANNI: It's critical. It's a critical judgment. When you have those types of critical judgments being made within a framework, I think it's important to make sure that those judgments get reviewed not only on an individual basis but on a collective basis to see whether there are areas that we can help refine the guidance, further improve the guidance so that stronger and better judgments are made in the future.
SEN. SHELBY: Do you believe that regulatory structure we have today, if used diligently, would be sufficient in the future or do we need to look somewhere else?
MR. GIANNI: I personally think that the bank regulators, working together, can accomplish what needs to get accomplished.
SEN. SHELBY: The Riggs case a wake-up call and some of the others, hopefully?
MR. GIANNI: I believe Riggs is a wake-up call as well as the fact that the committee has seen fit to have oversight. I don't-I personally don't underestimate the power of congressional oversight.
SEN. SHELBY: Your comment?
MS. D'AGOSTINO: I agree with the FDIC IG. I think training and keeping up to date with the most current approaches by the money launderers, terrorist financiers and anything that law enforcement could help package and put together and better inform the examiners would be useful too. But I'm not sure that structure is the only thing and I do think that the leadership and the oversight and that tone at the top, as Mr. Gianni pointed out, are very, very important in keeping attention properly focused on AML.
SEN. SHELBY: Well, you both got your hands full. We appreciate the job you're doing and the attitude that you have and we'll have you back before the committee. Thank you very much for the work and your commitment.
MR. GIANNI: Thank you very much, Mr. Chairman.
MS. D'AGOSTINO: Thank you.